Tag: loans

How Does a Down Payment Affect a Home Purchase?

Posted on Glenn S. Phillips

TOnce you find a home that you have fallen in love with, you will probably try to do the math immediately. There is a rule of thumb that tells you to calculate 20% of the loan to figure out your down payment.

down payment on a homeHowever, it will also depend on the type of loan. The down payment will affect how much your loan is. This will also affect the amount you pay as far as interest.

Loan and Value Ratio

Once you take out a loan, the lender will asses the loan to value ratio. This ratio is also called the LTV ratio. This is the assessment between the value of the home and the value of the loan.

For example, if you are buying a home that is $200,000 and you have $40,000 for a down payment, then you have saved 20% for the down payment. So in this specific case, the LTV ration will be 80%. The reason a lender looks at this is that the lower the ratio, the lower the lender’s risk for loaning to you.

Conventional Loans

The government does not back conventional loans, and it also requires the LTV ratio to be 80% or less. The borrower that has less than the 20% for a down payment may be approved for this type of loan, but only if the borrower agrees to pay for private mortgage insurance (PMI).

PMI is a monthly payment that is created to protect lenders if the loan goes into default until at which time the borrower reaches the minimum 20%.  Now that you know what this type of loan is, you will know that when someone is speaking of a 20% requirement, they are speaking of this type of loan.

Government Backed Loans

If you do not have the 20% for a down payment, then you will seek out a loan that is backed by the government. These loans are referred to as FHA loans and are backed by the Federal Housing Administration. Typically the down payment can be as small as 3.5%.

In the case previously stated of the home for $200,000, the down payment of 3.5% would be $7,000 for a down payment, leaving the LTV ratio at 96.5%. This process is considered extremely risky. In this situation, the borrower will be required to get PMI.

VA loans can also be used and backed by the Department of Veterans Affairs. These type of government loans are the only loans that do not require the borrower to have a down payment or PMI.

In conclusion, your down payment will affect which type of loan you will use to purchase your house. It is in your best interest to have as much of the amount saved as possible to lower the loan value, increasing your chances of securing a loan and not being required to pay out extra for PMI.

Housing Basics: What is Escrow?

Posted on Glenn S. Phillips

real estate agentMany people have heard of escrow, but do not know what it is. The reason for that is quite simple actually; it has several different meanings in estate transactions (i.e., buy/sell houses).

Escrow is something of high value such as a check, document, or precious artifact that is/are given to an impartial third party to keep until the conditions specified in the transaction are met.

Whenever the conditions are done, and everybody is paid, the escrow will close. The valued item will be returned to the person who owned it initially.

Examples of Escrow:

  • When someone makes an offer on his new home, he/she writes a money check and uses it as an escrow. The funds are given to an impartial third party while the purchase contract is still under negotiation. Real estate agents most often take care of creating and controlling the escrows.
  • The lender wants to create an escrow, where the money for taxes and home insurance will be kept. The lender will have a department that will handle this kind of escrow.
  • There are also escrow officers, people who get paid to create and control escrows between two parties. They must be impartial.

Who Is the Third Party?

Who will be your escrow creator depends on the place where you live. It could be escrow agent, attorney, title agent, or even an estate agent. They will take care of all the paperwork being thrown at you, arrange meetings, give instructions, disclose funds, and make sure of the completion of the transaction. Note that this person or group MUST be impartial; otherwise it will be regarded as illegal.

Funds Being Withheld

In some rare cases, the funds will continue to be held in the third party when the ownership gets transferred from the previous owner to the buyer. This usually happens if the agreement or part of it was not met or changes in the agreement have taken place where both parties have agreed.

Examples could be the buyer allowing the seller’s family to stay in the house for an additional week while the seller is paying a daily rate to the house. Another example is if something wrong was found within the house and a repair takes place, the cost of the repair is reimbursed by the funds in the escrow.

Enclosing Escrow

When both parties have agreed to a move-in date as well as cost and ownership having filled all the paperwork, and all funds have been transferred, the closing agent will disburse all funds and will oversee the document record within the county where the house/estate is located.

When the final step is taken, the deed is filed. That signals that the property has been transferred to the new owner. The deal is complete and escrow is finished. Both the seller and the buyer will receive final statements and documents by mail. Both of them must check the statements in case an error has gone unnoticed. If not, they must file the statement for tax purposes in their next income tax return.

Escrows are very useful in estate marketing because they make sure that no error has taken place during the transaction, both parties have agreed on buying/selling the property, and the required documents have been signed and met by them.

Should You Consider Refinancing Your Mortgage?

Posted on Glenn S. Phillips

RefinancingThere are any number of reasons to refinance your existing mortgage or mortgages. Start by considering what you hope to get out of a refinance and whether a refinance will save you in the long run.

If the list of reasons to refinance is longer than the list of reasons not to, or if your cost savings will be significant, then it’s a good time to consider refinancing.

What are some of the reasons to refinance your current mortgage?

*  First, if it gains you a better interest rate and/or it changes the term of the mortgage, then a refinance makes good sense. No refinancing plan will ever pay off your debt; rather it modifies the current loan. Lowering the interest rate is one of the top reasons people refinance. Now that banks are more willing to lend to people again, even those who owe more than their home is worth are more likely to be eligible.

*  Debt consolidation is a second reason. Some people have a lot of credit card debt that runs them hundreds of dollars a month in minimum payments. It makes good financial sense for some to refinance their mortgage and lower the overall amount they pay each month. Also, if you have a home equity loan or line of credit as well as a mortgage, it sometimes makes good sense to put the two together. This will lower the payments each month.

*  Third, many people got into loans with attractive entry level rates that then ballooned when the adjustable rate portion kicked in. Being able to lock in their interest rate at a consistent rate for the remainder of the loan period is very appealing and should be strongly considered.

*  Another major reason is because people need some extra cash. Though it might not necessarily be a refinance, a restructuring of an existing loan can mean a substantial check sent to the homeowner. This can be used to start a business, care for an aging parent, buy investments, or do home repairs.

*  Sadly, sometimes a divorce can mean a need to refinance, if for no other reason than to remove the other spouse’s name from the title. It sometimes helps the person who will be staying in the house by giving him or her a lower monthly payment, since now there is only one income paying the bills.

Some factors to consider when refinancing include the costs of the fees and any title paperwork filings. These can sometimes eat up any savings that might otherwise be realized.

Also consider that the house will still always be the item the bank holds as collateral. This can be especially important if the refinance is being done as a way to get additional funding for something else and not just saving money each month.

For many, though, refinancing can be a good answer to a tough financial situation.