How Does an Interest Only Mortgage Work?

November 3, 2011 · Leave a Comment

A mortgage is a financial contract between the lender and the borrower. Mortgages are tailored to the individual and the precise terms and conditions given will be dependent on many different factors, such as the loan to value ratio, the amount of the mortgage and a whole range of other circumstances specific to each borrower. Yet despite this there are essentially two different types of mortgages which is the repayment mortgage and the interest only mortgage.

When a mortgage is advanced the borrower will not only have to pay back the principle sum, i.e. the amount advanced, but also an additional amount, i.e. interest, for having the privilege of the mortgage. The amount of interest is dependent on the interest rate, and the interest rate will depend on many factors. There will be an interest charge regardless of whether the borrower has taken on an interest only mortgage or a repayment mortgage.

Mortgages are usually paid on a monthly basis over an agreed number of years. If a borrower has taken out an interest only mortgage the monthly repayment will pay the interest charge only. If the interest rate is fixed, i.e. a specific percentage of the mortgage advanced, the monthly payment will be the same. If the interest rate is variable, i.e. subject to change during the duration of the mortgage, the monthly payment will fluctuate with every change in the base interest rate. Fixed rates are advantageous in that the borrower is certain of the specific monthly payment making it easier to budget, whereas a variable rate interest rate will be preferable when the base rate is on the decline or at a current low.

Since the monthly payment of an interest only mortgage only covers the interest charge the capital advanced, i.e. amount of the mortgage doesn’t decrease. This means that it is never paid off with the normal monthly payment. However, the mortgage will have to be repaid at some time in the future.

Since the interest only mortgage doesn’t change with each payment many may ask what is the point of them. The monthly payment of an interest only mortgage is often much less than that of a repayment mortgage and is likely to make it more affordable for a first time buyer. With an interest only mortgage a first time buyer can purchase a property, hence securing a foot hold on the property ladder, and wait for an ideal time when the property market picks up allowing the property to be sold for more than it was bought for which may result in a sizeable deposit for the next property. During this time the buyer is likely to want to change to a repayment mortgage to start paying off some of the capital. During this time a repayment mortgage is often more affordable than when first starting out.

Alternatively, an interest only mortgage is ideal for those people who already have a property but who buy a second property to rent out or let. The rent generated should cover the mortgage plus all other letting expenses although it is unlikely to generate much of a profit if any at all. When the time is right the land lord will sell the property for more than it was bought for, hence allowing the mortgage to be settled and leaving a nice profit through the capital gain. Rental properties should be seen as a long term investment and the best capital gains are usually made when the property is held for many years.

Before taking out a mortgage, regardless of whether it is an interest only or repayment, it is advisable to seek professional advice. A professional adviser will provide a range of options that will enable a borrower to assess and appraise a whole range of mortgages and choose the most suitable based on the individual’s specific circumstances.

Written by yackers1
ACCA qualified accountant who thirives in the world of business and finance

www.nddproperties.tv A Mortgage Loan modifications generally aim to achieve a specific goal create a payment that’s affordable for the borrower. Most borrowers have the mindset that the process is long, difficult and lenders are not motivated or open to modifying a loan because it is easier for them to initiate foreclosure.

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The Biggest Benefit of Refinancing Your Mortgage

October 20, 2011 · 25 Comments

Historically Low Rates

If you are considering refinancing your mortgage, now is a great time to look into it (January 2009).  Rates are at historic lows, so you may be able to lock-in a really great rate for the duration of your mortgage.   See the graph below for the three year trend on 30-year mortgage rates:

 

We recently looked into this ourselves and actually closed on our refinanced mortgage last week.  We were able to go from a 10-year adjustable loan with an interest rate of 5.75% to a 30-year fixed rate mortgage at 4.875%.  This is a pretty good improvement and most experts will recommend you consider refinancing if you can get a 1% improvement in your interest rate.  The math on this worked out well for us, especially since we are not planning on moving any time soon.

Why Refinance Your Mortgage

Obviously, the biggest reason to refinance your mortgage is to reduce your monthly mortgage payment.  There are two reasons why your monthly payment may go down with a refinance.  First, if you are refinancing at a lower interest rate, you will be charged less interest every month.  This is common sense and the reason that most people pay so much attention to the interest rate that they get.  Second, you will be re-spreading out your loan over another 15 or 30 years, depending on the term you choose.  So, if you have been paying your mortgage for the past five years on a 30 year mortgage, then you really have a 25 year mortgage left on your house, since it will take you another 25 years to pay it off.  By refinancing, you are spreading your loan out again over a 30 year period which brings the monthly payment down since you are giving yourself an extra five years to pay back the same amount of money.

The Biggest Benefit

If you refinance your mortgage, however, be careful not to miss out on the biggest benefit of refinancing, which is reaching your goal of Financial Independence sooner!  My advice to you, is to keep making the same monthly payments as before you refinanced.  If you do not, then you are in serious danger of wasting your monthly savings on things you don’t need and you’ll be no closer to reaching your financial goals.  The real benefit of refinancing is paying off your house sooner, and that’s it!  (You can read my other post on this topic at:  It’s Days, Not Dollars…)

A Real Life Example

Here’s how the math worked out in our case.  We had a 10-year ARM @ 5.75% and a monthly payment of just over ,550 for principal and interest (we escrow our own insurance and property tax payments, but that is the topic for another post).  So, assuming we made no additional payments, we were on track to have our mortgage paid off in March of 2035.  Now in order to refinance, we had to pay various closing costs which added up to just about ,000, which we rolled-into our new mortgage.  So the new mortgage was for 7,000, but was now at a super-low 4.875% interest rate.  Our monthly payments have come down by 2 and we’ll have paid back our closing costs after 1 year of savings (,000 / 2 = 11.7 months).  I now have the option of simply paying my new mortgage amount every month and having it paid off in 30 years in March of 2039, or I can make the same payments I used to (,550) and have it paid off in September of 2031.  That’s a full 7.5 years earlier than paying the minimum each month and it’s 3.5 years earlier than my old mortgage!  Having the house paid off sooner is a huge win in achieving Financial Independence.

Additional Benefits

There are two additional benefits to refinancing your mortgage.  First, assuming we had an emergency fund set aside (this is on my to do list for 2009!), and we had 6 months of expenses in there, then we would need to have a little over ,000 (6 x 2 = ,052) less in that account.  Secondly, whenever you refinance a mortgage, you end up getting a month off from a mortgage payment.  The reason is a little complicated, but it has to do with the fact that mortgages pay interest in arrears, but at closing you pay interest for the following month.  The bottom line is that if you close on your refinancing in January, you won’t pay your mortgage again until March.  In our case, that’s another ,550 savings.  Theoretically, I could take all of the ,550 and make a couple of extra payments on our mortgage!

Here is a summary of the benefits of refinancing our home mortgage:

Our mortgage payments have dropped by 2 per month
If we keep paying our same old monthly payment then we can have the house paid off 3.5 years earlier
We get a month off from paying our mortgage in February, saving ,550
Assuming we had an emergency fund set aside, we wouldn’t need to have as much money in it, saving ,052
Closing Thoughts

Here is my advice to you.  Take advantage of the historically low interest rates and consider locking in a great rate.  Just make sure to keep paying your old mortgage amount every month, or else you are at risk for being out the ,000 or so for closing costs and not having your home paid off until years later!

Written by JorgeL

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Question by TexasBound: I have a mortgage on one home, can I get a second mortgage to pay for another house?
I’m planning to relocate, but current owe a mortgage for $ 50k. I also have a bankruptcy on my record thats a couple of years old. I’d like to find new home in the state I choose to live in. Would I be able to get a second mortgage or refinance my current home in order to pay for a new one?

Best answer:

Answer by lendingwhiz2008
That depends on a few things.

How much equity do you have in your current home?

What is your credit score?
What is your debt load?

Yes you can get a 2nd mortgage on your current home to buy another, people do it all the time.

Your income must support maintaining your current home (you should be able to get a renter in there to offset the mortgage payment or some portion there of) and support your new mortgage.

You can get a loan with a BK. Many lenders require it to be discharged for 2 years, however, there are still a few lenders that will lend on a BK only being discharged 1 day.

In a nutshell, yes you can, if all your other ducks are in a row.

Good luck

Know better? Leave your own answer in the comments!

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How to protect your finances from a mortgage rate spike

October 15, 2011 · 4 Comments

Mortgage rates have been declining in concert with falling interest rates on long-term Treasury bonds. The situation in the mortgage market facilitates the plans of home buyers, who can find 30-year fixed rate at 5.08% (as of 12/17/09). However, there is no guarantee that these rates will last. The mortgage market is highly fluctuating and a possible rebound in long-term Treasury yields is likely to cause mortgage rates to increase again.

If you worry about a mortgage rate spike before you can find a new property, there are ways to hedge against this probability provided you realize that if mortgage rates rise considerably, you may end up ‘trapped’ in your property. When mortgage rates are so low, consumers do not sell their properties until their mortgage matures. Although the solutions available may not the simplest, they are worth considering because they can save you from the cost of even a slight rate change, which can be a lot of money on an amount of 0,000 mortgage.

In particular:

a)      Investing in index funds that track long-term interest rates

There are several exchange-traded funds that track long-term interest rates. One of the most commonly known ETFs and the most successful ones that track long-term interest rates is the ProShares Short 20+ Year Treasury fund (TBF).  This ETF calculates daily returns of an index that can be equal to 200%. Due to the compounding of daily returns, your returns over a period of time may differ in amount from the target return. Therefore, you need to monitor your ProShares investments on a daily basis to make sure they are consistent with your investment profile and strategies. ProShares Short 20+ Year Treasury fund (TBF) can be purchased on the stock market like shares.

Another successful ETF is the Rydex Inverse Government Long Bond Strategy mutual fund (RYJUX). This ETF is inversely correlated to the price movements of long-term Treasury bonds and seeks total returns before expenses and costs. Through investment to a significant umber of derivatives including futures, options and interest rate swaps, the Rydex Inverse Government Long Bond Strategy mutual fund focuses on financial instruments that perform opposite to fixed-income securities.

b)      Investing in call options of index funds

ProShares Short 20+ Year Treasury fund is highly volatile because it tracks daily moves rather than long-term moves. Its high volatility may double the market up but it may also double the market down. This means that, in case of a mortgage rate spike before you find a new house, you may save money on the mortgage, but will lose money on the ETFs.

A very good alternative is investing in call options of these funds.

By purchasing call options on an ETF, you actually purchase a sort of insurance if mortgage skyrocket out of the blue.

To illustrate better, we assume that today with 30-year Treasury rates a 4.375% (as of 12/19/09), the ProShares Short 20+ Year Treasury fund (TBF) has a net asset value of .22 per share (as of 12/18/09). However, for .20 per share you can buy a call option on the TBF anytime between December and March that allows you to buy the fund at between December and March. This means that, having the right to buy the fund at per share, even if mortgage rates rise over the next months, and the TBF increases to from .22 per share, you will have a profit of .78 per share minus the .20 that you gave to buy the call option.

As it is impossible to know the correlation between long-term Treasury rate and the price of TBF in the future, buying a call option is a good strategy to trade off the possible losses from tracking daily performance.

c)       Understand your budget

To properly evaluate the impact of a mortgage rate spike on your finances, it is extremely important to understand how you are spending your money. Setting up a budget in Excel or using a financial planning software will enable you to list all your expenses and keep track of your finances. In doing so, you will be able to see how an increase in mortgage rates affects each item in your household budget and what changes you need to make to lower your basic costs.

d)      Consider debt consolidation

Debt consolidation is another possibility when mortgage rates are on the rise. The aim is to lower the interest expenses by consolidating your debt payments and putting your debt payments and salary payments in sync. For instance, if you’re paid weekly, arrange to have your mortgage paid on a weekly basis so that you reduce your total interest costs and boost your cash power. Besides, you may consider a high-interest savings account rather than a regular bank account to ensure more cash.

Major considerations

Lower mortgage rates actually translate into less of a safety net.  Currently, homeowners have less equity in their properties because they are using it to borrow it to take advantage of the lower mortgage rates. However, this is likely to lead in a higher debt than their properties’ real value. Besides, even if their first mortgage is controllable, there is always a risk involved in paying the additional costs of refinancing.

As the integrity of prime mortgages deteriorates, the pool of money where borrowers can draw from becomes smaller, making it harder for consumers to get loans. Therefore, although the mortgage rates are low, the cost of loans is directly proportionate to the increase in defaults, enabling fewer people to refinance their taxing existing mortgages. This situation creates a chain reaction of events including foreclosures, lower property prices, crumbling equity, and a growing number of prime mortgage defaults.

In conclusion, there is no strategy that can offer 100% protection against a mortgage rate spike. However, there are always solutions provided you are prepared and well-informed. Questioning your spending habits is a good start to protect yourself from a cycle of increasing mortgage rates. The more careful your financial planning is today, the better positioned you will be to cope with a future mortgage rate spike as it comes.

Sources:

http://quote.bloomberg.com/markets/rates/keyrates.html

http://quote.bloomberg.com/markets/rates/index.html

http://www.proshares.com/funds/tbf.html

Written by Christina Pomoni
Investment Advisor – Freelancer Writer

More NEWS at www.newzzcafe.com In a move that could either send BAC stock limit down overnight or send it soaring (we are still trying to figure out just what is going on here), the NYT has broken major news that the US is preparing to go nuclear on more than a dozen big banks among which Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, in an attempt for Fannie and Freddie to recoup billion if not much more. The lawsuit is expected to hit the docket in the next few days: “The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.” FHFA goes hog wild and potentially full retard in suing everyone, or specifically 17 global banks, up to an including such dead men walking as Barclays, RBS and SocGen. Oddly such crony capitalist favorites as Wells Fargo are suspiciously absent: we wonder what the cost of that particular Eureka moment was to the interested party. “While I believe that FHFA is acting responsibly in its role as conservator, I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again.” Either way, come Monday, this will get interesting when already scarce liquidity goes… poof. www.zerohedge.com

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Mortgage- Significant Information For Commercial Mortgage

October 13, 2011 · 25 Comments

The economy is in trouble and borrowing the full Mortgage is near to impossible. What can you do to assist yourself in these hard times?  Well you’ll be able to take a look your financial position at the moment.

 

If you are looking for information about mortgage, you will find the below related article very helpful. It provides a refreshing perspective that is much related to mortgage and in some manner related to construction loans, online banking services, goldman sachs actions in the 2007 subprime mortgage crisis or mortgage refinancing home. It isn’t the same old kind of information that you will find elsewhere on the Internet relating to mortgage.

 

When buying a hone you wish to have to inspect the home carefully. Take a look at for roof leaks. The ceiling will have yellowish or brown spots, or else you may determine the drywall peeling. Look on the roof to determine if the shingles properly mounted and fitted. Confirm the rafters are fitted also. You may look in the attic to see the structure of the rafters.

 

Educate yourself. Get several quotes. Mortgage brokers will sometimes offer a better deal than a bank, but it doesn’t hurt to call a bank or two for comparison as well. A good loan originator will spend as much time with you on the phone because you need. And a truly qualified loan originator will ask enough questions to know your goals. If you do not feel good about a conversation, trust your instinct; cross them off your list and move on.

 

SIDEBAR– If you have the patience to go through the remainder of this article related to mortgage you will certainly learn one or two things that will prove very helpful to you. Keep right on reading and be well informed about mortgage and other related loans, real estate search, subprime lending and the subprime mortgage crisis or mortgage modification information.

 

Shop around for the most suitable deal. The lowest rate does not necessarily mean the best mortgage. If you don’t want to do all the shopping around yourself, you may be able to use the services of a mortgage broker. Mortgage brokers help you in looking for the best overall loan for your up to date circumstances from a panel of different lenders.To make sure you have a level of consumer protection, confirm the broker you are dealing with is an Accredited Mortgage Consultant (AMC) with the MFAA. AMCs have satisfied certain educational and qualified entry levels and have access to the Mortgage Industry Ombudsman Scheme.

 

Here is the only item that we can really file as a bad side effect of and online mortgage quest- your name and information is shared with all other online lenders, and at some point in time your phone will ring, and a telemarketer will asked to speak with you, so as to sell you a mortgage. Now, a mortgage is not truly something that you impulse buy, therefore we believe this to be a waste of time for you, the telemarketer, and the online mortgage company.

 

Many people searching for mortgage also searched online for mortgage loan calculator, home loan, refinance, and even southern realty inc real estate and mortgage loans.

 

If you follow these tips then you are well on your way to finding a great mortgage. Just keep in wits that you may be stuck with this decision for a very long time. Don’t mess it up.

 

 

 

So here is chance to get your free tips on mortgage and in addition to that get basic information on saving money visit mortgage interest rates

Written by sudarsan chhetri
Why Give Love a Chance?

From a subscriber: “I have a MERS mortgage in Idaho and have a successful attorney fighting for me to keep my home. He has already won a case where the folks got to keep their home scott free.” www.realistnews.net
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Question by PrimeConcern: How much mortgage debt is there in the USA?
Given all the worries about credit in this country, and subprime mortgages, I was curious as to what the entire amount of home mortgage debt is. There are about 110 million households in the country, with 70% of them owned residences. Let’s say there are 75 million owned homes. Not all have mortgages, but if 70 million do, and the average mortgage amount on such homes is $ 200,000, that comes out to a scary $ 14 TRILLION of mortgage debt in the USA. If just 2% default, the amount of bad home loans is $ 280 billion. It could obviously be much higher.

Does anyone know what total mortgage debt is per household and in total? This is a real problem that could damage the economy.

Best answer:

Answer by Pete W
You bring up an important question. The best data I can find on the ‘net are figures for 2003 (USA Today) – nothing newer available according to them. If that number is correct then the total mortgage debt in the US, 2003, $ 6.3 trillion. Some adjustments must be made for the past four years- higher, I’m sure.

Lots of bucks out there!!

What do you think? Answer below!

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California Home Loan Mortgage Rates

October 12, 2011 · Leave a Comment

California Home Loan Mortgage Rates

The California Home Loan Mortgage Rates are low at this point of time. The California Home Loan Mortgage Rates are connected to the national interest rate and controlled by national housing market interest index. The national interest rate is controlled by secondary markets which are closely monitored by the Government since the whole economy depends on them. The economy at this time coupled with the housing market situation has brought about this change in California Home Loan Mortgage Rates.

Home Loan Mortgage Rates in California do not rally appeal to a prospective buyer especially if he is from a different state. These rates can inject more frustration than excitement into his life since the cost of living in California is high in comparison to other states. It really takes a lot of intellect and skill to play around with different options to reduce interest rates and payments in order to make California Home Loan Mortgage Rates affordable.

The California Home Loan Mortgage Rates fluctuate daily. In order to get the feel of it, it is advisable to wait and watch and see the trend before making a decision. These mortgage rates come in with a variety of different options. There are interest only rates, standard fixed rates, adjustable rates and variable rates. All these rates have to be taken into account while making a decision in order to get the best rates possible.

Interest only California home loan mortgage rates are the lowest since the buyer or borrower is paying only the interest component. This apparent low level of payment options makes it interesting and attractive to borrowers

A standard fixed mortgage rate gives the maximum security to the home buyer in freezing the interest rates, i.e. the interest rates will neither raise nor fall. They will have a consistent, preplanned repayment schedule throughout the loan term. The term comes in different sizes viz. 15, 20, 25, 30, or 40 years. A fixed California home loan mortgage rate follows the national housing interest index faithfully.

Mortgage rates that variable or adjustable carry a lower interest tag; normally 2%-3% lower than the fixed rates. They begin as fixed for a short period which is predetermined, usually 2, 3, 5, or 7 years, after which they start fluctuating in accordance with the current market California home loan mortgage rates. The borrower has certain options here; he can refinance for a new loan, sell the home, or start repayment of the new variable or adjustable rates. Buyers planning to invest in property for a short period often choose the variable or adjustable mortgage rate because of the lower payments they offer during the starting years of the loan.

Lower California home loan mortgage rates are always attractive to borrowers because they are mostly on the higher side due to higher cost of living. The best way to ensure a low California home loan mortgage rate is to possess a good to excellent credit score. These credit scores directly determine interest rates and the better the score, the lower the California home loan mortgage rate.

Written by luciancluj2010
Startup Writter

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