Why should I buy a house?

You’ll love the feeling of having something that’s all yours-a home where your own personal style will tell the world who you are. A thriving vegetable garden in the backyard, a tiled entryway, a yellow kitchen…when you own, you can do it all your way! But there’s more to owning a home than personal satisfaction. You can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes, too. And interest will compose nearly all of your monthly payment, for over half the number of years you’ll be paying your mortgage. This adds up to hefty savings at the end of each year. And you’re also allowed to deduct the property taxes you pay as a homeowner. If you rent you write your monthly check and it’s gone forever. Another financial plus in owning a home is the possibility its value will go up through the years.

 What is an FHA loan?

A mortgage on which the lender is insured against loss by the Federal Housing Administration, with the borrower paying the mortgage insurance premium. The Major advantage of an FHA mortgage is that the required down payment is very low, but the maximum loan amount is also low.

What is a VA loan?

A mortgage with no down payment requirement, available only to ex-servicemen and women, on which the lender is insured against loss by the Veterans Administration.

What is a Conventional Loan?

 A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac are both Federal agencies that purchase home loans from lenders. Both agencies finance their purchases primarily by packaging mortgages into pools, then issuing securities against the pools. The securities are guaranteed by the agencies. They also raise funds by selling notes and other liabilities. Conventional Financing remains the preferred way to purchase a home. Conventional loans are offered by virtually all lenders. Conventional financing usually requires 20% down, with mortgage terms extending from 15-30 years. Almost any home can be purchased with conventional financing, and sellers are always happy to see a buyer who is financing conventionally. Aside from a straight cash purchase, conventional financing is the least expensive way to buy a home. You’ll get the best interest rates available. You won’t need to pay Private Mortgage Insurance. Generally, no repairs or upgrades to the home are required to complete the purchase. And, since conventional offers are viewed favorably by sellers, sometimes a better price for the home can be negotiated. The higher costs notwithstanding, sometimes it is still better to use a low down payment program even if you can afford to purchase conventionally.

What is an Interest Only Loan?

 A mortgage is “interest only” if the monthly mortgage payment does not include any repayment of principal for some period. The payment consists of interest only. During that period, the loan balance remains unchanged. For example, if a 30-year fixed-rate loan of $100,000 at 8.5% is interest only, the payment is .085/12 times $100,000, or $708.34. Otherwise, the payment would be $768.92. This is the “fully amortizing payment”-the payment that, if maintained over the term of the loan, will pay if off completely. The interest only loan thus reduces the monthly payment by 7.9%. A loan that is interest-only for the full term would not amortize. The loan balance would be the same at term as it was at the outset. Back in the twenties, loans of this type were the norm. Borrowers typically refinanced at term, which worked fine so long as the house didn’t lose value and the borrower didn’t lose his job.

Which type should you choose? The answer to this question is seldom black and white. But there are some scenarios where the choice is obvious. For example, let’s say you need $7,000 to pay for your daughter’s wedding next month and $3,000 to fix your roof, which will take a week. You know exactly how much you need and both amounts are due in full fairly quickly. If you don’t have plans to borrow again, a straight home equity loan for $10,000 is more suited to your purpose. But if you need money over a staggered period of time – for example, at the beginning of each semester for the next four years to pay for Jimmy’s schooling or for a remodeling project that will take three years to finish—a line of credit is the better choice. It gives you the flexibility to borrow only the amount you need, when you need it. And if you borrow relatively small amount and pay back the principal quickly, a line of credit can cost less than a home equity loan.

 Consumers who have run up credit card debt will often borrow a lump sum and pay off their Visa, MasterCard, and department store charges, then pay back the bank over time at a lower interest rate than the cards would have imposed. This sort of debt consolidation is the single most-popular reason people have for taking out home equity loans, and fixed rate home-equity loans. To help you determine which loan best suits your needs, ask yourself:

“When do I need the money?”

“For how long do I need the money? Is it for a short-term purpose, or a long-term?”

“How long do I need to pay it off?

“How big of a monthly payment can I handle?”

“Would a line of credit tempt me to use the money carelessly because it works similar to having a charge card or checking account?”

Ask your lender:

“How long is the term of the closed-end loan?”

“What is the life span of a line of credit?”

“How large a line of credit do I qualify for?”

“Is my line of credit renewable when the life of the loan expires?”

“What are the interest rates?”

“Do I have to use my credit line right away? (If you’re opening a credit line for future or emergency needs, you’ll want one that doesn’t require a minimum draw at closing.)”

“Under what circumstances can you freeze, reduce or demand full payment of my loan?”

“Can I lease my house during the time of the loan?”

“Will you loan to me if my house is on the market (and what rate)?”

If interest rates go down, how low ill my loan go?”

What is the difference between a 2^nd mortgage and a Home Equity Line of Credit (HELOC)? Which is better?

 There are two types of home equity loans: Term, or closed-end loans, and lines of credit. Both are sometimes referred to as second mortgages, because they’re secured by your property, just like your original (first) mortgage. Home equity loans and liens of credit are usually for a shorter term than first mortgages. The most common type of mortgages runs 30 years, while equity loans typically have a life of five to 15 years. A home equity loan, sometimes called a term loan, is a one-time lump sum that is paid off over a set amount of time, with a fixed interest rate and the same payments each month. A home equity line of credit (HELOC) works more like a credit card. You are allowed to borrow up to a certain amount for the life of the loan—a time limit set by the lender. During that time you withdraw money as you need it. As you pay off the principal, your credit revolves and you can use it again. Let’s say you have a $10,000 line of credit. This gives you more flexibility than a fixed-rate home equity loan.  Credit lines have a variable interest rate that fluctuates over the life of the loan. Payments will vary depending on the interest rate and how much credit you have used. When the life span of a line of credit has expired everything must be paid off. A lender may or may not allow a renewal.

Which type should you choose? The answer to this question is seldom black and white. But there are some scenarios where the choice is obvious. For example, let’s say you need $7,000 to pay for your daughter’s wedding next month and $3,000 to fix your roof, which will take a week. You know exactly how much you need and both amounts are due in full fairly quickly. If you don’t have plans to borrow again, a straight home equity loan for $10,000 is more suited to your purpose. But if you need money over a staggered period of time – for example, at the beginning of each semester for the next four years to pay for Jimmy’s schooling or for a remodeling project that will take three years to finish—a line of credit is the better choice. It gives you the flexibility to borrow only the amount you need, when you need it. And if you borrow relatively small amount and pay back the principal quickly, a line of credit can cost less than a home equity loan.

Consumers who have run up credit card debt will often borrow a lump sum and pay off their Visa, MasterCard, and department store charges, then pay back the bank over time at a lower interest rate than the cards would have imposed. This sort of debt consolidation is the single most-popular reason people have for taking out home equity loans, and fixed rate home-equity loans. To help you determine which loan best suits your needs, ask yourself:

“When do I need the money?”

“For how long do I need the money? Is it for a short-term purpose, or a long-term?”

“How long do I need to pay it off?

“How big of a monthly payment can I handle?”

“Would a line of credit tempt me to use the money carelessly because it works similar to having a charge card or checking account?”

Ask your lender:

“How long is the term of the closed-end loan?”

“What is the life span of a line of credit?”

“How large a line of credit do I qualify for?”

“Is my line of credit renewable when the life of the loan expires?”

“What are the interest rates?”

“Do I have to use my credit line right away? (If you’re opening a credit line for future or emergency needs, you’ll want one that doesn’t require a minimum draw at closing.)”

“Under what circumstances can you freeze, reduce or demand full payment of my loan?”

“Can I lease my house during the time of the loan?”

“Will you loan to me if my house is on the market (and what rate)?”

If interest rates go down, how low ill my loan go?”

What if I have bad credit? Can you run my credit?

Credit can be an issue. If you feel you have bad credit but are not really certain then Redlands Mortgage will be more than happy to run your credit at a nominal cost. At this point, Redlands Mortgage would be able to ascertain whether or not you would qualify for a home loan. If for some reason you can not qualify doe to credit issues then Redlands Mortgage will make suggestions as to how you can better your credit score.

 (Please note…Redlands Mortgage IS NOT a credit repair agency, so the steps that we may describe cannot be guaranteed to improve your credit score. They are just suggestions and should never be construed as legal advice.)