First of all we must start by saying the debt consolidation loans may not be a good idea for you. In fact many dubious loans are often “sold” as debt consolidation loans when they are just a bad loan you wouldn’t want to touch with a barge pole.
Debt consolidation loans are loans that are purchased to pay off loans. This is especially attractive for people who have a number of loans with different companies. For example a good candidate for a debt consolidation loan might have a few thousand dollars in credit cards, a car loan and a mortgage to pay. The credit card loans probably are set at a 16% interest rate, while the car loan will probably be a little lower at around 10%, with the mortgage at even less probably around 7% depending when the person got the mortgage and how good the deal was. Unless this person has an incredible wage he is probably in a bit of trouble as his monthly credit card debts, car loan and mortgage are eating up most of his income. A debt consolidation loan will pay for all his debts and allow his monthly payments and his interest rate to drop.
How do they work?
Debt consolidation loans often work by extending the length of the loan. If you owe a total of $90,000 to 3 different lenders it will pay all of them with a large loan and charge you the total as a single mortgage-like loan. When you are paying for credit cards the time you have to pay back differs from credit card to credit card, you might have to pay a minimum, or you might be suffering from the high interest rate that seems to be increasing your debt faster than you can pay it. Your car loan will be set at another rate of payment, as will your mortgage. Paying for various loans at the same time can make it impossible for a household to meet this payments, however if these loans are combined into one large loan, the payments can be reduced and made affordable for the borrower.
What is good about debt consolidation loans?
Debt consolidation loans can allow a household to take control of their monthly expenses and get to the end of the month without having to get further into debt. For some people it is the only real option besides either losing their home, their car or even declaring bankruptcty.
What are the cons of debt consolidation loans?
They can be expensive. Debt consolidation loan providers are not often charitable organizations if you get my drift. They are there for the profit and know that people will be willing to pay a lot of money to bring down their monthly payments to an affordable level. Debt consolidation loan lenders will often charge large fees for their services and provide sub premium (higher than normal) interest rates. By extending the loan borrowers will often automatically pay more interest because the tenure of the loan is longer even if the interest rates are lower.
They can cause you to lose your home. Debt consolidation loans are often designed to be linked to your home as security. If your loans were made up of credit card and car loans you might have been struggling to pay them but your house was never at risk. Credit card handlers cannot force you to sell your house to pay them. However if you get a debt consolidation loan with your home as a security and you cannot make the payments you could lose your home.
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FHA loans are back as good business.
The Federal Housing Administration guaranteed almost 186,000 mortgages in June, a record tally for the agency, which has insured more than 34 million properties since its establishment in 1934.
First-time homebuyers are in part driving the record push. Since late May, prospective purchasers have been able to use the $8,000 first-time homebuyer’s tax credit on FHA-backed loans.
Part of the American Recovery and Reinstatement Act of 2009, the tax credit allows first-timers to pay for closing costs or even defray the 3.5 percent minimum down payment on FHA loans.
These long-standing loans continue to grow in popularity given the slumping economy and tight credit market. The FHA’s record performance in June smashed the agency’s old record of about 157,000 loans in October 2008. Before that, the record dated back to March 1994.
“A primary reason government-insured loans have retained a high share of the purchase market is that these loans typically require lower down payments than conventional loans,” Orawin Velz, associate vice president of economic forecasting for the Mortgage Bankers Association, said in a news release. “In addition, lending standards tend to be tighter for conventional loans, especially for loans that require private mortgage insurance.”
FHA loans represent an affordable avenue for many first-time buyers. Anyone who has not purchased a home in three years gets that “first-time” status. But there are some strings attached for buyers looking to capitalize on the new $8,000 tax credit.
Prospective borrowers hoping to offset their down payment costs must utilize a proper FHA-approved lender. Otherwise, that $8,000 can be put toward closing costs or shaving down interest rates.
First-time homebuyers also must meet a handful of other criteria. There are income thresholds that exclude individuals who make more than $75,000 or joint filers who clear $150,000.
At present, first-time buyers can also decide when to claim the tax credit – either for 2009 or by filing an amended 2008 return.
About a dozen states have started offering bridge loans to help spark home buying. These low- and zero-interest loans have to be repaid when the tax credit is applied. The FHA has also begun offering tax credit advance for prospective homebuyers who do not want to wait.
This post was written by Brandon Laughridge of Mortgage Loan Place. MLP specializes in educating consumers about all types of mortgage loans with an emphasis on government mortgage programs such as FHA refinancing and VA Loans.
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Related posts:Buying your first home can seem intimidating, especially when faced with many different loan types. When researching general information about the most popular home loan types, remember it is not as simple as finding the cheapest interest rate. At first taking out a mortgage may appear daunting, but once you break it down, it becomes straightforward. As with any financial decision, the first step in the process is to educate yourself about the process.
What IS a Mortgage?
What is a mortgage really? A mortgage is a lien on the real property that gives the lender the right to take the property by foreclosure if you default on the loan. Because most people cannot afford to buy real estate with cash, nearly every real estate transaction involves a mortgage. Contrary to popular belief, a mortgage is not a loan; it creates a lien on the property, which serves as a lender’s security for the debt. The party who borrows the money is the mortgagor; the party who provides the money is the mortgagee. A mortgage gives the lender the right to sell the secured property to recover funds if you do not pay the debt. .
While the choice of mortgage product affects the amount of the monthly mortgage payments, there are plenty of other aspects of homeownership, such as homeowner’s insurance, property taxes, maintenance, and homeowner’s dues, that need to be factored into your overall cost. The mortgage note, in which the borrower promises to repay the debt, sets out the terms of the transaction:
When comparing monthly payments from various lenders, be sure to ask if the lender included monthly taxes and insurance costs in the total payment. Often times if your downpayment is large enough, inclusion of taxes and insurance won’t be required, but you will instead pay your insurance company and real estate taxes directly.
It can not be emphasized enough that preparation is the key to ensure a smooth process. If you are working with a real estate attorney, he or she should walk you through the entire process in advance.
Pre-Qualified vs Pre-Approved
First, its important to understand the differences between a home mortgage prequalification and preapproval. Pre-Qualifying helps you determine what you can realistically afford in order to start your shopping. It provides an indication of what you expect to be qualified for. However, it is not a sure thing and doesn’t carry the same weight as being pre-approved. Home loan pre-approval is a more involved process, which includes submitting a formal application and documentation and provides a conditional commitment from the lender for the exact loan amount. Essentially you are getting your home loan approved prior to selecting a property. A pre-approval will require income and asset documentation. Pre-approval gives you a definite idea of what you can afford and shows sellers that you are serious about buying. A pre-approval can help you negotiate a better price with the seller, since being pre-approved is very close to having the cash to pay for the house.
Formal Application
Once you locate your property you wish to purchase and have a successful offer, it’s time to begin the formal application process. If you were not pre-approved, at this stage you will need to provide more detailed documentation to your lender, including assembling your financial records. Mortgage loan qualification guidelines typically differ depending on the loan program and the lender. The costs of your transaction may vary depending on the loan program you select with your lender, and any changes you decide upon during the loan process. The type of loan you choose is a very important aspect of the loan process, and one you should completely understand before making any kind of commitment. Once the lender receives all this information, they will verify them and start the decision making process. The appraisal is ordered and is done during the same time that the processor is verifying information. Whether it’s during the pre-approval stage or during the approval process itself, the essential question the lender’s underwriters are asking is “How good of a long term risk is the borrower?”
Approval
The loan processing (approval) stage is typically the longest in the process. During this step there isn’t really much you can do but wait. Again, be aware that any material changes in your financial situation can impact this stage, so before you do anything that could have an affect, make sure you discuss it with your lender. When the underwriter is satisfied, the borrower will receive an approval and be cleared to close.
As well as your home loan costs, there are other fees and charges associated with buying a property you need to consider, such as loan origination or underwriting fees, broker fees, transaction, settlement, and third party costs. Costs associated with property surveys and searches may be required. Make sure you look into the closing costs and other costs in detail. It is very important that each client fully understands all of the costs associated with their mortgage loan. Be aware that other fees and costs vary by program and by lender, so when you are shopping for a loan, make sure to get all of the associated costs so you can make a proper comparison.
Closing
The final step in the mortgage process is the closing meeting. You should have a good understanding of what is involved in the closing process, because there are a number of things that you can do to make sure that it goes smoothly and on time. The closing is a meeting, most often at the title insurance company, where the lender, homebuyer and seller meet to complete the sale and mortgage process. Closing costs may vary among companies and also throughout the nation because of differing local laws and customs.
A couple of fees to be aware of:
As with all the fees, rates, and points involved in a mortgage transaction, don’t shy away from negotiating these down or even out of the agreement. Keep in mind that knowing the process and having knowledge of the competitive marketplace enables you to be a more successful negotiator.
Parting Thoughts
With all of the finance programs available to the consumer, from conventional, adjustable rate mortgage and interest only, having an experienced mortgage professional on your side will help you achieve your goal of buying a home and should save you money in the process. Certainly your interest rate is important, but getting the right mortgage, receiving the true costs of the transaction, and getting sound counsel can be far more valuable than a fraction of a percentage difference in your rate. Improving your expertise and knowledge before you start will help the whole loan process be a smooth and relatively painless one.
Balloon mortgages can, and often do, contain a contractual opportunity to refinance at prevailing rates when the balloon payment is due. If the balloon mortgage loan has the option to be refinanced when the initial period expires, it will be called a convertible balloon mortgage. Some balloon mortgages come with “reset” clauses that provide for the original lender to reset the loan terms so that the loan is fully paid off in the remaining twenty three to twenty five years. The advantage of a balloon loan with a reset is that the loan payment will remain constant for the remaining life of the mortgage. The disadvantage is that the borrower is subject to the then current rates. If you are unable to convert or refinance the balloon mortgage, you may be forced to sell your home to make the loan whole. However, for the initial period of the loan, the interest rates on a balloon mortgage are usually a little lower than a comparable Adjustable Rate Mortgage.
Alternatively, with a fixed-rate mortgage you’ll have the benefit of knowing exactly what your monthly payments will be for the entire term of the loan. Because few people have the funds to fully pay off the balance due at the end of the balloon term, when using a balloon mortgage as the instrument of financing, the borrower should be concerned about future interest rates because they will be subject to them when the loan matures. However, most people that take out balloon mortgages assume that they’ll be moving within the term of the balloon period or that they will be eligible for a more attractive loan at the end of that period. Many people also use balloon mortgages to get that larger dream house. This strategy can, in fact, be fairly risky and a borrower should consider the market risk against the benefit of a larger home. Again, at the end of that period, the borrower must pay off the loan in full – this is the “balloon” payment. For example, a 7 year balloon calculated to amortize over 30 years will have low payments for 7 years and then the remaining balance will be due.
Before borrowing it’s important to consider whether you already have too much debt, whether you will be able to service the debt if you refinance at the end of the balloon period (or pay the balance), the risks associated with the current real estate market, and other factors as well. While it can be fairly easy to make the monthly payments on a balloon mortgage, it is very important to consider that there could be difficulty in managing the terms of the loan once it matures. In the current climate, fixed-rate mortgages are definitely the “loan of choice” for homeowners seeking a refinance mortgage, but if all the factors are considered and risks weighed, a balloon mortgage can be a viable alternative. Loan programs vary depending on the borrower’s credit, closing costs vary from state to state, work with your loan officer to get a proper estimate when you apply for your loan.
The simplest way to explain the difference between amortization and depreciation is understand the type of the financial events that they are associated with. Depreciation is a term used to define an asset (cash or non-cash) that loses value over time. Mortgage amortization is the periodic reduction of the principal balance of a home mortgage that is usually fixed in the terms of the loan.
For the purposes of a home mortgage, amortization is the reduction of the principal or capital on a loan over a specified time and at a specified interest rate. Interest is the fee paid by the borrower to reimburse the lender for the use of credit or currency. At the beginning of the amortization schedule a greater amount of the payment is applied to interest, while more money is applied to principal at the end. In other words, a borrower will start out paying mostly interest and in the end the majority of the monthly payment goes toward cutting down the actual loan amount.
A mortgage is amortized when it is repaid with periodic payments over a defined term. The goal is for the mortgage to be fully amortized, an elaborate way of saying paid off, at the end of the term of the loan. As more and more of the principal is paid down, the interest declines, leading to greater mortgage amortization in the later years of the loan and a subsequent increase in the borrower’s equity in the property.
One thing to consider when taking out a mortgage is the amount of money which will be paid out over the life of the loan. A mortgage calculator which provides an estimate of monthly payments and amortizations can make it easier to see the entire schedule and impact to the borrower. Negative amortization, which can occur in financing instruments like a balloon loan, exists when the monthly mortgage payment is not big enough to cover the full amount of interest due.
The process of amortization is an easy one to understand once you know the basics and get the idea of how it all works. Mortgage amortization, as used in real estate, is when the principal balance on a mortgage is reduced over time as the home owner makes monthly payments. Amortization describes the process of paying off a loan in regular, typically monthly, installments. As a general rule, amortization is desirable, because if a mortgage is not amortizing, it means that the borrower is not making any headway on the loan.
This mortgage calculator can be used to figure out monthly payments of a home mortgage loan, based on the home’s sale price, the term of the loan desired, buyer’s down payment percentage, and the loan’s interest rate.
This calculator factors in PMI (Private Mortgage Insurance) for loans where less than 20% is put as a down payment. Also taken into consideration are the town property taxes, and their effect on the total monthly mortgage payment.
