What Exactly Is a HELOC?

A HELOC is a home equity line of credit. Equity in a property is the difference between its market value and what you owe on it.

For example, a homeowner who has a property worth $150,000 and has a mortgage balance of $120,000 has $30,000 of equity in the property. To access some of this equity for your own use, you could look into taking out a HELOC.

A HELOC is a mortgage, separate from the one you may already have. To get one, you would go through a similar process as you would for a traditional mortgage. Income, assets, and credit are all considered.

Common uses for HELOC funds include home improvements and college tuition. Because it is a line of credit, as opposed to a loan, a HELOC works more like a credit card.

As with a credit card, you are able to purchase items and then pay down the balance over time. As you reduce that balance, you are then able to borrow the same money again and again.

While they operate in a similar fashion, HELOCs offer two advantages over credit cards. The first is a lower interest rate. The second concerns taxes. Often, the interest paid on a HELOC is tax-deductible.

The HELOC is a line of credit, which is different from a home equity loan. The equity loan has a fixed payment over time.

With a HELOC, the interest rate can fluctuate, so the payment amount can also change. This means that your qualifying income must be high enough that you can make the payments when they are high.

Interest rates are also typically higher on HELOCs than they are on fixed-rate mortgages. This is because, in the case of default, the first mortgage lender will get paid back first. This puts more risk on the HELOC lender.

For additional information on HELOCs, contact your mortgage professional.

Mortgage Insurance 101: What You Need to Know

Mortgage insurance is insurance that lenders take out and borrowers pay for, to help offset losses that lenders incur.

There are two types of mortgage insurance. The first covers conventional mortgages. These mortgages use guidelines from Fannie Mae or Freddie Mac.

With this type of loan, if you put down less than 20% of the purchase price, you’ll be required to pay for mortgage insurance. In the case of a refinance, if you have less than 20% equity (market value minus financed amount), you will also pay mortgage insurance.

The cost of mortgage insurance is based on the amount of equity you have in the property and other factors, such as credit scores.

At some point in the life of the loan, you will be able to remove this mortgage insurance. This typically occurs once you have built up more than 20% equity.

The second type covers FHA loans. With FHA loans, there are actually two types of mortgage insurance. One of them you pay as a one-time fee.

This is called the upfront premium and can either be paid at closing or financed into your loan. As of early 2018, this premium was 1.75% of the amount being financed.

The other type of FHA mortgage insurance is called an annual premium. It is paid on a monthly basis. Unlike with conventional loans, this premium will likely remain on the loan until the loan is paid off through the sale of the property or a refinance.

Contact your mortgage professional for more details.

Should I Consider a Mortgage Recast?

A mortgage recast is a one-time “paydown” of your mortgage, which results in a lower payment.

Sounds good, but there are some things to consider before opting for a recast.

You can accelerate the payoff of your mortgage in two main ways: The one you are probably most familiar with is when you send in a specific amount of extra money each month with your mortgage payment to be applied to the balance.

The goal is that the stream of extra payments, over time, will lower the principal balance, reduce interest expense, and thus shorten the term of the mortgage.

For example, by annually making one extra payment of principal and interest this way, over the course of 12 monthly payments on a 30-year loan, you’ve taken roughly four years off the end of the loan.

Keep in mind, though, that throughout the whole process of this “paydown,” regardless of how long it continues, the base mortgage payment will remain the same.

The mortgage recast

A recast works a little bit differently. As opposed to the example above, when you made smaller payments over time, a recast is a one-time larger payment.

The recast process includes a recalculation of the mortgage payment downward. This could be beneficial to you as your monthly mortgage payment is lower. But you may want to consider the following:

First, not all lenders offer this option. If it’s something that you are hoping to do, discuss it with your lender before making plans. Second, the lender may have a minimum “paydown” amount, such as 10% of the original mortgage amount.

Finally, the lender may charge a fee for a mortgage recast. This can range from a nominal fee to well over $500. Lenders incur expenses in offering this option, and this is how they recoup some of this expense.

To learn more, contact your mortgage professional.

Your Closing Date Will Affect Your Closing Costs

Everyone knows mortgage payments are always due on the first day of the month. But, while this is correct, there’s more to the story.

If you make your mortgage payment on June 1, the principal and interest you’re paying are applied to the period of May 1 through May 31. This is called making payments in arrears, meaning you’re paying the principal and interest for the periodafter you use it.

And it’s important information to know when you are buying a home.

Why? Because the day of the month on which you have your closing will determine how much principal and interest you will pay at that time.

Take an April 22 closing: At that time, you’ll pay principal and interest to the lender from that date, April 22, through the end of the month, April 30.

As payments are made in arrears, the next mortgage payment that you make will be due on June 1. This will cover principal and interest for the month of May. The cycle then repeats itself.

So, if you close earlier in the month, say on April 4 or 5, you can expect to pay more in principal and interest than if you closed on the 24th or 25th.

This is important to know, in that it will factor into the equation when you and your mortgage professional are determining how much money you will need to take to closing.

If you have any questions about this, contact him or her for more details.

Use Your Home to Fuel Your Retirement Goals

Although mortgage rates are creeping up, they’re still very low.

So now may be the right time to discuss with your financial and mortgage advisors how you can use the equity in your home to further your financial goals.

They can help you find the approach that’s right for you.

Tapping your equity

There are a couple of ways you can take cash out of your home, and many places you can then invest it.

The first is a cash-out refinance of your existing mortgage, whereby you replace your existing mortgage with a new one, and pull out cash in the process. Typically, this approach comes with a lower rate than the second option.

This option involves some type of home equity loan or line of credit. If you go that route, you’ll then have two mortgages. Check with your tax professional to see if any of the interest on these mortgages is tax deductible.

Investing it

With cash in hand, here are two of many paths you can take to invest it and make it grow. The first is in some type of investment vehicle that your financial pro can recommend. Getting a rate of return on your financial investments that is greater than what you pay each month on your mortgage is one good way to build wealth over time.

Or you can invest the equity in the purchase of a rental property that will produce a monthly stream of income. Real estate has historically been a great investment, and this is a good way to prepare for retirement. If this is the right approach for you, your mortgage pro, real estate agent, and other members of their teams can help you by

  • researching current and future trends in the rental market you’re interested in,
  • running a return-on-investment analysis, and
  • finding and working out the details of your purchase.

Don’t Think Short Term, Get a Home Inspection

If you are a home buyer, your home inspector can be your best friend. However, many are concerned about the cost of an inspection and prefer to waive it. This is unwise. Here’s why.

A home inspection is a very detailed examination of all the major systems of a property. These include the plumbing, electrical, heating, and cooling systems as well as the structural integrity of the property, and radon gas, mold, and termite detection, as needed.

Unlike an appraisal – the report ordered by your lender, which is used to determine how much a property is worth, and which may uncover some of the more obvious issues – a home inspection is something you order. It looks at the property in greater detail and effectively educates you on the condition of your home-to-be.

There are a couple of reasons why you need a home inspection on any property you buy but especially on foreclosures that are often sold as-is.

First, there is a window of time (often five days) after you sign the purchase contract to get the home inspection and potentially back out of the sale. If you find a significant issue after this window expires, you still are obliged to purchase the property.

Second, the seller may be unaware of or unwilling to share details regarding the condition of the home. If an inspection uncovers a significant issue within that time window, you can renegotiate the price or walk away.

In all cases, you are your own advocate, and your home inspector facilitates this.

Be Sure to Maintain Your Credit after You’re Approved

If you’ve been pre-approved to buy your dream home, and are waiting for the paperwork to go through, you may be thinking about some needs and wants to make your new home just right.

You could buy a big-screen TV to go into the family room. And maybe the kitchen remodeling should be done sooner rather than later. But with all the money you’ve put into purchasing your home, you may be strapped for cash.

Your credit is good enough to enable you to buy your new home, so would it really be a problem to purchase some of your needs and, OK, a few wants, before you go to closing? Unfortunately, the answer is yes.

Here’s why: Your lender will pull your credit on the day of closing. And if new credit lines show up on your credit report, your loan file will have to go back to underwriting to be re-approved.

If you barely qualified for the loan when you signed the papers, you could have pushed your ratios out of range, and you may not qualify now.

But can you make your purchases by applying for new credit after closing? Resist the urge. Credit pulls could potentially lower your credit scores, and because you may have access to more credit than you did before you started to look for a new home, that may also have an impact.

So before you buy, talk to your mortgage professional. That big-screen TV just may not be worth the risk.

Two Ways to Pay Your Mortgage: Which Is Best?

With traditional mortgages, payments are made to the lender once per month, so a 30-year mortgage would have 360 payments, while a 15-year loan would have 180.

If you are considering making biweekly mortgage payments, you would make a payment every two weeks. At the end of each year, you will have made the equivalent of 13 monthly payments.

The effect of this on a 30-year loan, for example, would be to reduce the term of the loan by approximately four years.

This sounds great, but what the bank is doing for you in allowing you to make biweekly payments is something you can also do for yourself.

For example, if you have a 30-year, $100,000 mortgage at a rate of 5%, and are making 12 payments per year, your monthly loan payment will be $536.82.

If you decide to take the biweekly option, your payments would be $268.41. However, one drawback is that you are locked into that payment for the life of the loan.

Another is that you may be charged a premium by the lender for setting up the payments in this manner. But there is another way.

To make up that extra payment a year, all you need to do is send in an additional 1/12 of your monthly payment each month, and apply it to the principal.

So, in the example, you would take the original payment of $536.82 and divide it by 12 to equal $44.74. You’ll send in this extra amount each month to apply to the principal. This also means that if there’s a month where you are experiencing financial challenges, you could skip the extra payment for that month.

The interest savings you realize over time is almost the same for the biweekly mortgage and the do-it-yourself approach (making the additional payment each month). Both methods will save you about $17,000.

Speak with your mortgage advisor to decide which is the best option for you.

Eligible Veterans Can Really Benefit from a VA Mortgage

If you are eligible for it, a VA mortgage can be a great way to finance a home.

The program comes under the Department of Veterans Affairs. Its purpose is to allow eligible veterans to finance a home at favorable terms. Effectively, with a VA loan an eligible veteran can buy a property for less money than through another financing option.

You obtain a VA loan from a private lender, and the Department of Veterans Affairs guarantees a portion of the loan, allowing the lender to offer favorable terms.

You’ll still go through the process of qualifying for a VA mortgage, as you would with any other type of mortgage. In order to qualify, you must have a Certificate of Eligibility, plus good credit and sufficient assets; occupancy rules are complicated, but basically you must personally live in the home as your primary residence.

There is no down payment unless the lender requires it or the price is higher than the home’s value. Other advantages include:

  • The benefit can be reused.
  • A VA loan can also be used to make improvements to your home at the time of purchase.
  • You can refinance in order to get a lower interest rate.
  • There are no mortgage insurance premiums, but there is a funding fee, which is a percentage of the purchase price. You may be able to roll it into the mortgage.
  • The loan is assumable. This means that a qualified potential buyer can take over your loan payments.

How to Finance a Condominium or Townhome

Financing a condominium or townhome differs from financing a single-family property. If you’re considering which of these options is right for you, you may want to factor in this information.

According to a blog post on nationwide.com, “A condominium, or condo, is a building or community of buildings in which units are owned by individuals, rather than a landlord.” Townhomes are defined as “conjoined units that are owned by individual tenants.”

One important difference: When you purchase a townhome, you own the structure you live in, as well as the land underneath it. In a condo, you own the interior, but the building exterior and the land on which the building sits is owned by a homeowners association (HOA).

The HOA is governed by a board of directors elected by the owners of individual units. There are monthly HOA fees for both townhomes and condominiums, designed to assist with maintaining the property. Typically, these fees are higher for condos, because they include lawn care, snow removal, pest control, and other regular maintenance tasks. Townhome owners usually have more responsibility for upkeep.

In financing a condo or a townhome, your lender may require that the development be on the Federal Housing Administration (FHA) approved condo list, which is maintained by the Department of Housing and Urban Development (HUD). This is a nationwide list of developments that have been approved, and are regularly reapproved, for loans. Depending on the way the development is classified, some townhome projects may not be included on the FHA list.

Your real estate attorney will be able to examine the HOA financials, as well as bylaws, insurance certificates, and other documents that indicate how well – or how badly – the HOA operates.

This is an important step; your purchase will likely hinge on what your attorney finds in those documents.