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Mortgage
Questions and Answers
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Pre-qualified vs. Pre-approved
What is the difference? |
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When you are pre-qualified for a loan the
lender has basically looked over your numbers and suggested
the amount you can afford. Although this may appear to be a
guess as your numbers have not been verified, the lender
does this every day so it is better than a guess. A lender
may provide you with a letter of pre-qualification to be
used when searching for a home. Generally there is no charge
for getting pre qualified.
When you are pre-approved, the lender has basically verified
all of the information you provided for the application.
This includes how much you earn, how much you owe and your
credit rating or FICO score. You will most likely be charged
for this service. A letter of pre approval is furnished to
you by the lender and this puts you in a much stronger
position when purchasing a new home as the seller knows you
are pre approved and are thus qualified to buy a new house.
The reason the term "pre" is used is because it
happens prior to actually finding a home. Many years ago
lenders would only allow buyers to apply for a loan once
they had actually found a new home.
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Are you Refinancing?
Things you should know. |
Whenever rates are low, many borrowers will find that
refinancing to lower interest rates makes financial sense.
When you refinance, you are getting a new mortgage by first
paying off the old one and then replacing it with a new one
with a lower interest rate. This move can lower your monthly
payment and the overall interest bill. You may also change
the term of the loan to a shorter one thus paying off the
loan earlier and saving on interest. By changing the term of
the loan from, say 30-years to 15-years, you can build up
equity more quickly on your home and cut the interest paid
on the loan substantially.
You may also refinance to get additional cash you need. You
can do this by going through what is known as "cash out
refinancing". Consumers get the difference between the loan
balance and the new one at closing to spend as they see fit.
Rather than to get a separate equity loan, some borrowers
choose to just refinance their first mortgage and take the
cash out at closing to spend. Yet refinancing mortgage may not be suitable for
everyone. If you are 20 years into a 30-year mortgage, it
may not make sense to refinance to a new 30-year mortgage.
This would mean you would be paying off the home for a total
of 50 years. A consumer with poor credit history may not
qualify for good rates so refinancing could actually
increase your monthly payments.
It is important to remember that when you refinance, the
lender may charge a loan origination fee, which may be 1% of
the loan amount. Also, any points paid in refinancing cannot
be deducted from taxes in the year of refinancing as the
amount is amortized over the life of the loan.
All in all, when you have built up some equity in your home,
you do have options and can cash in on this money whether
you refinance or obtain a home equity loan.
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Profit or Loss from the sell of your house?
How the IRS could affect
you. |
When selling a home, a couple can profit up to $500,000
on the sale of the home tax-free over a five-year period.
This is a rolling benefit over a five-year period, which
means that if you profit $250,000 on the sale of a home you
have lived in for 3 years and another $250,000 on a home
you've lived in for the next two years, you have maxed out
your benefit for that five-year period. The property does
need to be the principal residence. In order to get the
maximum benefit, you need to live in each home for a minimum
of two years, however, the amount can be pro-rated if you
need to sell your home in less than two years following the
purchase. There may be many reasons for this such as a new
job requiring you to move or relocate.
The amount for a single person is $250,000 and again if you
need to sell and move before the two year period from sale
is up the benefit may be prorated e.g. if you need to move
after six months a couple can profit $125,000 tax free and a
single person can profit $62,500.
You only need to report on a gain to the IRS once you have
reached the cap over the five year period and this can be
reported on IRS Form 1040 Schedule D. For more information
on selling a home and the tax implications see IRS
publication 523.
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Different types of loans
Do you know them? |
There are many different types of mortgages out there
and you will need to decide which one best suits your needs.
When selecting the right mortgage for yourself, you must
take into account your current financial situation and what
you expect your financial situation will be in the future.
There are other factors that will need to be included in
making this decision such as how may points you wish to pay
and whether you wish to be tied into a set interest rate for
the term of the loan or are willing to take a gamble and get
an adjustable mortgage. Your lender will be able to help you
make this decision.
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Down payment
How much do you need to put down? |
The answer to this question is: "It depends". These days
however, you can start at zero and go to whatever money you
can afford to put down.
Zero-down loans are relatively new but are gaining
popularity as lending institutions become more comfortable
with them. One of the reasons lending institutions are
getting more comfortable is that most people do not default
on their loans and lending institutions understand this.
Nowadays, many advertised homes have no money or very little
money down. These can prove to be an excellent way to go but
you should carefully examine the details of these offers. In
most cases, however, you will need to put some money down.
The lender feels that the more money you put down for the
home the more likely you are not to default on the loan
because you have equity in the home.
It is recommended to put down about 20 % or more of the cost
if you have that amount of money available. This is known as
80% Loan To Value ratio (LTV). If you put down less than
this you will be required to pay Private Mortgage Insurance
(PMI) which protects the lender in the event you default on
the loan. PMI is not tax deductible and can cost anywhere
from $25 to $65 per month for a $100,000 loan. It's
determined by the size of the down payment, the type of
mortgage and amount of insurance. Monthly PMI is paid with
the mortgage. Remember that under the federal law the lender
is required to cancel the PMI once the LTV ratio reaches 78%
or, in other words, when your mortgage amortized to 78% of
the original value of the house. The borrower must be
current on all mortgage payments and the lender must tell
the borrower at closing when the mortgage will hit that 78%
mark.
Some lenders may require this 20 % to be put down in order
to get a loan. You can be turned down for a loan if you are
not able to come up with the 20 % the lender requires. In
some areas of the country such as the New York Tri State
area and the San Francisco Bay area, where homes for even
the first time buyer are every expensive, 20% can be a large
amount of money. Starter homes in these areas can cost
$300,000 or more.
For Federal Housing Authority (FHA) loans, you may only need
to put down as little as 3% of which 2% can be a gift from a
friend, relative or Nonprofit organization. However, you
will need to pay PMI on this loan.
A new development is that nontraditional lenders are jumping
into the mortgage game. Many of these are investment
companies such as Fidelity. They allow you to borrow on a
margin, which basically means you are essentially using your
brokerage account as collateral for whatever you are buying.
Your brokerage account may be your retirement account or
investment assets you don't wish to sell in order to come up
with down payment cash. If you accounts are with other
financial institutions, investigate if they offer this
option.
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Programs, rates, terms and conditions are
subject to change without notice.
Some restrictions may apply.
© Valley Mortgage, Inc. 2006. All Rights Reserved.
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Equal Housing Lende