Financial Future

Over half of Americans are buried in debt and desperate for some help in gaining control of their outgoing cash, while finding ways to keep enough to pay the bills. What was once considered impossible, refinancing with bad credit can now be done without the overwhelming hassles.

A bad credit refinance could actually help your credit in a number of ways.

With the many other default loans on your record, refinancing to deal with it will show that you have taken steps to take control of your situation. This proves to other lenders you are capable of making the right decisions with your money.

Refinancing means that you are aware of your financial problem and would like to start putting some of your cash, now going to interest, in places that will really raise your credit score.

When exploring the options of refinancing with bad credit you will notice that most lenders are happy to consolidate, meaning you only make one payment a month. No more late payment penalties, miscalculated interest, and keeping up with too many statements; bad credit refinance and you will be taken care of.

Some people can actually refinance and get a lower interest rate at the same time. This can be a blessing when it comes to having a little extra cash saved up at the end of the year.

Now that you know how refinancing could help you with your debt situation you need to know what it will involve. The truth is, you will be surprised at how easy it really is but don’t expect it to be free. Bad credit refinancing usually costs a little, but getting your score up and under control will be well worth it. Here are a few of the things you may need to know before applying for bad credit refinancing.

Interest rates when refinancing with bad credit are typically much higher. If you are looking into consolidating this may be worth it but otherwise you should make sure it won’t be worst then your current APRs.

When refinancing with bad credit there will more than likely be fees to pay, along with penalties of paying loans off early or in one lump sum. You should explore all your options and investigate each loan thoroughly before heading to the bank.

Loan application fees are standard whether doing a bad credit refinance or you have perfect credit. Check into several lenders before choosing the one that fits you best. You can easily explore your options further online.

The bottom-line is you never know what you may be able to do until you try. With the great competition between lenders, more are willing to assist you in refinancing with bad credit just to have another consumer on their side. Investigate all the possibilities and you will more than likely find the perfect lender to help you out.

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Home Equity loans and lines are among the most economical lending solutions available. Depending on your unique financial situation, the interest paid can be tax deductible. They are flexible and generally offer the best rates. There are many advantages to a home equity loan. Refinance with caution, still.

There are two types of home equity loans. The actual loan is usually a fixed rate with a specific time period in which the loan will be paid off. The payment is also fixed. These types of loans are good for the borrower who has a specific amount in mind. When consolidating debts, such as credit cards, student loans, car loans, or doing specific home improvements, a person will use a home equity loan to put all their payments into one, usually, lower payment.

A home equity line of credit is a more flexible option. This type of loan is open ended. The rate and payment is generally variable and tends to be lower. You can use a line of credit somewhat like a credit card with added tax benefits. You only pay interest on the portion of the line that you use and the rest is available for you when you need it. When you make payments, the portion applied to the principle is made available for use again. Many lenders offer a card for easy access. This option is useful for those who don’t have an immediate use for the funds or want to have the flexibility to keep borrowing without going through the application process over and over.

When you refinance your existing home loan and have equity left over, many times you will be offered a home equity loan or line. If you have additional debts that you did not include in your first home loan, a home equity is a good way to go. Why would you not include all your debts in the first loan you ask? Well, many times, debt is split into two loans in order to keep the larger portion under 80% loan to value. This allows a borrower to take advantage of the best rate. The lower your loan to value is the better your rate will be. Keeping a loan under 80% of the appraised value of your home will also allow you to avoid paying costly PMI, or Private Mortgage Insurance.

If you do not have use for a second loan at the time you are refinancing your first, you can get a line of credit. Even if you don’t use it right away, it is a good thing to have in case of an emergency. When you need it, it’s there ready for use. You will not need to go through the lengthy application and approval process all over again. Another benefit is that they can use the same credit inquiry and appraisal that they used for the first loan. One thing to be aware of is that there is usually an annual fee for a line of credit. Ask your bank about any special programs they may offer to help offset this cost. Sometimes they will negotiate with you to entice you to take the offer.

As you can see, there are many benefits to both home equity loans and lines. Carefully weigh all of the options before you make your decision. Talk about the cost and ask about any hidden fees so that you can make the most informed decision possible.

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First time home buyer loans allow buyers to get into a house more easily. However, just because you’re a first time home buyer doesn’t mean you should use a first time home buyer loan. These programs have restrictions and strings attached. While they are a perfect fit for some, first time home buyer loans are the wrong choice for others.
In addition to loan programs, be sure to learn about the First-Time Homebuyer Tax Credit.

What is a First Time Home Buyer Loan?

A person’s first home purchase is a big deal. It takes time, energy, and money. To help with the cash hurdle, some people use first time home buyer loans. These programs vary depending on where they’re offered, but the general idea is this: first time home buyer loans give financial assistance to qualified borrowers. They may do this in the following ways:
Allow for a very low (or no) down payment
Subsidize interest costs (they pay all or part of it)
Offer grants
Forgive loans
Limit fees that lenders are allowed to charge
Defer payments

Note that first time home buyer loans available to you might offer any or none of the benefits listed above. You should research first time home buyer loans available in your area.

Who Gets First Time Home Buyer Loans?

As you might imagine, individuals who have never owned a home are good candidates. In addition, some programs offer first time home buyer loans to consumers who have not found a home within the last three years. Again, check to see what’s available to you.

You may have to meet certain income restrictions to qualify for a subsidized first time home buyer loan. In general, these programs try to limit benefits to Americans with low and moderate income levels. If you earn too much, you won’t qualify for the program.

First Time Home Buyer Loan Restrictions

Most programs put a dollar limit on the property you’re buying. You probably can’t use a first time home buyer loan to buy the more expensive properties in your area. Instead, you’ll be limited to properties on the lower end of the spectrum. Again, the idea is to benefit people who have the most need.

You also have to live in the home as your primary residence. If you’re going to rent the place out, don’t use the first time home buyer loan. Finally, the home you buy most likely has to meet some physical requirements. It must be in good condition and free from any safety hazards (such as lead-based paint, for example).

First Time Home Buyer Loan Pitfalls

For some first time home buyers, these programs are perfect. They open the door to home ownership where a family would not have been able to buy a home. Communities also benefit from first time home buyer loans – homeowners take care of their property, get involved, and contribute to the economy. Nevertheless, first time home buyer loans can be the wrong choice in some cases.
With a subsidized first time home buyer loan, you face some challenges:
Lower value home may not be the home you want
You might lose some of the benefits of the program if you sell your home too soon
You may have to pay recapture tax for some of the benefits you received
You may be limited to a short list of loan types (only 30 year fixed rate mortgages for example)
You may have to share increased home values with the program

Given these restrictions, you may do best to avoid subsidized first time home buyer loans. Patrick Schwerdtfeger, a California mortgage broker, notes that you’ll probably come out ahead using a plain-vanilla mortgage if you’ve got decent credit (Mr. Schwerdtfeger also does the Beyond the Rate podcast – required listening for first time home buyers). With a FICO credit score above 720, you probably won’t see an advantage with the subsidized first time home buyer loan. Once you get below 680, the subsidized program will start to look better. These days, you can get traditional home loans or FHA loans with very little down.

The best thing to do is to explore all your options. Take a look at what your traditional home loan lender is offering, and compare it to the subsidized first time home buyer loans. Once you see how the numbers compare, consider the cost of flexibility.

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Many people who are considering buying their first home can be overwhelmed by the myriad of financing options available. Fortunately, by taking the time to research the basics of property financing, homeowners can save a significant amount of time and money. Having some knowledge of the specific market where the property is located and whether it provides incentives to lenders may mean added financial perks for buyers. Buyers should also take a look at their own finances to ensure they are getting the mortgage that best suits their needs. Read on to find out which financing option may be right for you.

Loan Types

There are several home loan loan types; these are differentiated by loan structure and the agencies that secure them.

1. Conventional Loans
Conventional loans are fixed-rate mortgages that are not insured or guaranteed by the federal government. Although they are the most difficult to qualify for due to their requirements for criteria such as down payment, credit score and income, certain costs, such as private home loan insurance, can be lower than with other guaranteed mortgages.

Conventional loans are defined as either conforming loans or non-conforming loans. Conforming loans comply with the guidelines set forth by Fannie Mae or Freddie Mac. These stockholder-owned companies create guidelines, such as loan limits – $417,000 for single-family homes, for example – because they package these loans and sell securities on them in the secondary market. (To find out what happens to your home loan in the secondary market, read Behind The Scenes Of Your Mortgage.)

A loan made above this amount is known as a jumbo loan and usually carries a slightly higher interest rate because of the lower demand for loan pools with these loans in them. Non-conforming loans, usually provided by portfolio lenders, have guidelines that are set by the particular lending institution underwriting the loan.

2. FHA Loans
The Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development, provides various home loan loan programs. An FHA loan has lower down payment requirements and is easier to qualify for than a conventional loan. FHA loans are excellent for first-time home buyers because in addition to lower upfront loan costs and looser credit requirements, they allow down payments of as low as 3%. FHA loans cannot exceed the statutory limit. (For more on this type of loan, see Insuring Federal Housing Authority Mortgages.)

3. VA Loans
The U.S. Department of Veterans Affairs (VA) guarantees VA loans. The VA does not make loans itself, but guarantees home loans made by qualified lenders. These guarantees allow veterans and service people to obtain home loans with favorable terms, usually without a down payment, and in most cases they are easier to qualify for than conventional loans. Lenders generally limit the maximum VA loan ($417,000 in 2008, $625,000 in Hawaii, Alaska, Guam and the U.S. Virgin Islands). Before applying for a loan, request eligibility from the VA. If you are accepted, the VA will issue a certificate of eligibility to be used in applying for a VA loan.

In addition to these common loan types and programs, there are programs sponsored by state and local governments and agencies, often with the goal of increasing investment or home ownership in certain areas. (For further reading, see Shopping For A Mortgage.)

Equity and Income Requirements

The pricing of home mortgage loans is determined by the lender in two ways, each of which determines the creditworthiness of the borrower. In addition to checking the borrower’s FICO score from the three major credit bureaus, lenders will require information to determine two standard statistics, which are used to set the rate charged on the loan. These two statistics are the loan to value ratio (LTV) and the debt-service coverage ratio (DSCR)..

LTV is determined by the amount of actual or implied equity that is available in the collateral being borrowed against. For home purchases, LTV is determined by dividing the amount being borrowed by the purchase price of the home. The higher the LTV, the more expensive the loan will be because the lender believes there is a higher risk of default. The idea here is that the more cash the borrower is putting at risk (in the form of a down payment), the less likely he or she is to default on the loan.

LTV also can contribute to loan costs by determining whether a borrower will be required to purchase private home loan insurance (PMI). PMI insulates the lender from default by transferring a portion of the loan risk to a home loan insurer. Most lenders will require PMI for any loan with an LTV greater than 80%, meaning any loan where the borrower will have less than 20% equity in the home. The cost of home loan insurance and the way it is collected are usually determined by the amount being insured and the mortgage program being used to obtain the loan. (For more on PMI, read Six Reasons To Avoid Private Mortgage Insurance and Outsmart Private Mortgage Insurance.)

For the most part, mortgage insurance premiums are collected monthly with tax and property insurance escrows, and are supposed to be eliminated automatically after the loan has been paid down to a point where LTV is equal to or less than 78%. It may also be possible to cancel PMI once the home has appreciated enough in value to give the owner 20% equity and a set period of time has passed, such as two years. Some lenders, such as the FHA, will assess the home loan insurance as a lump sum and capitalize it into the loan amount.

There are ways to avoid paying for PMI. One is not to borrow more than 80% of the property value when purchasing a home; the other is to use home equity financing or a second mortgage to obtain the funds needed above 80% LTV. There are many programs that allow for this, but the most common is called an 80-10-10 home loan. The 80 stands for the LTV of the first home loan, the first 10 stands for the LTV of the second home loan, and the third 10 represents the equity the borrower has in the home. Although the rate on the second mortgage will be higher than the rate on the first, on a blended basis it should not be much higher than the rate of a 90% LTV loan and for most consumers it will be cheaper than paying for PMI.

This is an exceptional alternative for borrowers who wish to pay off their homes early because they can accelerate the payment of the second mortgage and eliminate that portion of the debt quickly. As a rule of thumb, PMI should be avoided if at all possible because it is a cost that has no benefit to the borrower.

The debt service coverage ratio (DSCR) determines a borrower’s ability to pay the cost of the home loan. By dividing a borrower’s monthly net income available to pay home loan costs by the home loan costs, lenders can assess the probability that a borrower will default on the mortgage note. Most lenders will require DSCRs of greater than one. The greater the ratio, the greater the probability that a borrower will be able to cover borrowing costs and the less risk the lender takes on. The greater the DSCR, the more likely a lender will negotiate the loan rate because even at a lower rate, the lender receives a better risk-adjusted return. For this reason, borrowers should try to find any type of qualifying income they can when negotiating with a home loan lender. Sometimes an extra part-time job or other income-generating business can make the difference between qualifying or not qualifying for a loan or receiving the best possible rate.

Fixed vs. Floating Rate Mortgages

Another thing to consider when shopping for a mortgage is whether to obtain a fixed-rate or floating-rate home loan. A fixed-rate mortgage is one where the rate does not change for the entire period of the loan. The obvious benefit of getting a fixed-rate loan is that the borrower knows what the monthly loan costs will be for the entire loan period. However, a floating-rate home loan, such as an interest-only home loan or an adjustable-rate home loan (ARM), is designed to assist first-time home buyers or Americans who expect their incomes to rise substantially over the loan period. (To learn more, see Mortgages:Fixed-Rate Versus Adjustable-Rate.)

Floating-rate loans usually allow borrowers to obtain lower introductory rates during the initial few years of the loan, allowing them to qualify for a larger loan than if they had tried to get a more expensive fixed-rate loan. Although the benefit can be great, these loans entail a substantial risk for those borrowers whose income does not grow in step with the change in interest rate. The other downside is that in most cases, the rate change is not known at the outset of the loan because it is usually pegged to some market rate that is determined in the future.

The most common types of ARMs are a one, five or seven-year ARM. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. Once an ARM resets, it adjusts to the market rate, usually by adding some predetermined spread (percentage) to the prevailing Treasury rate. Although most ARMs by contract can only increase by so much, when an ARM adjusts, it can end up being more expensive than the prevailing fixed rate mortgage loan to compensate the lender for having offered a lower rate during the introductory period. (To learn more about the risks involved with adjustable-rate home loans, read ARMed And Dangerous.)

Interest-only loans are a type of ARM in which the borrower is responsible for only paying home loan interest and not principal during the introductory period until the loan reverts to a fixed, principal-paying loan. Such loans can be very advantageous for first-time borrowers because only paying interest significantly decreases the monthly cost of borrowing and will allow one to qualify for a much larger loan. However, because the borrower pays no principal during the initial period, the balance due on the loan does not change until the borrower begins to repay the principal.

Borrowers must weigh the benefit of obtaining a larger loan with the risk. Interest rates typically float during the interest-only period and will often adjust in reaction to changes in market interest rates. Borrowers also have to contend with the risk that their disposable income won’t rise along with the possible increase in borrowing costs. (Interest-only loans can be beneficial, but for many borrowers they represent a trap. Read Interest-Only Mortgages: Home Free Or Homeless?)

Conclusion

If you’re looking to find a home home loan for the first time, there are a few things that can be done to reduce the difficulty of sorting through all the financing options. The best approach is to put some time into deciding how much home you can actually afford and then finance accordingly. Homeowners who can afford to put a substantial amount down or who have enough income to create a high coverage rate will have the most negotiating power with lenders and the most financing options. Those who push for the largest loan will undoubtedly receive a higher risk-adjusted rate and then may have to deal with adjustable-rate mortgages and private mortgage insurance. A good mortgage broker or mortgage banker should be able to help steer you through all the different programs and options, but nothing will serve you better than knowing what you want and what you can ultimately live with.

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If you are considering refinancing your home to get a better refinance house loan interest rate, there are some things that need your careful consideration, and a few tricks to help you get the lowest refinance mortgage rates possible.

Advice On How To Get The Lowest Refinance Mortgage Rates

Never take the first offer you are given. Make sure that you shop around, and compare APRs, as well as terms from a number of different lenders, to make sure that you are getting the best possible deal. When you have found a good deal, make sure that you inquire about closing fees that will need to be paid on your old mortgage, as well as other fees included to open a new house loan.

Calculate the amount per month, and yearly that you will be saving on your home loan once it has been refinanced, then deduct the costs that you will need to pay to refinance. That way, you know whether it is worth your while.

After you have done your calculations, if it is worth refinancing, you may decide that you have a preferred lender, such as your current lender. If this is the case, ask them if they will be willing to match the best offer that you have been given. Don’t forget that if you find you have fees that you are unhappy with, it never hurts to ask the lender if they will waiver some of them to keep your business. The worst they can do is say is no, after all.

Your Credit Rating – Is It Important?

Lenders determine creditworthy Americans through a scoring system. The better your credit, and payment history, the better the rate you will be offered. Ideally, you need to have the best possible credit score to get the lowest refinance house loan rate. If you don’t have a good credit history, there are things that will help you get a better interest rate when you refinance, but these things will take some time.

First of all, you will need to make sure that your monthly repayments are made on time for your existing house loan. This will prove to the bank that you are able to pay your repayments on time. The other thing you should be doing is getting rid of as much consumer debt as possible before applying for your refinance. Consumer debt is considered bad debt, and is looked on unfavorably when you are applying for any type of loan. Consumer debt includes unsecured debts such as store cards, credit cards, and personal loans.

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