Mortgage Cycling Secrets Revealed Mortgage Factors Loan To Value Low Refinance Rates Bad Credit Mortgage Loans Are You Killing Your Chances Of Getting Approved The Pros And Cons Of Adjustable Rate Mortgage
Have you heard about mortgage cycling? Maybe you’ve seen the ads for books on this “secret technique” for paying off your mortgage sooner. Is there some useful information in them? Yes, especially if you are not familiar with the basic premise that you can pay extra principle every year and you’ll pay off the loan sooner and save thousands on interest.
Mortgage cycling is dressed up as a “new” system, and of course there are many little tricks to doing this most effectively.There are more risky techniques too, like using short-term home-equity loans to pay down your primary mortgage now. This latter technique could cost you more in interest or even put you into financial trouble that leads towards foreclosure.
The safest way of “mortgage cycling” is to just put large lump sums of money towards your mortgage loan every few months to a year. Pay thousands of dollars extra per year, and you will pay off your loan many years sooner. No surprise there, right, but what if you don’t have the hundreds of dollars a month extra needed to do this?
Money For Mortgage Cycling
Don’t assume you can’t come up with SOME extra money, at least each year. Some will say they can’t, and yet still add hundreds of dollars per month to credit card payments from buying anything from expensive shoes to snowmobiles. There’s nothing wrong with buying these things, but the choice is yours if you want to pay down that mortgage instead.
You can also pay off large chunks of principle by using your annual tax refund, insurance settlements that are not otherwise allocated, and any cash gifts or prizes you may receive.
How much sooner you can pay off your mortgage depends on how much extra you pay and when. The sooner you pay extra money towards the principle, the better. Let’s demonstrate with a simple example, just making an extra payment each month.
Suppose you have a $160,000 30-year mortgage at a 7% annual interest rate. Regular monthly payments would be $1064.40. If you looked at your second payment you would see that it’s composed of $932.57 interest and $131.83 principle (the amount you actually pay down the loan). Just add $131.83 to your normal payment of $1064.40, and you have taken an entire month off the time it will take to pay off your mortgage.
If you did this each month, you would cut the time to pay off your loan in half. The principle part of the payment would be growing with each payment, so the extra payment would be a little more each month (around $137 by the end of the first year), but hopefully over the years your income will rise enough to afford that. Consider that if you pay normally, your last year of the mortgage you’ll pay $12,772.80 ($1064.40 x 12 months). On the other hand, pay about an extra $1600 that first year, in the way shown above, and you’ll eliminate that entire last year – a savings of over $11,000!
Other ways to pay off extra principle need to be evaluated carefully. You could, for example, put a few thousand of your savings towards the loan now and save perhaps tens of thousands in interest over the years. However, will you then need to pay even higher credit card rates because you emptied your savings account and need some money? You could cash in stocks and apply the money to the loan, but will you be giving up a 9% return to pay down a 7% mortgage? You may also want to consider paying off any debts with higher interest rates before you apply extra money to your mortgage.
To keep it simple, set aside extra money every month and apply it to the loan. Then use any other money that may otherwise be squandered (like tax refunds). If you just do a few simple things to pay something extra on the loan each year, and you can forget about complicated mortgage cycling plans.
When applying for a home loan, there are a number of factors you have to take into account. Loan to value is one of the key issues that will determine whether you get that loan.
Mortgage Factors: Loan to Value
When considering an application for a mortgage, lenders look at a number of factors. Regardless of the type of loan, they always look at loan to value ratios. The loan to value ration is simply a calculation that tells the lender and you the value of the property in question versus the amount of the loan. The ratio is determined by dividing the appraised value of the home by the amount sought for the home loan. For instance, assume a home is appraised at $200,000. If you apply for a $160,000 home loan, the loan to value is 80 percent.
In evaluating any loan of any type, lenders try to evaluate the risk factor. By risk, they are trying to ascertain the chance you will default on the loan and leave them holding the property. The loan to value ration is one of the factors used to determine risk. Simply put, the larger the loan to value ratio, the more risk the lender has of getting stuck with the property. The higher the risk level, the more picky the lender is going to be about other factors in the application process such as income, credit and so on.
The magic number with loan to value rations is 80 percent. If you can come up with sufficient cash to put down 20 percent on a property, the lender will consider the loan to be less risky. Put in practical terms, the lender knows you aren’t about to walk away from your large cash down payment if you can help it. Thus, there is less risk in granting the loan.
If you are applying for a mortgage with a high loan to value ratio, you need to make sure you have excellent credit and a strong history of employment. An application with 90 or 100 percent loan to value is going to make a lender risk sensitive, so you can expect it to be much harder to get the loan.
In the current home financing market, the loan to value ratio is not as critical as it used to be. There are now a bevy of lenders that specialize in particular types of loans, particularly high loan to value ratio mortgages. If you are looking at a high loan to value ratio, a mortgage broker is your best option to finding the best deal.
If the thought of paying your high housing loan interests makes you feel queasy, then opt for refinancing and get rid of all your worries and anxieties. Refinance your loan and lead a stress free life. And the veritably low refinance rates available in the market today makes mortgage refinance a lesser devil to tackle than usual.
What is Refinancing? Securing a loan to pay off your previous loan against the same assets, property etc is called refinancing. It is generally undertaken when the interest rates on the new loan are lower than that charged on the previous one. There are no-cost as well as low-cost refinance loans. In low-cost refinance loans the costs are included in the loan.
When to Refinance? Interest rates fluctuate, when the Central Reserve enters a rate cutting period. The prevailing rates may become significantly lower than when you originally secured your first loan. By refinancing your mortgage when interest rates are lower, you can exchange higher interest rates for a lower one, which, in turn, will lower your monthly payment. Low refinance rates leads to interest savings ultimately recovering the cost you’ve paid for the new loan. Refinance when you find the current market rates are low. You can enjoy the benefits of refinance if you can secure an interest rate 2 per cent below the rate on your current loan. Refinancing is beneficial even if the rate decline is only 1 percentage point, that is, even if you have contracted a fixed-rate home loan at 9 per cent, you will benefit from refinancing the rate to 8 per cent. This is possible due to low refinance rates which may vary from 2-2.5 per cent.
Benefits of low refinance rates – Reduces Interest Cost
Low refinance rates reduces interest costs and helps save more money at the end of month that would. It brings great respite in times of emergency by providing ready cash. Refinance rates are usually lower than the original loan when you actually compare rates, thereby allowing you to have extra cash, while simultaneously lowering your monthly mortgage payment.
– Lowers Monthly Mortgage Payment
In essence, refinancing a mortgage or other type of loan can lower the monthly payments owed, either by changing the loan to a lower interest rate or by extending the period of loan so as to spread out the repayment over a longer period of time. Low refinance rates helps save money which can be used to pay down the principal of the loan, thus further reducing payments.
In order to avail low refinance rate, keep a check on your credit score. Your credit history will make a big difference in refinance rate offered to you. Paying points are also one more way of getting low refinance rate. So, refinance your loan, pay low rate of interest and invest the savings thereby for exigencies. Low refinance rates sure make borrowing seem like a piece of cake. But do not get carried away with low refinance rate alone. Remember there is something called closing costs and redemption penalty.
When you have poor credit, your list of lenders that will approve you for a home loan can shrink down very small. You want to make sure that you are doing everything in your power to keep your credit rating as high as you can.
Many people will unknowingly hurt their chances of getting approved and make it more difficult for themselves. Here are 3 things you will want to avoid doing if your credit history is already bad.
1. Don’t have your credit pulled over and over by different lenders – Many people will, because of their difficulty in getting approved, apply with many different brokers and have the broker pull their credit over and over. Every time your credit is pulled, your score will drop just a few points. In some situations, it can be enough to disqualify you from the loan. The best way to go is to apply with companies online that will give you a pre-approval without pulling your credit, but instead, ask you what your credit is like.
2. Don’t Open Too Many New Credit Accounts – If a lender sees that you have a lot of new accounts open it can make them wary to want to lend you money. It can also raise your debt to income ratio, which will make it difficult, if not impossible, to get approved.
3. Don’t Be Late On Your Current Payments – Some people feel that since their credit score is already poor, it doesn’t make any difference whether or not they make their payments on time now. That is not the case, your credit score improves a little, everytime you make your monthly payments on time.
An adjustable rate mortgage, commonly referred to as an ARM, is a mortgage where the interest rate on the mortgage changes periodically, on a schedule, according to an index. The most common indexes used to determine the interest rates are:
One-year constant maturity treasury securities (CMT)
Cost of Funds Index (COFI)
London Interbank Offered Rate (LIBOR)
A lending institution’s own costs of funds.
The mortgage payment that you pay will thusly change, either up or down, to ensure a steady margin for the lending institution.
For many people who are looking at mortgages, the adjustable rate mortgage can seem like a great idea, however there are many pros and cons to an adjustable rate mortgage – items that need to be weighed over the short and long term to decide whether an adjustable rate mortgage is right for you or not.
The Pros of an Adjustable Rate Mortgage
The initial interest rate on an adjustable rate mortgage looks great on paper. Most often, the adjustable rate mortgage inserts rate is much lower than a fixed rate mortgage, which also means that the payment is lower. As a borrower, this lower interest rate can also mean that they can qualify for a higher loan amount if the lender is willing to base their ability to pay on the initial monthly payment amount. It’s important to do some research on the interest rates and see where they are sitting at in comparison to the six months to a year prior.
An adjustable rate mortgage is a good idea for people who only plan on staying in a house for a few years – from three to five years. Taking advantage of the lower interest rate that accompanies an adjustable rate mortgage is a good idea in this case. It means that you will ‘pay less’ for the home that you will be living in over the period of the three to five years, and gain more in equity in your home.
The Cons of an Adjustable Rate Mortgage
The biggest issue with an adjustable rate mortgage is that the interest rate will rise and thusly, so will your monthly mortgage payments. You have to decide whether the gamble is worth it or not. If you are looking at getting a raise in the next year from your job, then you may be able to handle an increase in your mortgage payments.
Some of the adjustable rate mortgages that are offered by lending institutions have a prepayment penalty, which you incur if you pay the mortgage off early. By having this prepayment penalty, you could be opening yourself up to a lot of strife – having a prepayment penalty on your mortgage contract is never a good idea because you simply just do not know what the future will bring.
You must also consider the payment cap. A payment cap sounds great – your mortgage payment can not go above “x” amount of dollars, however, that doesn’t mean that the interest charge is capped. If the interest rate raises high enough that you go over your payment cap, the lender adds the interest to your mortgage debt, which then finds you in the position of paying interest on the interest. This can translate to you paying much more for your home than you did when you bought it – this is called negative amortization. Many lenders have a cap on negative amortization that you can have, and if you reach that point, your payment cap goes out the window and your mortgage’s monthly payments are adjusted to begin repaying the negative amortization debt.
Factors that can go either way
There are a few factors of adjustable rate mortgages that can fall on either side of the pro/con debate. Due to the fact that there are many different types of adjustable rate mortgages available from different lenders, it’s important that you research the adjustable rate mortgage and find out whether it is right for you. Some of the ‘ambiguous’ factors that you have to consider can make or break the decision to go with an adjustable rate mortgage.
One of the first things you need to consider is the lifetime interest rate cap on the mortgage. This is the maximum amount that the interest rate can raise through the period of the mortgage. There are also the periodic adjustment caps that limit the amount that your mortgage interest rate can raise from one adjustment period to the next. The law states that adjustable rate mortgages have some type of lifetime cap.
Most lenders use one of the index rates to base their interest rates on. The index rates change and fluctuate with the movement of the economy. To determine the interest rate that you will be charged, the lender adds a margin (profit percentage) to the index rate. The margin that the lender will add is also important – it determines your future interest rates with an adjustable rate mortgage. The margin is different from lender to lender, so it’s important to find out what the margin is..
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