Mortgage Loan FAQs -- Frequently Asked Questions
What are the considerations for getting a home loan?
Buying and owning a home are cornerstones of the American dream. There are, however, some compelling financial benefits as well. The biggest advantage to owning your own home are the tax benefits. Any interest you pay on a mortgage is 100% tax deductible. Depending on the rental rates in the area in which you live, this savings can effectively make owning a home comparable to renting an apartment. Even if your home mortgage loan costs a bit more each month (after factoring in the tax breaks), it is certainly worth it given the next advantage.
As you make your monthly mortgage payment, you effectively build equity (ownership interest) in your home. Real estate markets certainly fluctuate but typically increase at a slow, steady rate over time -- making your home more valuable and increasing the money you will make if and when you should decide to sell.
An investmnt in real estate leverages your investment dollars (good in a solid housing market, bad in a declinging market). For example, if you had $50,000 in invest in the stock market and made a 5% return in a single year, you would make $2500 in profit. That same $50,000 used as a down payment on a $250,000 home that appreciates at 5% in a single year would give you $12,500. Of course, if the housing market went down, you would lose that same amount (a good reason to avoid selling a home in a down market unless you are purchasing in that same market).
Finally, a homeowner can borrow against their equity to consolidate debts, make improvements to their home, or pay for large expesnes like medical bills or college tuition.
Q. How do I know whether I should refinance my existing loan?
There are three basic situations where refinancing your mortgage loan makes a lot of sense.
The first is if you qualify for a lower interest rate than what you are currently paying. However, you have to calculate how long you plan to keep this new loan as refinancing costs money -- closing costs, broker’s fees, points, etc.
Another situation that may call for refinancing is if you have an option ARM (adjustable rate mortgage) that is going to expire in the next few years and you believe that when it does interest rates will be less favorable than they are today.
Finally, refinancing may be a good option if you have gained significant equity in your home. Let’s say, for instance, that you have a second loan at a fairly high interest rate – you may be able to refinance the entire loan into your first – thus saving you hundreds of dollars on interest payments that higher second. This is especially true if your second is a home equity line of credit that is directly tied to the Fed interest rate.
What is an Adjustable Rate Mortgage?
An Adjustable Rate Mortgage (ARM) – also known as a Floating Rate or Variable Rate Mortgage – is a mortgage loan with a fluctuating (rather than fixed) interest rate. Adjustable Rate Mortgages are subject to periodic interest rate adjustments based on an index (an outside indicator of the prevailing interest rates in the market, such as interest rates on U.S. Treasury bills or the average national mortgage rate). These adjustments come at pre-determined regular intervals and may involve raising or lowering of the loan’s interest rate, depending on the changes in the market.
I have heard alot about reverse mortgages lately -- what are the pros and cons to this type of loan?
A reverse mortgage is a loan in which the borrower pays LESS than even the interest only payment on the mortgage, thereby actually increasing the loan amount that they owe to the bank or lender. At first glance, it may seem like this is a very risky or foolhardy step for a borrower. However, for many older individuals who have lots of equity in their homes but they are on a fixed income, a reverse mortgage makes a lot of sense as they keep more of their monthly income. As well, for anyone who anticipates a couple of lean years in their revenue, a reverse mortgage may be a good temporary option to keep ahold of needed disposable income until the revenue increases and the strain to make the mortgage payments lessens.
The downside to this type of loan is that a borrower LOSES equity in the homes, not typically the way you want to be moving as a homeowner. When the borrower goes to refinance their house, they are refinancing a higher loan amount that they originally took out from the bank. The key to a reverse mortgage loan is to BE AWARE of exactly what you are getting yourself into and to know the loan amount will be when you do decide to get out of a reverse mortgage
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