Longer Fixed Term Mortgages Could Save You More
Since he came into office one of the things that Alistair Darling, Chancellor of the Exchequer, has been pushing for is long term fixed rate mortgages, which he wants to see become more affordable and more accessible. Darling has always said that longer term fixed rates could help to improve stability in the mortgage and housing markets, and has also stated that this type of longer term fixed rate could provide homeowners with valuable security and peace of mind, as their repayments would remain the same throughout most or all of their mortgage terms.
The trouble with Darling’s idea is that the cheap mortgages he is pushing for are 20 and 25 year fixed rate mortgages, and these are far too long for many consumers. In the past many lenders have stated that consumers are not interested in tying themselves into a particular rate for such a long period of time, as interest rates could fall and they would then end up losing out. Longer term mortgages of ten years or more are popular in other countries, such as France and the United States, but not in the UK, where only 3% of all mortgages taken out last year were for a fixed rate period of ten years or more.
However, whilst industry professional warn that consumers that sign up to a very long term deal could pay dearly to get out of the deal mid-term should they wish to do so, many have recently said that a slightly longer fixed rate mortgage term of five years could actually prove cost effective to those that may be looking to refinance to another fixed rate regularly. Officials have stated that in some cases taking on a slightly longer fixed rate than the more traditional and popular two year fixed rate could save the consumer a lot of money.
The arrangement fees on two year fixed rate mortgages usually come to around £1500, and whilst the interest rates on five year fixed term mortgages are generally slightly higher the arrangement fees are significantly lower, and this is where consumers may be able to save money. The arrangement fees on five year fixed rate deals are usually around £1000 or less. If you were to remortgage your two year fixed rate mortgage over a ten year period the cost in arrangement fees would come to £7500. However, with the five year deals the arrangement fees would be likely to come to £2000 or less.
Given the predictions that the interest rate is likely to fall over the course of this year, those that do wish to opt for a fixed rate deal should compare mortgages from different providers, including comparing the arrangement fees charged. They should also bear in mind the reduced choice and increased eligibility requirements that have resulted from the credit crunch.
BBA says level of mortgage approvals has slumped further
The British Bankers Association has recently confirmed that the level of mortgage approvals in the UK is still very low, with figures showing that compared to the same period last year the current level of mortgage approvals has dropped by a third. The low level of loan approvals has been put down to a number of factors, and this includes a slump in the housing market, expected property value falls, and tighter credit conditions resulting from the global credit crunch.
Officials from the BBA have stated that the number of mortgage approvals dropped by 33% in February of this year compared to February of last year, with around £43,870 being lent to home movers for the months – this did reflect a slight rise on January’s figure. The BBA also states that around half of the money lent out on mortgage approvals was for those refinancing to a more affordable mortgage rather than for property purchasers and home movers.
One BBA official said: "In an environment of tightening lending criteria, re-mortgaging, either to fix, re-fix, or reduce borrowing costs, has been a clear influence on mortgage data in the first two months of this year, resulting in mainstream lenders picking up market share." He went on to state: "Despite the relative pick-up in February’s reported retail sales, consumer credit cards in particular, continued to be subdued."
Furthermore the BBA is expecting mortgage conditions to keep getting tighter, as lenders increase stringency on lending criteria and buyers hold back from making a purchase in the hope that property prices and interest rates will fall further.
Choosing a Lender
Choosing a Lender
Refinance Life Insurance and Debt Relief
Choosing a lender is a very important part of the process of re-financing a home. Understanding the different re-financing options and knowing how each of these options work is very important but none of this matters at all if the homeowner is unable to find a lender who is willing to offer them the rates and terms they are seeking. Choosing a lender can be a long and difficult process but there are some ways to make it easier. One simple way to make it easier is to ask for advice from friends or family members who recently re-financed. Additionally, homeowners can do their own research to determine which lenders are able to offer them the best rate. Finally the homeowner should determine whether or not the finances should be the governing factor in choosing a lender. Surprisingly enough, in most cases it is not.
Ask for Advice from Friends and Family Members
Friends and family members who recently refinanced can be a homeowner’s most valuable resource in the process of selecting a lender. These friends and family members are so valuable because they will most likely be willing to offer you a quite candid opinion of the lender they used. This opinion may be either positive or negative but in either case it is useful to the homeowner. If the opinion is negative the homeowner can remove this lender from their list of lenders to consider. Conversely if the lender comes highly recommended, the homeowner may consider this lender more carefully.
Comparison Shop
Homeowners who want to know which lender is offering them the best interest rate and financial terms should do a great deal of comparison shopping. The homeowner may even consider requesting quotes from each and every lender. This should make it perfectly clear which lenders are willing to offer the homeowner more favorable rates. When comparing these quotes all of the factors should be considered to ensure the quotes are being compared fairly. For example each quote should be broken down to determine the monthly savings, total savings, etc. All of this statistical data will make it much easier for the homeowner to make a wise decision when the time comes.
Consider More than Finances
Finally, while interest rates, loan terms and other financial matters are all certainly important none of these are more important than being treated fairly by the lender. For this reason, the homeowner should carefully consider all of their lenders and should determine whether or not they feel as though the lender is responsive to his needs. For example, a lender who does not return calls in a timely fashion or answer questions truthfully and accurately may not be the ideal lender for a homeowner even if he is the lender who is offering the most favorable rates.
Additionally, homeowners should trust their instincts regarding their trust in the lender. Some lenders simply do not appear to know what they are talking about. Homeowners might be inclined to avoid these individuals because they may end up doing more harm than good during the re-financing process. Conversely some homeowners may be immediately impressed by the honesty and intelligence of another lender. In most cases, the homeowner would likely choose the second lender as long as the rates offered by each lender were comparable.
Re-Financing with Shorter Loan Terms
For some homeowners there is the possibility of making a sound re-financing decision even when interest rates are stagnant, the homeowner does not have a great amount of equity in the home and the homeowner’s credit score has not increased significantly. You might wonder how this is possible. It certainly isn’t an option for every homeowner but those who can afford to pay significantly more each month can yield huge financial benefits by refinancing their loan terms from 30 years to 15 years. The benefits which may result from this type of re-financing include a significant overall savings, the ability to gain equity quicker and the ability to repay the balance of the loan quicker.
Higher Monthly Payments Increase Overall Savings
Re-financing with shorter loan terms is definitely not an easy option but homeowners who have a large monthly cash flow or who receive a sizable promotion at work might be able to consider the possibility of re-financing by decreasing the loan terms from 30 years to 15 years.
The result of this type of re-financing will be a significantly higher monthly payment which is not conventional but can be worthwhile if it meets the needs of the homeowner. In particular this type of re-financing option is a viable solution if the homeowner can afford the increase in monthly payments and has an overall goal of reducing the amount of interest they will pay over the course of the entire loan.
Reducing the amount of interest is critical to the overall savings plan because the homeowner does not have the option of reducing their original debt but they can drastically reduce the amount of interest paid over the course of the loan. Consider two loans with a 5% interest rate. One loan is to be repaid over a period of 15 years while the other loan is to be repaid over a period of 30 years. It is clear that in this example, the homeowner with the 30 year mortgage will pay more during the course of the loan.
Equity Gained Quicker
Another major advantage to re-financing by reducing the loan terms from 30 years to 15 years is the ability to gain equity in the home at a significantly faster rate. The amount of the equity in the home is equal to the amount of the principal loan which has already been repaid by the homeowner. Under a conventional loan, the homeowner typically pays a combination of principal and interest with their monthly payments. The amount of the principal which is repaid on two mortgages for the same amount and with the same interest rate will be different if one loan is a 30 year term and the other is a 15 year term. The homeowner with the 15 year mortgage will be paying more of the principal each month and will therefore be accumulating more equity each month. Gaining equity in the home quicker is ideal because it gives the homeowner greater flexibility. The equity in the home can be used for a number of purposes including home improvement projects, travel, educational pursuits and small business ventures.
Loan Repaid Quicker
One advantage of shortening the loan terms, which cannot be denied by some homeowners, is the ability to repay the loan quicker by re-financing to shorten the loan terms from 30 years to 15 years. In this case the homeowner will have completely repaid the home loan a full 15 years earlier than they would have under the conventional loan. This is advantageous because it can enable the homeowners to enjoy living mortgage free a full 15 years earlier. Once the mortgage is fully repaid, the homeowner may be able to make significantly more sizable contributions to his retirement plan. Some homeowners may even be able to afford to retire once their mortgage is repaid in full. This ability can have a significant impact on the quality of life for the homeowner. Homeowners may find themselves with the financial means to travel, assist family in educational pursuits or invest in a small business.
Re-Financing with an Interest Only Mortgage
Interest only mortgages are a relatively new phenomenon in the re-financing industry as well as the home buying industry. While the appeal of an interest only mortgage is typically a greater monthly cash flow, this increased cash flow can come with a hefty price tag. In exchange for more cash flow each month, the homeowner may be sacrificing the ability to obtain a fixed rate mortgage as well as the ability to build equity. This article will further examine these features to provide the reader with more information on the subject of interest only mortgages.
Greater Monthly Cash Flow
The one main advantage for many homeowners in an interest only mortgage is the ability to increase monthly cash flow. Homeowners who re-finance by utilizing an interest only mortgage will likely have more money available each month because they will only be paying interest on their mortgage initially. The reduction of the principal payment can make it easier for the homeowner to either afford a larger house or have the ability to live more extravagantly on their budget. However, there is often a significant price to pay for these types of re-financing options.
While interest only loans may not be ideal, they can be beneficial in the situation where the homeowner is having a great deal fulfilling his monthly obligations. In this case, the homeowner may be willing to sacrifice an overall financial loss for the ability to continue to pay monthly bills in a timely fashion.
Unknown Risks of an ARM
Interest only re-finance loans are typically offered with an adjustable rate mortgage (ARM) this means the interest rate is not fixed and may fluctuate with the rise and fall of the prime index. This risk can be quite costly for the homeowner if the interest rate rises significantly. There is usually a cap placed on the amount, in terms of percentage, the interest rate can rise in a certain period but this can still be a very costly mistake for the homeowners.
An ARM re-finance option with an interest only component may be worthwhile in some situations. For example if the homeowner has a hybrid mortgage which features a fixed interest rate during the interest only portion and an ARM during the principal and interest portion of the loan they might benefit from this situation if they do not plan to stay in the home for longer than the interest only period. This period may vary depending on the lender and the circumstances. Homeowners who plan to sell the house before the interest only period ends and the ARM period begins enjoy the benefits of lower monthly payments and the security of fixed interest rates before they ever have to worry about repaying the principal or dealing with the varying interest rates.
No Equity in the Home
Another disadvantage to the interest only re-finance loans is they do not allow the homeowner to build equity in the home during the initial period where only the interest on the loan is repaid. This can be a problem for homeowners who are looking to profit through the sale of their home. These homeowners may find the participation in an interest only re-finance has had a damaging effect on the profit they are able to generate from the resale of their home.
Re-Financing with a Line of Credit Loan
Some homeowners might consider re-financing with a home equity line of credit as opposed to a traditional loan. There are definite advantages and disadvantages to these types of situations. The key to understanding whether or not re-financing with a home equity line of credit is worthwhile involves understanding what a home equity line of credit is, how it differs from a home loan and how it can be used. This article will briefly cover each of these topics to give the homeowner some useful information which may help them decide whether or not a home equity line of credit is ideal in their re-financing situation.
What is a Home Equity Line of Credit?
A home equity line of credit, sometimes called a HELOC, is essentially a loan in which funds are made available to the homeowner based on the existing equity in the home. However, in this case, it is not really a loan but rather a line of credit. This means a certain amount of money is made available to the homeowner and the homeowner may draw on this line of credit as funds are needed. There is a specified period in which the homeowner is able to make these withdrawals. This is known as the draw period. Additionally there is a repayment period in which the homeowner must repay all of the funds they withdrew from the account during the draw period.
How Does a Home Equity Line of Credit Differ from a Home Equity Loan?
The difference between a home equity line of credit and a home equity loan is really quite simple. While both loans are secured based on the existing equity in the home, the manner in which the funds are disbursed to the homeowner is rather quite different. In a home equity loan the homeowner is given all of the funds immediately. However in a home equity line of credit the funds are made available to the homeowner but are not immediately disbursed. The homeowner is able to draw against this line of credit as he sees fit. There are limits to the amount which can be withdrawn and there is also a limit on when funds can be withdrawn. A home equity has a draw period and a repayment period. Funds can be withdrawn during the draw period but must be repaid during the repayment period.
How Can a Home Equity Line of Credit Be Used?
One of the biggest advantages of a home equity line of credit is that the funds can be used for any purpose specified by the homeowner. While other loans such as an auto loan or even a traditional mortgage might have strict restrictions on how the money lent to the homeowner can be used, there are no such restrictions on a home equity line of credit. Common uses of a home equity line of credit include the following:
* Home renovations or improvement projects
* Opening a small business
* Taking a dream vacation
* Pursuing higher educational goals
* Opening a small business
In some cases the interest paid on a home equity line of credit may be considered tax deductible. This may apply in situations where the funds are used to make repairs or improvements to the home. However, these expenses are not always tax deductible and the homeowner should consult with a tax professional before making decisions regarding which interest payments can be deducted.
Re-Financing to Consolidate Debt
Some homeowners opt to re-finance to consolidate their existing debts. With this type of option, the homeowner can consolidate higher interest debts such as credit card debts under a lower interest home loan. The interest rates associated with home loans are traditionally lower than the rates associated with credit cards by a considerable amount. Deciding whether or not to re-finance for the purpose of debt consolidation can be a rather tricky issue. There are a number of complex factors which enter into the equation including the amount of existing debt, the difference in interest rates as well as the difference in loan terms and the current financial situation of the homeowner.
This article will attempt to make this issue less complex by providing a function definition for debt consolidation and providing answer to two key questions homeowners should ask themselves before re-financing. These questions include whether the homeowner will pay more in the long run by consolidating their debt and will the homeowners financial situation improve if they re-finance.
What is Debt Consolidation?
The term debt consolidation can be somewhat confusing because the term itself is somewhat deceptive. When a homeowner re-finances his home for the purpose of debt consolidation, he is not actually consolidating the debt in the true sense of the word. By definition to consolidate means to unite or to combine into one system. However, this is not what actually happens when debts are consolidated. The existing debts are actually repaid by the debt consolidation loan. Although the total amount of debt remains constant the individual debts are repaid by the new loan.
Prior to the debt consolidation the homeowner may have been repaying a monthly debt to one or more credit card companies, an auto lender, a student loan lender or any number of other lenders but now the homeowner is repaying one debt to the mortgage lender who provided the debt consolidation loan. This new loan will be subject to the applicable loan terms including interest rates and repayment period. Any terms associated with the individual loans are no longer valid as each of these loans has been repaid in full.
Are You Paying More in the Long Run?
When considering debt consolidation it is important to determine whether lower monthly payments or an overall increase in savings is being sought. This is an important consideration because while debt consolidation can lead to lower monthly payments when a lower interest mortgage is obtained to repay higher interest debts there is not always an overall cost savings. This is because interest rate alone does not determine the amount which will be paid in interest. The amount of debt and the loan term, or length of the loan, figure prominently into the equation as well.
As an example consider a debt with a relatively short loan term of five years and an interest only slightly higher than the rate associated with the debt consolidation loan. In this case, if the term of the debt consolidation loan, is 30 years the repayment of the original loan would be stretched out over the course of 30 years at an interest rate which is only slightly lower than the original rate. In this case it is clear the homeowner might end up paying more in the long run. However, the monthly payments will probably be drastically reduced. This type of decision forces the homeowner to decide whether an overall savings or lower monthly payments is more important.
Does Re-Financing Improve Your Financial Situation?
Homeowners who are considering re-financing for the purpose of debt consolidation should carefully consider whether or not their financial situation will be improved by re-financing. This is important because some homeowners may opt to re-finance because it increases their monthly cash flow even if it does not result in an overall cost savings. There are many mortgage calculators available on the Internet which can be used for purposes such as determining whether or not monthly cash flow will increase. Using these calculators and consulting with industry experts will help the homeowner to make a well informed decision.
Finding Re-Financing Information
Homeowners who are considering re-financing but are not knowledgeable about the subject have a number of options available to them for finding more accurate information regarding the types of re-financing options available as well as the ways to obtain the best available rates and tips for finding a reputable lender. This information can be obtained through a number of resources including published books, Internet websites and conversations with experts in the financial industry who specialize in the area of re-financing. All of these sources can be very helpful but there are also precautions homeowners must take when using each information source. Taking these precautions will help to ensure the homeowner is receiving accurate information.
Using Books for Research
Published books are often considered to be one of the most reliable resources for researching re-financing options. However, not all books on the subject are created useful. Readers may find some books provide a great deal of useful, current information while others books are filled with outdated information and information which is not 100% accurate.
The best way to select a book or books when researching the subject of re-financing is to start the search with books that were only recently published. This is important because the financial industry is continually evolving and as a result books which were published only a few years ago may already be considered out of date.
Homeowners should also seek out independent reviews when considering books on the subject of re-financing. This is important because books which consistently receive solid reviews from consumers are likely to be worthwhile. Conversely books which consistently receive negative reviews are likely to not be worthwhile. Homeowners should seek out highly recommended books while avoiding those that are not highly recommended. This may prevent the homeowner from wasting time reading books which are not informative and may even be inaccurate.
Using the Internet for Research
The Internet is another resource which can be very valuable for homeowners who are considering re-financing their home. The Internet is filled with valuable information but there is also a great deal of misinformation floating around on the Internet. Homeowners who are completely uninformed about the re-financing process may not be able to distinguish between the useful information and the misinformation. As a result these homeowners may be led astray by inaccurate information on the Internet. Homeowners who wish to avoid the potential for this problem should consider verifying the information they find online through an outside source such as a published book from a renowned author or by conferring with an expert in the subject of re-financing.
Homeowners should also do the majority of their research on well established websites. This includes websites owned and operated by major lenders which have been in business for years. The information on these websites is likely to be much more up to date and accurate than websites which are created for profit by website owners.
Consulting with Re-Financing Experts
Finally, consulting with financial experts who specializes in re-financing can be very helpful for homeowners who are considering re-financing. This might be the most expensive option as many of these experts will likely charge a fee for their services but it can also be the most reliable source of information.
There are a number of advantages to consulting with an industry professional as opposed to researching the subject independently through published resources. The most significant advantage is the ability to ask questions throughout the re-financing process. This will help to ensure the homeowner fully understands the available options. It will also help to ensure the homeowner receives the best possible re-financing option for his specific needs. The re-financing process works best when the homeowner offers their input about the type of re-financing they are seeking as well as the benefits they hope to obtain through re-financing. The re-financing expert can than make a better recommendation which will suit the homeowner’s needs.
Beware of Credit Card Limits
Credit card limits are rarely static. It is not uncommon for many consumers to open up their credit cards monthly statement only to find that the card company has increased the credit limit on the card without the holder’s knowledge or permission. For most people this is not a big issue, but it can be for some.
In order to fully appreciate how this works one must understand two things. The first is a basic lesson on credit scores and the second is a term called debt to credit ratio.
Most people understand that their credit score is important, but many people do not really understand just how important the credit score is as it pertains to future interest rates. Future interest rates are the rates that lenders will offer you, in the future, for any loans that you may wish to take out, in the future. If you have a high credit score, meaning you are diligent with paying your bills and have not used up too much of your available credit, you will get the best rates for future loans. On the other hand, if your credit score has fallen you will not get those better rates and be faced with high-interest loans should you ever need them.
So what does this have to do with increased credit limits? Once a credit limit has been increased many consumers feel the need to use up that increase by charging more things to the credit card. Two things can happen here. One is the payments may become so large that consumers start making late payments. This will certainly bring your score down if done too often. Secondly, you can actually lower your overall credit score if you max out a card that has an increased credit limit.
This is where your debt to credit ratio comes into play. In simple terms, your debt to credit ratio is calculated by how much debt you currently owe, divided by the total amount of credit that has been approved for your use. The more debt you owe the more negative this ratio becomes. Keep in mind this debt includes all of your debt, not just credit card debt.
Another way to put this is that when a credit card company raises your credit limit, you can improve your credit score as long as you do not significantly increase the amount of debt that you currently owe.
The main tip is to make sure that you do not fall into the habit of using the extra credit if there is any possibility that it will cause you to be late on payments in the future. Also, if you are already close to being maxed out on your debt to credit ratio refrain from using the extra credit as this will only make your ratio worse. You can order a copy of your credit reports and credit score online if you wish to do so. This is a great place to start when trying to improve your overall credit worthiness.
Pre-Mortgage Tips
Buying a home is a huge step for most people. Even the idea of beginning the home search can seem daunting to some. There are some actions you can take, however, before you attempt to get your mortgage that can help ease the confusion and make you a better consumer in the process.
Before you begin looking for a home, attend a homeownership education course offered by the U.S. Department of Housing and Urban Development (HUD). If you cannot find one of these close to you, visit the HUD website and read up on some of the terms, language, and other issues that have to do with buying a home.
If you know of someone who is in the real estate business, have a talk with them and let their expertise help you. They can often give you inside tips that you would not know otherwise.
It is important that once you find a home that you like that you get some idea of its true worth as compared to the other homes in the area. This allows you to avoid being overpriced.
Before you sign a mortgage, make sure you hire a qualified and licensed home inspector to go through the house and the property. These professionals will go over the home and the foundation to make sure that you know exactly what is wrong (if anything) with the home. This can be one of the most important steps to take before buying a home. Once the inspection is complete, you and the seller can determine who is responsible for the repairs needed.
It does not happen often, but some builders and other people will ask you to make false statements on your mortgages application. Sometimes they may tell you to overstate your income level or to falsify your employment history. Do not do that. Giving false information on a loan application is fraud and it can cause you more problems than it is worth.
Sometimes in the pre-mortgage phase people will try to convince you to borrow more money than you can afford to pay back. At other times during the pre-mortgage signing phase, they may ask you to sign a blank document or a document that has blanks on it. You should not sign these types of documents. If a document needs to have blank spaces, put an entry of NA into the blank.
Even if you are dealing with a reputable bank or other institution, it is always a good idea to have a qualified attorney look over the mortgage agreement before you sign. If you are dealing with builders who finance their own homes, it is even more important that you have an attorney look over the contracts.
Some of the current housing mess was caused by lenders who did not fully explain to the buyer the details of the mortgages. This was especially true for those buying sub-prime mortgages. If you are careful and honest and work with reputable lenders, you can avoid a lot of the problems that others are now facing.
