What Are Points and Why Should I Purchase Them?

Are you looking to refinance your home or mortgage? Are you looking at an initial mortgage where points were offered to you? Then you probably ought to know a thing or two about points-and if you don’t, then you should read further, because learning about points could save you money.

Points are an option available to both initial mortgages and mortgage refinances. They exist to provide the lender with more profit-though you may make out better in the end. Purchasing one point costs the same as 1% of the total principal amount of the loan, but it reduces your interest rates to purchase them. So whether or not you earn a profit really depends on how long you plan to stay in your home.

Say a lender offers you two choices: one $80,000 loan at 7% fixed interest with a 2-point purchase-costing an extra $1,600 due at closing; or one $80,000 loan at 8% fixed interest with no points available. It would take you about two and a half years to earn back what you spent at closing on the points. If you plan to stay at your home for longer than that, you can even earn a profit from purchasing the points. However, if you plan to stay at your home for less than two and a half years, then you should go with the second option-because you would not earn back the $1,600 spent at closing.

There are, of course, other factors to consider when looking at purchasing points to refinance your home or mortgage. Let’s use the same example from before-two points costing you $1,600 and you’re even planning to stay for five years, earning you a solid profit. But what if you took that money and invested it at an 11% interest rate? If you bought the points, you would make a profit of $800 over the five years, but if you invested the same money, you would make a profit of $880. So you have to compare your options and decide what course of action is the best and most profitable-simply choosing a profitable course may not be the most helpful in the long run.

Points can also be deducted from your income tax returns. But you need to be careful-if you’re refinancing mortgage loans, it can be deducted with the down-payment, but if you’re refinancing your home, this is considered prepaid interest-so you have to deduct it over the term of the loan, rather than all at once at closing. You should discuss points with your tax advisor or accountant to better understand this process.

So now you know a little more about points. They could help you, but they might not; they might speed up the process of getting out of debt, or they might just make you lose money. Remember: it all depends on how long you’re staying in the home. Just keep these things in mind when you’re looking to refinance.

The HELOC-What You Should Know About a Home Equity Line of Credit

You probably are fully aware of what a mortgage is, and you probably have an idea about home equity, too, especially if you’re a homeowner. But you may not know about a little something called a “HELOC”-or a home equity line of credit. It’s a special kind of mortgage, and if you want to know what that means, you’ll need to keep reading.

Home equity line of credit is usually a type of second mortgage. You may think that this refers to a home equity loan, but I assure you, it doesn’t. HELOC is special in that it gives you an account instead of a lump sum-that means that you draw out what you need, when you need it, and you’re not burdened with the entire loan all at once. You can access this account with a credit card or checking account, too. Usually, you must meet a minimum draw requirement for every withdrawal, and the time period during which you can make these withdrawals is often up to 11 years, but it could be shorter than that.

Here’s the thing that makes a HELOC great: the payments. On a home equity loan, when you receive the lump sum, you pay interest on the lump sum. On a HELOC, however, you only pay interest on the amount you’ve taken from the account-only on what you’ve used, in other words. That way, you’re not paying for money that you haven’t used.

There are two ways that a HELOC can amortize: either over a period of time following the draw period, or in total immediately at the end of the draw period. In the former case, the total term of the HELOC is from 15 to 30 years, and any time left after the draw period is the time you have to pay back the loan. In the latter case, refinancing is usually required to pay back the loan. After repayment, your prior agreement determines whether or not you have the credit extended again.

You should be aware of a few other details, too. A HELOC is often an adjustable rate mortgage, and though some are being offered as fixed rate mortgages, this is not (yet) common practice. It also may occur that the interest is calculated on a daily basis, and you should be aware of your HELOC’s margin before you get it.

Knowing more about the HELOC, don’t you feel more prepared to tackle home improvements and other needs your family has? Now that you know even more about home equity and about the HELOC, you can be more ready when the time comes to add value to your home (not to mention that HELOC funds are tax deductible!).

Adjustable Rate Mortgages-How to Keep From Losing An ARM and a Leg

An adjustable rate mortgage (ARM) is what it sounds like: a mortgage or loan for which the interest rate fluctuates, instead of remaining fixed at a certain percentage throughout the period of the loan. What about this is good? Or is it bad? Let’s cover some of the basics of an adjustable rate mortgage so you can be clear if it ever comes time for you to refinance.

An ARM usually starts at a low interest rate, which is why so many homeowners prefer them; however, since the interest rate fluctuates over time, you should only get an adjustable rate mortgage if you are financially secure. Even if you plan ahead and predict a fall in interest rates-which many people attempt to do, thus making adjustable rate mortgages even more profitable than a fixed rate-there may be an unforeseen circumstance which causes the interest rate to rise. In such a case, relying on a low interest rate would cause a lot of trouble when it came time to pay.

Depending on the loan you get, though, you may be lucky enough to have a low rate for a considerable period of time. Cheap initial rates are available in adjustable rate mortgages for one-, three-, five-, seven-, and ten-year periods, which means that the interest rate stays low for one to ten years, after which it is changed to suit an index (such as the yield on the one-year Treasury bill, the most common index used for ARMs) and a set margin.

An ARM does not fluctuate its rate monthly; in fact, it usually fluctuates on a one- to three-year schedule. Six-month periods do exist, but they are difficult to handle, so if you decide on one of these, make sure all adjustments are very clear in the loan agreement beforehand. This means that you get more time with a set interest rate, which can be good (if the interest rate is low) or bad (if it is high). Also, that would give you more time to predict fluctuations in the future, either telling you to save money for a higher interest rate in the next term, or letting you know that you’ll have a little spending money in the coming months.

An ARM may be changed to a fixed rate mortgage if necessary, but you had better be sure-because there’s not a feeling quite like getting a fixed rate and then watching as interest rates drop. Also, the adjustable rate mortgage is assumable-which means that a new buyer (who must first qualify for the ARM) may receive the loan under the exact same terms as the original buyer. This transfer would allow someone to help you out-or it would let you help a dear friend or family member out-if the interest rate should rise too high for them to pay.

So now you know a little more about the adjustable rate mortgage, or ARM. That means that you’ll be better prepared in the future, if it ever should happen that you need to take on a mortgage, because you’ll have an idea of what to expect in the area of adjustable rate mortgages.

What is an Interest-Only Loan and When Is It a Mistake?

Do you think that you need an interest-only loan? Are you even sure what it is? Because if you are, or if you’re not, then you need a little information before you dive right in and get an interest-only mortgage. There are a few things you have to understand about interest-only mortgages before you get one, so read up and pay attention.

An interest-only loan is one on which you may opt to pay only interest in a month, or you may pay principal as well. That means that if you pay interest and principal every month, as if it were a standard mortgage, then the loan would amortize at precisely the same rate as a standard mortgage of the same value. It also means if you only pay interest every month, then your loan balance remains unchanged. So if you got a $100,000 loan, and paid interest-only for ten years, then at the end of the ten years, you still have a $100,000 loan balance.

So there are a few things you need to clarify before you get an interest-only loan. First of all, can you make yourself pay on the principal when you don’t have to? Because if you can’t, you may not want to get an interest-only mortgage. It never forces you to pay principal-only interest. What you need to understand is that interest-only loans are not for people to buy a home they normally wouldn’t be able to afford, or for those who otherwise want more money for less cost-because in the end, an interest-only loan costs the same as a standard mortgage.

An interest-only loan is useful for two primary reasons. First of all, it’s useful for individuals with fluctuating incomes, because when money gets tight, it’s helpful when they have the option of not paying principal on the loan, but are able to pay it at other times. It’s also good for those who want to invest the money that they would normally use to pay the principal on a loan. Of course, the issue here is making sure that the return from the investment is greater than the interest on the mortgage-but if you can manage that, then it works well.

Another thing most people don’t know is that interest-only loans still need mortgage insurance. Sometimes lenders will insure the loan, but at a higher interest rate-so you need to be sure with your lender beforehand whether or not the loan is insured, and how.

So maybe now you’ll think again before getting an interest-only loan; if it’s still right for you, great! But if it’s not, or if you don’t think you could manage making “unnecessary” payments, now you know how to avoid a big mistake by getting a loan you can’t afford.

Are You a First Time Home Buyer?

If you’re looking to buy a home for the first time, then you’re probably quite unprepared for the business of it. That makes sense-it seems like there isn’t always a lot of free information on home ownership just lying around. But if you really want to buy a new home, you need information-and you may need a special deal. So let’s see if we what we can find that’s special for first-time home buyers, because it could really help you get where you want to go.

First-time buyers often get pulled in by scam artists trying to make a profit from the things you don’t know about the business of buying a home. Always be sure to watch out for these crooks; research the lender before you make a down-payment to someone who won’t really help you. But why not just borrow from banks, you ask? Because banks don’t specialize in mortgage loans. Would you want to get brain surgery from a general practitioner? Then why would you get a mortgage loan from a bank? Find a good, solid, reputable mortgage lender and make sure they are who they say before you start getting that loan to buy your new home.

A first-time buyer is usually charged a low, manageable interest rate with small principle payments over a long period of time, so you can afford to pay it all back. This lets you pay back at your convenience, without having to dread the bill coming in every month-because you can manage it. However, your house will be held as collateral for the loan, which means that if you can’t make the payments, the lender gets your house. But that’s the risk you run when buying a house-just make sure you can cover the payments.

To help you with the financing, don’t forget that the government wants you to build a house-mainly because it helps the economy by providing jobs and buying materials and so on. The government offers loans as well, ones that are easily manageable, such as the VA (Veteran Affairs) and FHA (Federal Housing Administration) loans. The VA is only for active or honorably discharged military personnel, but the FHA is open to any employed person with good credit in the last two years. The FHA has a maximum 5% down payment, and as long as you have a less than 41% debt-to-income ratio (and that includes the mortgage), you qualify. The government also provides grant money to new homeowners. In fact, up to $200 million are authorized each year for the next few years so that people like you can buy a new home.

So the finances are all in place, and there are plenty of special deals for first-timers like you. Now you know a few more things about being a first-time home buyer, and you can go out and buy a home without worrying so much about your finances.