US Helps Veterans with Mortgages
VA benefits no mortgages began in the WWII era when the government decided to help veterans get into homes. Because loans for homes depended on good credit history, and because many young veterans had not had the opportunity to build up credit history, banks tended to have an aversion to lending to them. To help veterans in this respect, the government began to place guarantees on money borrowed by veterans so that banks would not treat them as risky borrowers and give them good loan terms.
What VA Benefits Did: -Banks do not require private mortgage insurance on government insured loans. PMI helps banks cover the cost of borrowers who default on their loans. Because the bank is insured against loss by the government, they do not need to charge vets PMI. -Due to the fact that banks do not risk defaults on loans made to veterans, they charge less interest than they would on someone more likely to default. -Down payments are optional for veterans. -Borrowers may prepay without a prepay penalty that some lenders charge. This gives vets more home refinancing options should interest rates improve by making this process more affordable than for those whose lenders do require prepay fees.
Vet loans can’t:
-The government is not giving veterans money; they are guaranteeing that banks will get paid. This allows banks to give veterans preferential treatment. -The government is not responsible to deal with any concerns about the house after it has been purchased. -A fee is charged of veteran who wish to refianace.
How do you know if you qualify for these benefits? Check the official website, www.homeloans.va.gov, for this and more information that you should be aware of. The site can be used to look up information or ask any questions that you might have.
Using the Equity in Your Home
Refinancing most often takes place after interest rates have dropped. In some situations it is advantageous to refinance when you need a low-interest loan.
One of the most prevalent uses of this type of the home equity loan (HEL) is to pay off credit card debt. One useful advantage to taking care of plastic debt this way is that it allows the debtor to amass all his or her debt into one debt. This is a helpful feature because having many small debts increases the chances of losing track of payment schedules. When you miss payments on credit cards then you suffer late fees which add to your debt. One big debt, makes it easy to keep track of when you need to pay.
The interest on home equity loans is substantially lower than on credit card debt. Depending on the size of your debt, this could mean double or triple digit savings on subsequent monthly payments.
HEL interest is tax deductible. You save even more money that way.
If you have bad credit, you might have difficulty convincing your bank to give you one of these loans. The more equity you have built up in your house, the larger the size of the HEL that you will be permitted to withdraw.
Credit card debt is only one use for HELs. Some homeowners feel a desired home improvement is worth the added interest, especially if the improvement can help save money. One might use a HEL to add solar panels to one’s home. The energy savings would effectively decrease the interest from the loan used to finance the purchase and installation.
In the case of paying off plastic, you are removing equity from your home and placing it into whatever you charged on to your credit cards, plus the interest they accrue prior to paying them off. A home improvement using a HEL is equivalent to boosting the value of the home and the principle required to pay it off. It does not reduce the amount of equity that has been built up.
The Advantages of a Down Payment on Your House
There is something about our need to possess that creates an aversion to renting an apartment and attracts us to the prospect of owning a home. To test this for yourself, just ask yourself which option you feel more drawn to. Do you feel a particular draw toward one over the other. Most do not prefer renting, but the transition to getting a home mortgage can have significant financial effects and must be undertaken carefully so that you can understand what your best options will be.
The ideal price range on a house will be one in which you can afford a twenty-percent down payment. Aside from saving on interest payments, a twenty-percent payment eliminates the need for lenders to charge private mortgage insurance.
Private mortgage insurance is a special fee that lenders charge their customers to help reduce the impact of a default by one of its borrowers. Banks do not charge PMI to clients who have made their twenty percent payment because they do not worry as much about these borrowers defaulting, because to a certain extent they have proven their ability to meet their payment up to a substantial portion of the total loan amount. PMI payments are discontinued in light of the lower rate of risk involved in loaning to these borrowers.
For many years lenders were not compelled to notify their clients after twenty percent of the home had been paid off, resulting in unfair profits from the unwarranted fee. In recent years, legislation was based outlawing this devious practice. At the moment, PMI payments are tax deductible, which reduces their strain on homebuyers’ finances. If you cannot afford a twenty percent down payment, you should aim to make this benchmark by the year 2010. This is the year that the deduction expires and may not be reinstated. If it is reinstated you will be no worse off; if not, you will have protected yourself.
Those who are able to finance these large down payments are gaining a serious advantage over those who do not in the amount of interest that they are saving. Money paid is money you will not have to borrow, which means it is, obviously interest free. With principle high, the payments on a loan go primarily toward covering interest with little covering the amount borrowed. Prevent banks from charging you high interest by taking down the principle to a lower amount to begin with, so that you can pay more principle and less interest with every payment.
A shorter loan is required if you want to maximize the amount of principle you are paying off with every payment. In addition to more principle being financed with each payment, these also tend to have better home refinance rates than longer loans.
Mortgages to Avoid: Interest Only and Negative Amortization
Interest only and negative amortization loans are home refinance options that many homeowners find appealing. Compared to some other options available to homeowners, these loans have lower monthly payments. You cannot get something for nothing; while low payments are nice, unfortunately they are not the whole story.
What is less inviting about interest only loans is the fact that payments toward principle are never made; you are simply paying back the bank’s interest. While you get to live in a house, you do not own the house, and you are not making any steps toward owning it. With the passage of time it becomes all too clear why a thirty-year loan is preferable to an interest only loan; with every year that passes the thirty-year loan is closer to being paid off, the interest only loan never changes.
Even worse are what happens in negative amortization loans. The low monthly payments seem like a nice break, but unfortunately these payments are so low that they cannot cover the interest lenders charge on the loans. This unpaid interest, doesn’t just magically disappear; it gets added to your principle. Interest mounts against you until your principle is significantly larger than it was to begin with, and you begin receiving calls from the bank.
What you should take from this exploration of different loan types is that while the idea of a house seems lovely, this may not be the best investment choice depending on the payment plan you must choose for yourself. If you are forced into an unfavorable plan because you have no other choice for acquiring your house, it may be wise to consider other investment options instead. A house is only one of many possible avenues.
Thirty-year loans are probably the longest loans that you should consider. If an interest only or negative amortization plan are the only mortgages you can afford, then you should reconsider buying a house. If you have credit card debt, this is the first place that you should start sinking your money. This gives you a return on the interest payments that you will no longer have to pay. If you smoke, stop. The government levies huge taxes on cigarettes to discourage people from smoking. Let you money work for you by investing it in securities, savings accounts, money market accounts, or CDs. Don’t make decisions based on emotions that you will regret later on down the road. Houses are tempting, but like anything, there is a place and a time, which might not be now.