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Should I pay points ? Does a zero-point/zero-fee loan really exist ?
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Can my loan be sold? What happens if my lender goes out of business?
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Choosing a lender just because they have the lowest rate. Not getting a written good-faith estimate.
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Choosing a lender just because they are recommended by your Realtor.
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Using a dual agent吠.e. an agent who represents the buyer and the seller on the same transaction.
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Not shopping for home insurance until you are ready to close.
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Refinancing with your existing lender without shopping around.
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Paying for an appraisal when you think that the house may appraise too low.
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Using the county tax-assessors' value as the market value of your house.
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Not providing documents to your mortgage company in a timely manner.
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Pulling cash out of your credit line before you refinance your first mortgage.
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Getting a second mortgage before you refinance your first mortgage.
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Not checking to see if your loan has a pre-payment penalty clause.
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Not understanding the difference between an equity loan and an equity line.
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Getting a home-equity loan from your local bank without shopping around.
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Assuming that a home-equity loan is always cheaper than a car loan or a credit card.
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Getting a home-equity line to pay off your credit cards if your spending is out of control!
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Frequently Asked Questions
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Should I pay points? Does a zero-point/zero-fee loan really exist?
The best way to decide whether you should pay points or not is to perform a break-even analysis. This is done as follows:
1. Calculate the cost of the points. Example: 2 points on a $100,000 loan is $2,000.
2. Calculate the monthly savings on the loan as a result of obtaining a lower interest rate. Example: $50 per month
3. Divide the cost of the points by the monthly savings to come up with the number of months to break even. In the above example, this number is 40 months. If you plan to keep the house for longer than the break-even number of months, then it makes sense to pay points; otherwise it does not.
4. The above calculation does not take into account the tax advantages of points. When you are buying a house the points you pay are tax-deductible, so you realize some savings immediately. On the other hand, when you get a lower payment, your tax deduction reduces! This makes it a little difficult to calculate the break-even time taking taxes into account. In the case of a purchase, taxes definitely reduce the break-even time. However, in the case of a refinance, the points are NOT tax-deductible, but have to be amortized over the life of the loan. This results in few tax benefits or none at all, so there is little or no effect on the time to break even.
If none of the above makes sense, use this simple rule of thumb: If you plan to stay in the house for less than 3 years, do not pay points. If you plan to stay in the house for more than 5 years, pay 1 to 2 points. If you plan to stay in the house for between 3 and 5 years, it does not make a significant difference whether you pay points or not!
Zero-Point/Zero-Fee Loans
Whatever happened to the conventional wisdom of waiting for the rates to drop 2% before refinancing ?
You have a 30-year fixed loan at 8.5%. A loan officer calls you up and says they can refinance you to a rate of 8.0% with no points and no fees whatsoever.
What a dream come true! No appraisal fees, no title fees and not even any junk fees! Is this a deal too good to pass up? How can a bank and broker do this? Doesn't someone have to pay? Whose money is being used to pay these closing costs?
No末this is not a scam. Thousands of homeowners have refinanced using a zero-point/zero-fee loan. Some refinanced multiple times, riding rates all the way down the curve in 1992, 1993 and, more recently, in 1996. Some homeowners used zero-point/zero-fee adjustable loans to refinance and get a new teaser rate every year.
The way this works is based on rebate pricing, sometimes also known as yield-spread pricing, and sometimes known as a service-release premium. The basic idea is that you pay a higher rate in exchange for cash up front, which is then used to pay the closing costs. You will pay a higher monthly payment末so the money is really coming from future payments that you will make.
You can also think of this as negative points! For example, a 30-year fixed loan may be available at a retail price of :
8.0% with 2 points or
8.25% with 1 point or
8.5% with 0 points or
8.75% with -1 point or
9% with -2 pointsOn a $200,000 loan, the loan officer can offer you 8.75% with a cost of -1 point, which is a $2,000 credit towards your closing costs. A mortgage broker can use rebate pricing to pay for your closing costs and keep the balance of the rebate as profit.
What are the benefits of a zero-point/zero-fee loan ?
The main benefit is that you have no out-of-pocket costs. As a result, if the rates drop in the future, you could refinance again even for a small drop in rates. So if you refinanced on the zero-point/zero-fee loan to get a rate of 8.75% and if the rates drop 1/2%, you can refinance again to 8.25%. On the other hand, if you refinanced by paying 1 point and got a rate of 8.25%, it may not make sense to refinance again. Now, if the rates drop another 1/2%, a zero-point/zero-fee loan can drop your rate to 7.75%, whereas if you paid points, you may have to do a break-even analysis to decide if refinancing will save you money.
The zero-point/zero-fee loan eliminates the need to do a break-even analysis since there is no up-front expense that needs to be recovered. It also is a great way to take advantage of falling rates.
Some consumers have used zero-point/zero-fee loans on adjustable loans to refinance their adjustables every year and pay a very low teaser rate.
What are the disadvantages of a zero-point/zero-fee loan ?
The main disadvantage is that you are paying a higher rate than you would be paying if you had paid points and closing costs. If you keep the loan for long enough, you will pay more末since you have higher mortgage payments. In the scenario where you plan to stay in the house for more than 5 years, and if rates never drop for you to refinance, you could wind up paying more money. If, on the other hand, you plan to stay at a property for just 2-3 years, there really is no disadvantage of a zero-point/zero-fee loan.
Whose money is it ?
Since you are being paid "cash" up-front in exchange for a higher rate, it really is your own money that will be paid in the future through higher payments. Investors who fund these loans hope that you will keep the loans for long enough to recoup their up-front investment. If you refinance the loans early, both the servicer and the investor could lose money.
To summarize, zero-point/zero-fee loans in many cases are good deals. Make sure, however, that the lender pays for your closing costs from rebate points and NOT by increasing your loan amount. So if your old loan amount was $150,000, your new loan amount should also be $150,000. You may have to come up with some money at closing for recurring costs (taxes, insurance, and interest), but you would have to pay for these whether you refinanced or not.
Zero-point/zero-fee loans are especially attractive when rates are declining or when you plan to sell your house in less than 2-3 years.
Zero-point/zero-fee loans may not be around forever. Lenders have discussed adding a pre-payment penalty to such loans, however few lenders have taken steps to implement such a measure.
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What is an Annual Percentage Rate (APR)?
The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. Typically the APR is found next to the rate.
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Example:
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The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan.
The APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees.
If life were easy, all you would have to do is compare APRs from the lenders/brokers you are working with, then pick the easiest one and you would have the right loan. Right? Wrong!
Unfortunately, different lenders calculate APRs differently! So a loan with a lower APR is not necessarily a better rate. The best way to compare loans in the author's opinion is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. Then delete all fees that are independent of the loan such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees.
Note
: The reason why APRs are confusing is because the rules
to compute APR are not clearly defined.
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The following fees ARE generally included in the APR:
Points - both discount points and origination points
Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
Loan-processing fee
Underwriting fee
Document-preparation fee
Private mortgage-insurance
Appraisal fee
Credit-report fee
The following fees are SOMETIMES included in the APR:
Loan-application fee
Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death)
The following fees are normally NOT included in the APR:
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Title or abstract fee
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Escrow fee
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Attorney fee
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Notary fee
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Document preparation (charged by the closing agent)
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Home-inspection fees
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Recording fee
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Transfer taxes
An APR does not tell you how long your rate is locked for. A lender who offers you a 10-day rate lock may have a lower APR than a lender who offers you a 60-day rate lock!
Calculating APRs on adjustable and balloon loans is even more complex because future rates are unknown. The result is even more confusion about how lenders calculate APRs.
Do not attempt to compare a 30-year loan with a 15-year loan using their respective APRs. A 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time.
Finally, many lenders do not
even know what they include in their APR because they use software programs
to compute their APRs. It is quite possible that the same lender with
the same fees using two different software programs may arrive at two
different APRs!
Conclusion :
Use the APR as a starting point to compare loans. The APR is a result
of a complex calculation and not clearly defined. There is no substitute
to getting a good-faith estimate from each lender to compare costs. Remember
to exclude those costs that are independent of the loan.
PMI or Private Mortgage Insurance is normally required when you buy a house with less than 20% down. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. This insurance protection is provided by private mortgage-insurance companies. It enables lenders to accept lower down payments than they would normally accept. In effect, mortgage insurance provides what the equity of a higher down payment would provide to cover a lender's losses in the unfortunate event of foreclosure. Therefore, without mortgage insurance, you might not be able to buy a home without a 20% down payment.
The cost of PMI increases as your down payment decreases. Example: The cost of PMI on a 10% down payment is less than the cost of PMI on a 5% down payment. Your PMI premium is normally added to your monthly mortgage payment.
The decision on when to cancel the private insurance coverage does not depend solely on the degree of your equity in the home. The final say on terminating a private mortgage-insurance policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, in most cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. Some lenders may require that you pay PMI for one or two years before you may apply to remove it.
To cancel the PMI on your loan, contact your lender. In most cases, an appraisal will be required to determine the value of your property. You will probably also be required to pay for the cost of this appraisal. Another way of canceling the PMI on your loan is to refinance and to get a new loan without PMI.
You cannot close a mortgage loan without locking in an interest rate. There are four components to a rate lock:
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Loan program.
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Interest rate.
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Points.
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Length of the lock.
The longer the length of the lock, the higher the points or the interest rate. This is because the longer the lock, the greater the risk for the lender offering that lock.
Let's say you lock in a 30-year fixed loan at 8% for 2 points for 15 days on March 2. This lock will expire on March 17 (if March 17 is a holiday then the lock is typically extended to the first working day after the 17th). The lender must disburse funds by March 17th, otherwise your rate lock expires, and your original rate-lock commitment is invalid.
The same lock might cost 2.25 points for a 30-day lock or 2.5 points for a 60-day lock. If you need a longer lock and do not want to pay the higher points, you may instead pay a higher rate.
After a lock expires, most lenders will let you re-lock at the higher of the original price and the originally locked price. In most cases you will not get a lower rate if rates drop.
Lenders can lose money if your lock expires. This is because they are taking a risk by letting you lock in advance. If rates move higher, they are forced to give you the original rate at which you locked. Lenders often protect themselves against rate fluctuations by hedging.
Some lenders do offer free float-downs末i.e. you may lock the rate initially and if the rates drop while your loan is in process, you will get the better rate. However, there is no free lunch末the free float-down is costly for the lender and you pay for this option indirectly, because the lender has to build the price of this option into the rate.
What do you do if the rates drop after you lock?
Most lenders will not budge unless the rates drop substantially (3/8% or more). This is because it is expensive for them to lock in interest rates. If lenders let the borrowers improve their rate every time the rates improved, they spend a lot of time relocking interest rates, since rates fluctuate daily. Also they would have to build this option into their rates and borrowers would wind up paying a higher rate.
Lock-and-shop programs.
Most lenders will let you lock in an interest rate only on a specific property. If you are shopping for a house, some lenders offer a lock-and-shop program that lets you lock in a rate before you find the house. This program is very useful when rates are rising.
New-construction rate locks.
Most lenders offer long-term locks for new construction. These locks do cost more and may require an up-front deposit. For example, a lender might offer a 180-day lock for 1 point over the cost of a 30-day lock, with 0.5 points being paid up-front, as a non-refundable deposit. Most long-term new-construction locks do offer a float-down末i.e. if rates drop prior to closing, you get the better rate.
Your loan can be sold at any time. There is a secondary mortgage market in which lenders frequently buy and sell pools of mortgages. This secondary mortgage market results in lower rates for consumers. A lender buying your loan assumes all terms and conditions of the original loan. As a result, the only thing that changes when a loan is sold is to whom you mail your payment. If your loan has been sold, your existing lender will notify you that your loan has been sold, who your new lender is, and where you should send your payments from now on.
If your lender goes out of business, you are still obligated to make payments! Typically, loans owned by a lender going out of business are sold to another lender. The lender purchasing your loan is obligated to honor the terms and conditions of the original loan. Therefore, if your lender goes out of business, it makes little difference with regards to your loan payments. In some cases, there may be a gap between the date of your lender's going out of business and the date that a new lender purchases your loan. In such a situation, continue making payments to your old lender until you are asked to make payments to your new lender.
A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair, Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.
Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.
Credit scores analyze a borrower's credit history considering numerous factors such as:
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Late payments
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The amount of time credit has been established
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The amount of credit used versus the amount of credit available
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Length of time at present residence
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Employment history
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Negative credit information such as bankruptcies, charge-offs, collections, etc
There are really three FICO scores computed by data provided by each of the three bureaus末Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score.
While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.
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Pay your bills on time. Late payments and collections can have a serious impact on your score.
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Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
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Reduce your credit-card balances. If you are "maxed" out on your credit cards, this will affect your credit score negatively.
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If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.
What if there is an error on my credit report?
If you see an error on your report, report it to the credit bureau. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly. Alternatively, your mortgage company may help you correct this problem as well.
For most people, their home is the biggest investment they will ever make. However, few people do the research necessary to make a good buying decision. The home-purchase process is extremely confusing for most people. With a little bit of homework and with advice from family and friends who have been through the process before, you can make this a little easier on yourself. There is no substitute for taking the time to educate yourself before you buy a house末which typically costs you 25% to 40% of your gross income!
Buying a house
1. Looking for a house without getting pre-approved.
Do
not confuse a pre-approval with a pre-qualification. During the pre-qualification
process, a loan officer asks you a few questions and hands you a pre-qual
letter. The pre-approval process is much more complete.
During a pre-approval, the mortgage company does all the work of a full-approval,
except for the appraisal and title search. When you are pre-approved,
you become like a CASH BUYER and have more negotiating clout with the
seller. In some cases (especially in multiple-offer situations), having
a pre-approval can make the difference between buying a home and not
buying a home. In other instances, home buyers have been able to save
thousands of dollars as a result of being in a better negotiating situation.
Most good Realtors will not show you homes before being pre-approved
because they do not want to waste your time, their time, and the seller's
time. Many mortgage companies will pre-approve you at little or no cost.
They typically will need to check your credit and verify your income
and assets.
If an agent makes you sign a written document that is contrary to their verbal commitments, don't do it! Example: the agent says that the washer will come with the house, but the contract says that it will not. In this case, the written contract will override the verbal contract. In fact, written contracts almost always override verbal contracts. Buying a house is a very complex process末but it's a lot easier when everything is in writing.
3. Choosing a lender just because they have the lowest rate. Not getting a written good-faith estimate.
While
rate is important, you have to look at the overall cost of your loan.
This includes looking at the APR,
the loan fees, as well as the discount and origination points. Some lenders
add origination points into their quoted points while other lenders add
an origination point in addition to their quoted points. So when one
lenders says 2 points they mean 2 points, whereas another lender means
2 points plus 1 origination point.
The cost of the mortgage, however, cannot be your only criterion. There
is no substitute for asking family and friends for referrals and interviewing
prospective mortgage companies. You must also feel comfortable that the
loan officer you are dealing with is committed to your best interests
and will deliver what they promise. Often, the company that has the absolute
lowest quoted rate may not be the best company for your mortgage business.
4. Choosing a lender just because they are recommended by your Realtor.
Your Realtor is not
a financial expert. They may not know what's the best loan for you. The
Realtor only gets a commission when your house closes. As a result, the
Realtor may refer you to a lender that is sure to close the loan, but
not necessarily the lender that has favorable rates or fees. Also, many
Realtors refer you to their friends in the loan business末who again may
not be able to get the best loan for you. Even if the Realtor is very
professional and looking out for your best interest, you should still
do homework on your own.
We recommend shopping for a loan with at least 3 mortgage companies before
you make a decision. There are countless stories of consumers who wound
up paying higher rates or getting a loan program that was not right for
them because they blindly followed their Realtor's advice.
5. Not getting a rate lock in writing.
When a mortgage company tells you they have locked your rate, get a written statement which details the interest rate, the length of the rate lock, and details about the program.
6. Using a dual agent末i.e. an agent who represents the buyer and the seller on the same transaction.
Buyers and sellers have opposing interests. A dual agent in most normal situations cannot be fair to both the buyer and seller. Most dual agents represent the sellers more strongly than they do the buyer. If you are a buyer, it is much better to have your own agent who will be on your side. The only time you should even consider a dual agent is when you get a price break from using a dual agent. If that is the case, then tread carefully and do your homework!
7. Buying a house without a professional inspection. Taking the sellers word that they have made repairs.
Unless
you are buying a new house where you have warranties on most equipment,
it is highly recommended that you get a property inspection, a roof inspection
and a termite inspection. This way you will know what you are buying.
Inspection reports are great negotiating tools when it comes to asking
the seller to make repairs. If a professional home inspector states that
certain repairs be done, the seller is more likely to agree to do them.
If the seller agrees to do the repairs, have your inspector verify that
they are done prior to close of escrow. Do not assume that everything
has been done the way it was promised.
8. Not shopping for home insurance until you are ready to close.
Start shopping for insurance as soon as you have an accepted offer. Many buyers wait until the last minute to get insurance and do not have time to shop around.
9. Signing documents without reading them.
Do not sign documents in a hurry. Whenever possible try to get documents that you will be signing ahead of time so you can review them. It is advisable to ask for a copy of all loan papers you are signing a few days ahead of the close of escrow. This way you can review them and get your questions answered. Do not expect to read all the documents during the closing. There is rarely enough time to do that.
10. Making your moving plans too tight. Example:
you
expect to move out of your prior residence on a Friday and into your
new residence over the weekend. So you give notice to your landlord to
end your lease on a Friday and arrange for movers to come to your house
on Friday. Then, your loan closing gets delayed until the next Tuesday.
You now may be homeless! New tenants could be moving into your apartment,
and the movers are going to charge you for wasting their time. You could
be forced to live in a motel for a couple of days!
A Better Plan: allow
for a 5-7 day overlap between closing and moving. In the long
run it is not nearly as expensive, and it will certainly give
you peace of mind.
Refinancing your house
1. Refinancing with your existing lender without shopping around.
Your existing lender may not have the best rates and programs. There is a general misconception that it is easier to work with your current mortgage company. In most cases, your current mortgage company will require the same documentation as other companies. This is because most loans are sold on the secondary market and have to be approved independently. So even if you have been very good at making payments to your existing lender, they will still have to do their verifications all over again.
2. Not doing a break-even analysis.
Find
out what the total cost of the refinance is, then figure out how much
you will save every month. Divide the total cost by the monthly savings
to get the number of months you will have to stay in the property to
break even on your refinancing costs. Example: if your refinance
costs $2000 and you save $50/month, your break-even is 2000/50 = 40 months.
You should refinance if you plan to stay in the house for at least 40
months.
Note: The break-even analysis only works if you are refinancing
to save money. If you are refinancing to switch from an adjustable
to a fixed loan, or from a 30-year loan to a 15-year loan, it
is much more difficult to perform a break-even analysis.
3. Not getting a written good-faith estimate of closing costs.
Your mortgage company is required to provide you with a written good-faith estimate of closing costs within 3 working days of receiving the application.
4. Paying for an appraisal when you think that the house may appraise too low.
Have the appraisal company do a desk review appraisal (typically at no charge) to provide you with a range of possible values. Your mortgage company can ask their appraiser to do this for you. Do not waste your money on a full appraisal if you are doubtful about the value of your house.
5. Using the county tax-assessors' value as the market value of your house.
Mortgage companies do not use the county tax-assessors' value to determine whether they will make the loan. Instead they use a market-value appraisal which may be very different from the assessed value.
6. Signing your loan documents without reviewing them.
Do not sign documents in a hurry. Whenever possible try to get documents that you will be signing ahead of time so you can review them. It is advisable to ask for a copy of all loan papers you are signing a few days ahead of the close of escrow. This way you can review them and get your questions answered. Do not expect to read all the documents during the closing. There is rarely enough time to do that.
7. Not providing documents to your mortgage company in a timely manner.
When your mortgage company asks you for additional paperwork, jump on it! Do not complain. They are trying to get you approved, not trying to hassle you unnecessarily! Jump through the hoops as quickly as possible. Borrowers who do not respond to requests for documentation quickly enough run the risk of paying higher rates if the rate lock expires.
8. Not getting a rate lock in writing.
When a mortgage company tells you they have locked your rate, get a written statement which details the interest rate, the length of the rate lock and details about the program.
9. Pulling cash out of your credit line before you refinance your first mortgage.
Many lenders have "cash-out" seasoning requirements. This means that if you pull cash out of your credit line for anything other than home improvements, they will consider the refinance to be a "cash-out" refinance. This leads to much stricter requirements and can in some cases break the deal!
10. Getting a second mortgage before you refinance your first mortgage.
Many mortgage companies look at the combined loan amounts (i.e. the first loan plus the second) even when they are refinancing the first mortgage. If you plan on refinancing your first, check with your mortgage company to find out if getting a second will cause your refinance to get turned down.
Getting a home-equity loan
1. Not checking to see if your loan has a pre-payment penalty clause.
If you are getting a "NO FEE" home-equity loan, chances are that it has a hefty pre-payment penalty clause. This can be very important if you are planning to sell your house or refinance in the next 3-5 years.
2. Getting too large a credit line.
When you get too large a credit line, you can get turned down for other loans, because some lenders calculate your payments based on the available credit and not just the used credit. Having a large equity line indicates a large potential payment, which makes it difficult to qualify for loans. Note : this argument holds even if your equity line has a zero balance.
3. Not understanding the difference between an equity loan and an equity line.
An
equity loan is closed末i.e. you get all your money up front and
then make fixed payments on that loan, until you pay it off. An equity line is
open末i.e. you can get an initial advance against the line and then reuse
the line as often as you want during the period that the line is open.
Most equity lines are accessed through a checkbook or a credit card.
On equity lines, you only pay interest on the outstanding balance.
Use an equity loan when you need all the money up front末e.g. home improvement,
debt consolidation.
Use an equity line if you have an ongoing need for money or need the
money for a future event末e.g. you need to pay for your child's college
tuition in 3 years.
4. Not checking the life cap on your equity line.
Many credit lines have life caps of 18%. Be prepared to pay payments at higher interest levels if rates move upwards.
5. Getting a home-equity loan from your local bank without shopping around.
Many consumers get their equity line from the bank that they have a checking account with. Use your bank, but shop around first.
6. Not getting a good-faith estimate of closing costs.
Your mortgage company is required to provide you with a written good-faith estimate of closing costs within 3 working days of receiving the application.
7. Assuming that your home-equity loan is tax deductible.
In some instances, your home-equity loan is NOT tax deductible. Perhaps you make too much and fall into the AMT trap, or perhaps you have pulled out more than $100,000 cash from your home. Do not depend on your mortgage company for information regarding this matter末check with an accountant or CPA.
8. Assuming that a home-equity loan is always cheaper than a car loan or a credit card.
A
credit card at 6.9% is cheaper than a credit line at 12% even after the
tax deduction. To compare rates, compute the effective rate of your home-equity
loan, with the rate on a credit card or auto loan.
Effective rate = rate * (1 - tax_bracket)
Example : If the rate of the home-equity loan is 12% and your tax bracket
is 30%, your effective rate is : 12% * (1-0.3) = 12%*0.7 = 8.4%
If your credit card is higher than 8.4%, then the equity loan is cheaper,
otherwise it is not.
Besides the interest rate, you may also want to compare monthly payments
and other terms of the loan.
9. Getting a home-equity line of credit if you plan to refinance your first mortgage in the near future.
Many mortgage companies look at the combined loan amounts (i.e. the first loan plus the second) even when they are refinancing the first mortgage. If you plan on refinancing your first, check with your mortgage company to find out if getting a second will cause your refinance to get turned down.
10. Getting a home-equity line to pay off your credit cards if your spending is out of control!
When you pay off your credit cards with your equity line, don't go out and charge up those credit cards again and put your house on the line! If you can't manage the plastic, tear it up!
US Mortgage of Florida 4400 N. Federal Highway Suite 130 Boca Raton FL 33431 phone 866-435-2562 fax 561-886-0301
email info@usmortgageofflorida.com
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