Mortgage Loan Solutions

Finding the ideal mortgage loan for your situation is much more than obtaining a rate quote. I suggest taking a different approach from the typical lender/broker -- instead, focus on the use of your mortgage within your financial blueprint. In other words, pinpoint exactly what you want to accomplish with your mortgage as it relates to your financial goals and current financial situation.

Many different types of loans are available with various time lengths: Fixed Rate, FHA, VA, Adjustable Rate, and Home Equity Line of Credit -- many with an Interest Only payment option for a initial specified period. Note: effective October 1, 2009, income verification is required on all new loans as mandated by the Fed.

Special note: Since the fourth quarter of 2007, lenders have tightened loan requirements by increasing credit score qualifications and lowering loan to value percentages. Many lenders now employ a maximum loan to value for conventional loans at 85-90%. Furthermore, the vast majority of lenders have decided to eliminate Alt A, Sub-Prime and Negative Amortization loans due to (1) the increased risk of foreclosure and (2) no secondary market for these products. In past years, a credit score of 680 was considered good enough to qualify for the best lending rate for a conventional loan -- no longer! For example, borrowers with less than 30% equity will pay more for a 30-year conventional loan if their credit score is less than 720; borrowers with less than 15% equity will pay more even with flawless credit. Although FHA loans require only a 3.5% down payment and requires private mortgage insurance, some FHA lenders often impose a minimum 670 credit score, exceeding the required 580 credit score. Standard debt to income ratios for conventional loans are 28% (monthly housing expenses of principal, interest, taxes, insurance, private mortgage insurance and association fees divided by monthly gross income) and 36% (total debt divided by gross income); in some instances, lenders may allow higher ratios but will levy a higher loan rate.

Special Update for Adjustable Rate Loans with an Interest Only Payment Option: In September 2010, Fannie Mae will enact tighter requirements for loans which have an interest only payment option, where the payment option is gone in five years or less and the loan rate is reset to an index level, such as Libor. Freddie Mac has already enacted similar policies and no longer purchases interest only loans. To obtain these type of loans, borrowers will be required to have down payment of at least 30% and at least two months of living expenses; in addition, lenders will be required to evaluate whether borrowers can make payments after the loan resets, calculating the greater of two percentage points about the current index level or the current index level plus an extra margin charged by the bank. What this means is these types of loans are available only to borrowers with an above-average down payment, excellent credit and ample qualifying income and assets.

 
 

When individuals obtain a loan, they satisfy at least one or more of the following mortgage uses: (1) affordability, (2) flexibility, (3) debt consolidation and (4) building wealth for financial security. Lets review each use.

1-Affordability -- Everyone is familiar with this concept. Borrowers desire the lowest payment, whether it be a fixed rate, an adjustable rate or an interest only option. Important lender factors to consider include credit score, loan to value, current earnings, future cash flow savings and how long the borrowers intend to own the property. The best choice for the exact type of loan depends on what borrowers specifically want to accomplish with their mortgage.

2-Flexibility -- This use appeals to borrowers who want their mortgage payment to fluctuate with their monthly earnings or to have leeway for unexpected emergencies. In essence, borrowers desire monthly control over their mortgage payment by having the ability to select various monthly payment choices  -- such as interest only, regular P&I or an accelerated payment. Self-employed, commissioned earners and seasonal workers are ideal for this concept due to their inconsistency of stable monthly earnings -- they like the idea of paying a lower mortgage payment when income is lower and can choose a higher payment when their monthly income is higher.

3-Debt Consolidation -- This scenario is for refinances only and appeals to borrowers who want to convert credit card debt, other high interest debt and their current mortgage debt into one lower payment. Often the equity appreciation in property presents a cash out situation where borrowers can pay off the entire non-mortgage debt and have a "clean slate"; at the very least, a sizable portion of credit card can be eliminated with the remaining balance paid off by future cash flow savings from their mortgage.

              The Credit Card Dilemma
                Average household has $12,000 in credit card debt.
                2% minimum payment on $12,000 @ 18% with no future charges takes over 51 YEARS to pay off!

Credit card debt is bad debt (high interest rates, no tax advantages). In contrast, good debt has lower rates and tax benefits in property that appreciates in value. An important concept: if you must have debt -- and most us must have debt -- then hold debt in an appreciating asset or at least in an asset that has the potential to appreciate in value over time.

4-Building Wealth for Financial Security -- mortgages can be an effective tool in the pursuit of financial independence. In today's economy and standard of living, it is very challenging for people to have available investment money after monthly expenses. As an example, a family of four with $100,000 in annual gross income would seem to be in good shape -- lets take a look:

                        Taxes:                $30,000
                        PITI:                    30,000
                        Automobile:           6,000
                        Credit Cards:         9,000
                        Total Expenses:  $74,000        Balance: $26,000 or $2,166/month

                                   Other monthly expenses?   Utilities                     250
                                                                            Telephone & Cell     200
                                                                            Auto Insur. & Gas    450
                                                                            Food & Clothing      700
                                                                            Child Care             1,000
                                                                            Cable & Internet       100
                                                                            Net Income           -$533/month

                    What about...Retirement?    College Fund?    Restaurants?    Entertainment?

The Problem? Cash Flow!

                    Current Situation for many Borrowers
                            earnings unlikely to significantly increase
                            monthly expenses on the rise
                            savings rate is zero or negative
                            insufficient retirement funds

                    Solution is Reallocating Debt
                          wealth building starts with cash flow
                          use mortgage as a financial tool to build wealth
                          let time and compounding generate future growth
                          future value of a one-time $10,000 @ 10%, compounded annually:
                                                        after 15 years = $41,772
                                                        after 25 years = $108,347

Certain mortgages can immediately generate significant cash flow savings, which can then be invested to pursue specific financial goals. In the above $100,000 illustration, nothing was available for investment due to a combination of taxes, mortgage and essential living expenses -- with a lower mortgage payment, either with or without cash out, it would be possible to invest for retirement. If a 401k with a company match was available, the borrowers could not only invest their cash flow, they would also generate tax savings and receive "free money" from the company match (most matches offer 50% of the first 6% of participation).

The key for this type of mortgage use: having a specific destination and time period for the cash flow. Borrowers should have a specific investment strategy along with the discipline to implement this action for at least 1-2 years. If you don't have a workable plan for the cash flow savings, you will more than likely blow the money and become very disenchanted.

Financial Dictionary

Financial Dictionary has definitions of over 300 financial terms. The dictionary was created to serve as financial education tool, helping anybody interested in learning about finance, money, and investing. The Financial Dictionary consists of definitions of the most popular and commonly used financial terms like loan, mortgage, financing, credit, credit card, bank, and more, including online loan and mortgage calculators.