Rarely has there been a time when there was so much interest in mortgages and mortgage rates. The devastating collapse of the financial markets, led by mortgages that weren’t worth the paper they were written on created incredibly high foreclosure rates and a corresponding plunge in housing prices. If you are in the market for a home the pricing isn’t going to get much better than it is today and mortgage rates are at a record low. However if you have a mortgage and you’ve been hit with an adjustment, your monthly payments are probably putting a strain on your wallet and you’re looking to refinance.
For both types of borrowers, getting a mortgage or refinancing an existing one can be a challenge in this economy. It’s best to “bone up” on the mortgage market and to help you do that we’ve listed the answers to the seven most frequently asked questions.
1. What kind of credit score do I need to qualify for a mortgage?
As recently as a couple of years ago you could find a lender willing to enter into a deal if you had a FICO score of at least 600 and could prove that you could breathe without assistance. That rapidly changed as all the toxic mortgages started sending the market into a downward spiral. Today you may have a chance at 720 but a FICO of 740 is preferred.
2. How much equity do I need to refinance a loan?
Typically a lender will want you to have at least 20% equity in your home. This presents a big problem today because of the reduced housing prices. If for example you bought your home 5 years ago and have a mortgage balance of $300,000 on a home you paid $375,000 for but which is now only worth $325,000, then you have insufficient equity. There are programs to finance up to 125% of the current value of a home if your loan is owned or guaranteed by Fannie Mae or Freddie Mac.
3. How can I avoid foreclosure if I can’t afford the monthly payments?
The federal government put pressure on the banking industry, particularly those banks that received TARP money, to do loan modifications. The initiative was designed to save over 1,000,000 homes from entering foreclosure proceedings. To date there have been fewer than 145,000 loan modifications executed. If you are on the brink of foreclosure, seek out a broker who has experience in modifications as trying to do it yourself is next to impossible.
4. What is a home equity loan
These loans are available to homeowners and are usually taken out for home improvements, consolidating debt or other long term expenses like college tuition. The loan is based on the amount of equity you have in the home. If you have sufficient equity, and you meet other requirements the bank may have, you can take out the loan at a far lower rate than a regular signature loan.
5. What is a home equity line of credit (HELOC)?
A HELOC essentially makes the equity in a home available to the owner when they need it. Unlike a home equity loan where you take out a specific dollar amount, the HELOC defines what line of credit you have and only charges interest when you actually use some of it. These loans can be tricky however and you want to be sure you understand the terms and conditions.
6. What does APR mean?
APR or Annual Percentage Rate is one tool available when comparing the actual cost of a loan and comes in handy when you’re shopping for a mortgage. All mortgages are not the same. If you find one with a low rate then you can almost guarantee it will have higher closing costs and other fees. What the APR does is consolidate interest rate, costs and fees and gives you a total cost for the loan.
7. What is a reverse mortgage?
This is a mortgage product that is fairly popular with the elderly. Basically this allows the homeowner to take out all the equity in his home and not pay his mortgage until he or she no longer lives there permanently. Older folks tend to have high equity or no mortgage at all so it appears to be a way to partially finance retirement. When they leave their home it’s normally because they died or were moved into a convalescing home. Either way, the house has to be sold to pay the mortgage.
Getting a mortgage today can be pretty scary. Know as much about your personal finances as you can (including your score) and you’ll have a better chance at success.