There are many types of subprime mortgages, but one of the most predatory types of mortgages is the Negative Amortization Loan. Negative Amortization Loans can sound attractive at first, but after a few years, it is very easy to end up owing more money on your mortgage than you initially paid.
In a negative Amortization Loan, the monthly payment is less than the total amount of interest owed for that period of time. This difference is then added back onto the loan, which raises the total amount of money that is owed to the mortgage lender.
Negative Amortization Loans are sometimes called a deferred interest loan, Graduated Payment Mortgage(GPM,) or NegAm Mortgage. No matter what the name, if you are paying less than the normal amortization amount every month, you are in a very dangerous position.
Amortization is used to refer to how the payments of a loan will be used to pay down a mortgage. During normal amortization, part of your payment goes toward the interest of a loan and part of it goes towards the principal of the loan.
At first, more of each payment goes towards interest than principal, but over time, this reverses and you begin to pay more towards the principal of the home and less in interest.
To see how each of your payments are used, you can view an Amortization Table, which most lenders will freely provide you with. The Amortization Table will break down all of your payments by month, showing you how much principal you owe after each payment.
A negative amortization loan is when each monthly payment is less than the total amount of interest owed on the loan. The interest that is not paid is then tacked onto the principal of the loan. As a result, each month that you pay negative amortization, the amount you owe on the home increases.
So, as an example, say that during the first year of a 30 year mortgage, a normal mortgage payment would be $500 a month, with $400 going towards interest. In a negative amortization loan, you might only pay $250, with $250 getting added onto your total mortgage balance each month.
As a result, this not only increases how much you owe on the home, but it also increases the amount of interest you owe.
Due to legislation, this is usually only allowed to happen after up to five years, which is referred to as the recast period. However, in five years time, paying negative amortization can result in owing many thousands more than what you paid for the home and what it is worth, which makes selling the home very difficult.
Many people who have negative amortization loans end up short selling, which means selling the home for less than they owe. This is because the principal of the loan vastly exceeds the homes actual value, which is referred to as being underwater on a loan.
When negative amortization loans are coupled with an adjustable rate mortgage, which has an increasing interest rate every few years, it is very easy to end up underwater on the loan. When the adjustable rate increases, which it will, this means that all of the money added on by negative amortization, will also increase.
There are many problems with negative amortization mortgages, which often result in drastic increases in mortgage payments each month. This is often referred to as payment shock, where the amount owed month by month can rapidly increase after the recast period.
While negative amortization loans can be very dangerous, if you plan on quickly selling a home for a profit, it can be a good investment tool, as you will have a lower monthly payment. However, this is very dangerous, as if you can not sell the home or if the value of the home decreases, you will end up owing more than the home is worth.
Many first time home buyers get into trouble over these types of loans, because they have a very low initial monthly payment, which can seem very attractive. However, once the grace period is over and the rate increases, they soon realize they have entered into a predatory loan.
Buying a home is a very big investment and most people use a mortgage, which is a special type of loan, because they do not have the money available to buy a home upfront. Since purchasing a home is such a large investment, and in some cases the biggest of a persons lifetime, it is important to get the best deal on your mortgage. There are many factors that go into evaluating a mortgage and finding a good lender.
One of the most important considerations is the interest rate of the mortgage. The interest rate can vary, based off of the current market, as well as the credit of the person applying for the mortgage. It is essential to have an idea of what the normal interest rate is, so that you can better compare mortgage offers from various lenders.
It is important to understand that mortgage rates can vary on a daily, hourly, or even minute by minute basis. They are not set directly by the lender, but are instead a reflection of a number of factors, which are based heavily upon the current market and economic situation.
Since interest rates can vary frequently, the advertised interest rate is often not very accurate. It is simply not practical, affordable, or possible for a lender to update their advertised mortgage rate every time it changes, so there is no guarantee that you will get the same mortgage rate you see in the newspaper or even online.
In many cases, this is simply a reflection of how often the mortgage rate changes, but there are some dishonest mortgage lenders who purposely advertise a much lower interest rate than they actually offer. So, it is important to always look at advertised mortgage rates cautiously and when speaking with a lender, make sure to ask them how often their mortgage rates are changed.
When you actually apply for a mortgage, especially if there is an application fee, make sure to ask if the mortgage rate is guaranteed and for how long they will honor this guarantee.
While interest rates play a big role in the overall cost of a mortgage and the monthly payments, there are many other costs associated with a mortgage. The closing costs of a home can easily exceed $3000 and even more, depending on the cost of a home. So, it is very important to ask your mortgage lender about any fees and charges that will be associated with the mortgage.
Remember that there is almost never a situation where you will pay nothing in closing costs, so if this is offered by a mortgage lender, you should be very suspicious and make sure to ask them how they get paid and what other fees are associated with the mortgage. In almost all cases, you will find that the $0 closing costs are offset by a number of fees and other charges.
Points are one way that lenders get paid and represent a percent of the total cost of the home, which is paid up front. So, if a lender requires you to pay 1 point on a $100,000 home, you would have to pay them $1000, which is 1% of the total cost of the property. Often, by paying more points, you can get a better deal on your mortgage and lower interest rates, but it can also add up very fast.
It is important to ask about points and other fees like these and compare these fees among lenders, so you can have a better idea of who is really offering the best deal on a mortgage.
It used to be that when you bought a home, lenders required a 20% down payment. Over time, lenders began to relax this requirement, often because the higher your mortgage amount, the more they get paid over the course of the loan.
However, a lot of lenders require that you purchase Private Mortgage Insurance(PMI) if you are not going to have enough money for a 20% down payment. PMI guarantees that if the home goes into default, a portion of it will be covered by the insurance company.
Make sure to ask the mortgage lender whether Private Mortgage Insurance is required and how long it is needed. Often, it is only required until there is 20% equity in the home, but remember that they will not cancel it automatically and instead you must request that the lender cancel it when you reach this point.
It is important to explore all of your options, so you can get a good deal on your mortgage and so you have a basis for comparison to compare different mortgage offers. One of the best places to start is your current bank, as they will usually offer fairly standard interest rates and can usually give you an answer fairly quickly.
You bank also might not require any money towards an application fee, although all reputable lenders will provide you with a free estimate, without actually checking your credit or financial information. Even though they are not checking your information at this time, it is important to be honest, because when it comes time to actually apply for the loan, they will run your credit and check your references, so any dishonesty will be uncovered.
By starting with your bank, you will have an idea of what a standard interest rate is, as most banks do not offer subprime mortgages. This will give you a basis to compare other mortgage lenders and mortgage brokers, so you can get the best deal on your home loan.
The current economic situation leaves much to be desired. Unemployment is up around the country and due to the bank bailout, we are facing a very large deficit, which has questionable returns. This and many other factors lead many to be very wary of what is to come, so it can be hard to find a silver lining. However, for those who are prepared to buy a home, now is a very good time, as home prices are at a historic low and the government is offering a tax credit for first time home buyers.
There are several reasons that house prices are so low, but it has a lot to do with the high rate of foreclosures. Over the last 10 years, the subprime mortgage market exploded.
Subprime mortgages are mortgages that have higher interest rates and less favorable terms than traditional mortgages.
Subprime mortgages have historically been a tool used by people who have less than perfect credit and would not be able to get a standard mortgage. One of the most popular subprime mortgage was the Adjustable Rate mortgage, which had a low initial rate that increases periodically. Not all Adjustable rate mortgages(ARMs) are bad, but subprime ARMs can have an interest rate that increases freuquently and exponentially raises the monthly mortgage payment.
Those who receive a subprime mortgage are still usually vetted by the lender, with credit checks and income checks to verify that the individual will be able to pay for the mortgage. However, over the last few years, many lenders stopped vetting loan applicants and instead approving pretty much anyone for a home loan.
Lenders stopped vetting mortgage applicants, because mortgages became a very popular investment tool. Investors would buy up a group of mortgages and then bundle them into a large group. They would then sell the mortgages to investors, many of who were overseas, as a high return investment. Since the bundled mortgages were subprime, they had a much higher than normal return rate.
The first investor, who financed the initial mortgages, would not be keeping the mortgages, so there was no incentive for the investor to vet applicants. Instead, as soon as they had enough mortgages in their bundle, they would sell them and be someone else’s problem. This resulted in many people who should not have had a mortgage ended up with a subprime mortgage.
One of the reasons that real estate became so popular as an investment tool was because of rapidly increasing home prices. Homes would often appreciate more than 25% a year towards the end, which gave the impression that even if the person defaulted on their loan, the home could still be sold for a profit.
This went on for some time, with home prices rapidly increasing, artificially inflated by the large number of subprime mortgages. However, this could not go on for ever and eventually those who received these subprime loans, were no longer able to pay for them, spurring a increase in foreclosures.
While the current housing market has brought much sorrow to many homeowners, there is a silver lining for some. With the vast number of foreclosures and empty homes, it is possible to buy a historically low prices. This large number of foreclosures has also driven the prices down on other homes. Further, interest rates are at an all time low.
Of course, lenders are now being much more careful in who they offer mortgages to, but for those with good credit and money for a down payment, it is possible to purchase a new home for much less than even a year ago. The federal government is also offering a tax credit for first time home buyers, which is up to $8,000 and does not need to be repaid, so for many, now is a good time to buy a home.
Many assert that housing prices were artificially inflated in the first place and the prices we see today are simple the real market value of the home, and in many ways this is correct.
When applying for a mortgage, the number of different costs and charges can quickly add up. From application fees to home appraisals, it seems like everyone has their hand out. Some of these fees and charges are a normal part of the mortgage process, while others may not be.
It is very important to understand what types of charges are normal when purchasing a home and what types of charges are junk fees. Junk fees are one time fees that are added by the mortgage lender. With the exception of interest and principal fees, most other charges are junk fees. It is important to question these junk fees, as they are often negotiable, but you will not know unless you ask.
Below, you will find a list of some of the common costs associated with a mortgage.
Application Fees: Application fees are also sometimes called processing fees and vary in price, but are usually between $300 and $400. An application fee may be refundable, but it is usually not. It is very important to ask about refunds before paying the application fee. More and more lenders are waiving application fees, but often they tack these fees on somewhere else, after the mortgage is processed, highlighting the importance of questioning all junk fees.
Credit Report Fees: Many lenders will charge the mortgage applicant for the cost of running their credit. The cost of a credit report should not exceed $20 and it is possible to purchase your own and save a few dollars. If a lender tries to tack on a few extra dollars for your credit report, this is a red flag, as most creditors get a bulk discount on credit reports.
Origination Fee: This is a fee charged by the lender to process your mortgage. It is also sometimes called an administration fee or commitment fee. Sometimes the origination fee can be waived, as the lender is making money on the loan and points already. It is important to question this fee and if it is excessive consider using a different lender.
Points: In addition to the origination fee, points are another way that the mortgage lender gets paid. Typically, the points is related to the interest rate, so with a 5% interest rate, they might charge you .05% of the cost of the loan up front. Sometimes the points are negotiable, but the lender could charge you a higher interest rate if you do not want to pay the points.
Prepaid Interest: When you close on your home, you will not be responsible for your first payment right away. Depending on when in the month you close, it could be two months before your first mortgage payment. However, the lender will require that you pay interest between this time, which is the prepaid interest. Make sure to talk with your lender to determine when would be the best time during the month to close, so that you pay the least amount of interest or have the longest time between your first payment.
Lock-In-Fee: Some lenders may charge a fee to guarantee an interest rate while you are looking for a home. This is considered a lock-in-fee and in reality most quality lenders do not charge anything to guarantee an interest rate, however you should get this in writing. If the lender does charge a lock-in-fee, this is a junk fee and if they are unwilling to remove it, this is another red flag that can indicate a less than reputable mortgage lender.
Title Insurance: Like a car, all homes have a title of ownership. When purchasing a new home, a title search is preformed to ensure that no one else has a claim to the property and that there are no liens on the property. Title insurance protects the interest of the bank in case the title search turns up another owner or a lien on the home. The cost can vary, but it usually costs around $200.
Documentation Preparation: This is a junk fee that can often be avoided, because with todays technology, it does not take too much effort to prepare the paperwork for the mortgage.
Underwriting Fee: The underwriters of a loan are the people who take the time to analyze the credit worthiness of the loan applicant. Often, this fee is a junk fee and is not needed. It is a good idea to speak with the lender and have them describe exactly what their underwriters do, as well as questioning the fee.
Property Tax Fee: It is usually necessary to pay the current years property taxes, as well as setting some money aside for next years property taxes, at the time the loan is completed.
Tax Service Fee: Some lenders require that the payments of the property taxes are verified, but this is often a junk fee. It is important to question the lender on this fee, ask them how it is verified, and to see the verification. This tells the lender that you know it is a junk fee and can help you determine if the lender is reputable.
Private Mortgage Insurance(PMI) Fee: Some lenders require private mortgage insurance if less than 20% is put down on the home. PMI partially insures the mortgage and if required, is used until 20% equity is built up in the home. Some lenders require a fee for setting up PMI, but it is a good idea to question this cost. Also, lenders will not usually automatically remove PMI once you have 20% equity, instead waiting for the mortgage owner to question the charge.
Survey Fee: A survey is often done to mark the boundaries of the property. A survey can be a good idea if there are close neighbors or structures on the boundary of the property of questionable ownership. In some cases a survey may be required in order to receive title insurance. Typically a survey is, compared to the other mortgage fees, rather inexpensive and can be a good idea to get an idea of how much land you own. If you decide not to get a survey, you can sometimes see the marking of a previous survey, such as flags on trees or marks on the road, to get an idea of your land’s boundaries.
Appraisal Fee: A home appraisal is used to determine the value of a home, so the mortgage lender can ensure that you are getting a fair deal. The appraiser will evaluate the condition of the home, as well as considering the recent sale price of other similar homes in the area. The cost of an appraisal is usually around $300 and is required when purchasing a new home or refinancing your existing home.
Appraisal Review Fee: This is a junk fee that should raise some warning flags, because it is basically an appraisal of the appraisal. If the lender is so uncertain of the the companies that do their appraisals that they require someone else to review it, you might want to look elsewhere for your loan, as the alternative is that the lender is just trying to fleece you of some extra money.
Courier Fees: Sometimes a lender may charge a fee to transport the mortgage package between the lawyer and mortgage office. However, this fee is often not needed unless it is an out of state transaction or there is a short window of time that the loan must be completed in. It is a good idea to question this fee, as it is often unnecessary.
In the United States, Bankruptcy is used as a last resort when a borrower is unable to pay back their creditors. There are several different types of bankruptcy, but most people either declare Chapter 7 Bankruptcy or Chapter 13 Bankruptcy. Chapter 7 Bankruptcy, which is most often used, focuses on the liquidation of the debtors assets. Chapter 13 Bankruptcy, on the other hand, deals more with the reorganization of the debt. However, with both of these types of bankruptcy, the debtor can usually retain some of their property.
While in some cases, bankruptcy is the only option, it can have a very negative affect on a persons credit rating. Typically, for the next 7 to 10 years, the individual will have a very low credit score, which makes borrowing money very difficult.
This article discusses how to refinance a home after bankruptcy, although the information provided can also be applied to anyone who wishes to refinance their home. Even though many types of loans, like a new car loan, can be very hard for someone who has declared bankruptcy to get, refinancing a home is often not viewed as a large risk by mortgage lenders. So, even if you have declared bankruptcy, it is usually possible to refinance your mortgage.
Most people decide to refinance their mortgage in an effort to get a lower interest rate and a lower monthly payment. In the case of someone who has filed bankruptcy, it is not uncommon to have a subprime mortgage, which can have excessive rate increases, higher interest rates, and unfavorable terms. As a result, refinancing your home can often be the best way to save money and stay in your home.
It is important to note, however, that when you refinance your home, you are basically starting from scratch with your new lender. Over the course of the first few years of a mortgage, you are primarily paying the interest of the loan. Over time, the amount of interest you are paying will decrease, while the amount that you are paying towards the principal will increase.
As an example, lets consider a home that costs $200,000. In the first three years of your mortgage, you might pay $50,000 to your lender, but only $3,000 goes towards the cost of the home. So, after 3 years, you would still owe $197,000 towards the home. Over the next three years, you may pay $9,000 towards the principal and as time goes on, the amount that goes towards principal increases. If you were to refinance your home after only 3 years, you would be refinancing it for basically the full amount, even though you have paid your lender $50,000.
This is important to remember, because a big part of refinancing your home involves determining whether it is in your best interests to do it in the first place.
The first step when preparing to refinance your home should be to begin setting aside some money every month. When you refinance a mortgage, you will usually have to pay a number of different fees, including an application fee and a loan origination fee.
These fees are often called junk fees, because they do not actually go towards the mortgage itself or the value of the home. In many cases, junk fees can cost several thousand dollars, so it is a good idea begin saving money as early as possible.
It is also important to determine if your current mortgage has a penalty for paying the mortgage off early. Some mortgages, especially subprime mortgages, have a pre-payment penalty, which goes into affect if you pay your home off early. If this is the case, you will need to take this into account.
Before you begin shopping around for a new mortgage, it is also very important to analyze your monthly expenses and compare these with your monthly income. This is important because you need to get an idea of what type of monthly mortgage payment you can afford.
It is important to take into account all of your monthly expenses, including utilities, phone bills, car payments, food, and any other living expenses you may have. Also, make sure that you include any outstanding debt, such as credit card bills, as well as emergency bills that may occur.
Getting an idea of the current mortgage rates is essential, even if you have poor credit or have filed bankruptcy. You can use these figures to help decide whether a particular lender is offering you a fair interest rate or if they are offering a subprime mortgage.
Begin by calling around to several of your local banks to find out what the current mortgage rates are. At this time, don’t mention the details of your situation, but simply inquire as to what the current mortgage rate is. It is also a good idea to consult some online lenders as well, who usually have their basic interest rates posted on their website.
Once you have an idea of the current mortgage rates, you can start to get estimates for refinancing your home, as a number of lenders to provide a pre-qualification letter with their rates. The lender will ask you for your financial information, but they should not actually run your credit or charge you any fees for the written estimate.
At this point, it is imperative that you are upfront and honest with the lender. Lying about your bankruptcy or your credit score, might get a higher estimate, but when they actually run your credit, they will find out you were lying and will not offer you the same rate. In the end, you are only wasting your own time, as well as that of your lender, which can often disqualify you from receiving the loan anyway. Instead, honestly answer their questions about your income and bring up the fact that you have filed for bankruptcy.
Make sure that you also ask about the cost of refinancing your mortgage, such as attorney fees, application fees, and any other charges that the lender might have.
It is a good idea to check the rates of a multiple lenders, so you can explore all of your options.
Once you have a number of estimates, you can begin comparing the different loans to find the one that best fits your needs. Start by comparing the interest rates offered to the standard interest rates that you found in step 3. This will give you an idea of whether the interest rate is normal or if it is subprime.
Next, compare the cost of refinancing your home against the cost of keeping your existing mortgage. It is essential not just consider the difference between the monthly payments, but also the cost of the junk fees and any pre-payment penalties associated with your current mortgage. For instance, if your monthly payment is $100 less on the new mortgage, but you have to pay $3,000 in junk fees, then it would take you almost 3 years before you break even on the mortgage. Remember, that the junk fees are due at the time of signing.
It is also important to look at the big picture. An amortization table can be very handy, which will break down every payment over the course of the loan to show you how much of it is going towards interest and how much towards principal. It is important to compare where you are with your current loan and where you would be if you refinanced your mortgage.
After you have carefully considered all of your options and decided upon a lender, it is a good idea to try to get your lender to reduce the junk fees. These fees can often be reduced with a little negotiation and are often padded just for this reason.
While refinancing your home can be a great way to reduce monthly payments or get out of a subprime loan, it is not a decision that should be taken lightly, especially for those who have filed bankruptcy. Instead, it is important to make sure that refinancing your home is really in your best interest and not just think about the difference in monthly payments.
Preparing to buy a new home can be a very daunting process, especially for a first time home buyer. Due to the current financial situation, in many cases lenders have become much more strict with who they will lend to and are much more likely to throughly analyze the finances of a prospective home buyer, more so than they would have only a few years ago.
For many lenders, having a high credit score with limited or manageable debt is a key factor in offering an individual a home loan, with some lenders now requiring minimum credit scores of 700. A persons credit score is a number that is based off of information on your credit report. Whenever you make a purchase on credit, are delinquent on a bill, or make a payment on your line of credit, this information is added to your credit report. In the case of a delinquent or unpaid bill, your credit score would likely be lowered, while a record of on time payments will raise your credit score.
A credit score of 850 is considered to be perfect, while a credit score of 300 is considered to be fairly low. With many lenders tightening their restrictions on financing mortgages and requiring a credit score of over 700, they have successfully limited the number of individuals who will now qualify for a home loan.
These restrictions help to highlight the importance of thinking about the big picture when using a credit card or deciding not to pay a bill. While missing a payment or making a late payment might not be a big deal at the time, if this prohibits you from getting a mortgage a year later, it has effectively cost you much more than a little bit of extra interest.
When preparing to apply for a mortgage, it is important to first take steps to repair your credit report and take care of any delinquent or unpaid bills. This will not only help raise your credit score, but will also show a strong sense of commitment to the bank or mortgage broker, who will see that an effort has been made to be fiscally responsible.
Not only will a lender take your credit score and borrowing practices into account when you apply for a home loan, but they will also consider your net worth. Your net worth is basically the difference between your total assets and how much money you owe. So, even if you were to make six figures a year, if your liabilities were also six figures, then you would not be considered to have a very high net worth.
Both your net worth and credit rating are two very important factors a mortgage broker or other lender will consider when deciding whether to offer you a mortgage and how much of a mortgage to offer. So, not only should you try to clean up your credit report well before applying for a mortgage, it is also a good idea to try to reduce your overall liabilities whenever possible.