Mortgage Insurance

For most first time home buyers, saving enough money for a sizeable down payment is the greatest barrier to home ownership. Traditionally, s have required a down payment of at least 20 percent of the home's purchase price. However, s will approve a mortgage with a smaller down payment if the mortgage is covered by private mortgage insurance. 

Private mortgage insurance is insurance that protects a in the event that a homeowner defaults on a loan. s generally require mortgage insurance on low down payment loans because experience and studies show that a borrower with less than 20 percent invested in a house is more likely to default on a mortgage. In effect, the mortgage insurance company shares the risk of foreclosure with the . 

Refinance Information

Should you refinance your home mortgage? That's a question many homeowners ask when lower mortgage rates become available. 

But, how do you decide if refinancing makes sense in your particular case? The answer depends on many factors, including your tax bracket, the length of time you plan to stay in your home, and the additional costs and charges you must pay for the refinancing.

Refinance Costs

When you refinance your mortgage, you usually pay off your original mortgage and sign a new loan. With a new loan, you again pay most of the same costs you paid to get your original mortgage. These can include settlement costs, discount points, and other fees. You also may be charged a penalty for paying off your original loan early, although some states prohibit this. The total expense for refinancing a mortgage depends on the interest rate, number of points, and other costs required to obtain a loan. To obtain the lowest rate offered by the most s will charge several points, and the total cost can run between three and six percent of the total amount you borrow. So, for example, on a $100,000 mortgage, the might charge you between $3,000 and $6,000. However, some s may offer zero points at a higher interest rate, which may significantly reduce your initial costs, although your payments may be somewhat higher. 

Interest Rate Savings

Talk to some s to determine the available rates and the costs associated with refinancing. These costs include appraisals, attorney's fees, and points. Then determine what your new payment would be if you refinanced. You can estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments (your monthly savings). However, the ultimate amount you may save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes. The old rule of thumb used to be that you shouldn't refinance unless the new interest rate is at least two percentage points lower. However, many s are now offering zero point loans and low-cost refinancing. Therefore, even if your rate change is less than one percentage point, you may be able to save some money by refinancing. 

Refinance Points

In refinancing, s usually offer a range of interest rates at different amounts of points. A point equals one percent of the loan amount. For example, three points on a $100,000 mortgage loan would add $3,000 to the refinancing charges. 

Shopping for points as well as interest rates may save you money. As a rule of thumb, each point adds about one-eighth to one-quarter of one percent to the interest rate the is offering. 

Generally, the lower the interest rate on the loan, the more points the lending institution will charge. Some s offer refinancing with no points, but generally charge higher interest rates. 

To decide what combination of rate and points is best for you, balance the amount you can pay up front with the amount you can pay monthly. The less time that you keep the loan, the more expensive points become. If you plan to stay in your house for a long time, then it may be worthwhile to pay additional points to obtain a lower interest rate. 

Some s may offer to finance the points so that you do not have to pay them up front. This means that the points will be added to your loan balance, and you will pay a finance charge on them. Although this may enable you to get the financing, it also will increase the amount of your monthly payments.

Income Taxes

With a lower interest rate on your home loan, you will have less interest to deduct on your income tax return. That, of course, may increase your tax payments and decrease the total savings you might obtain from a new, lower-interest mortgage. 

You should be aware of an Internal Revenue Service (IRS) ruling with respect to points paid solely for refinancing your home mortgage. IRS regulations require that interest (points) paid up front for refinancing must be deducted over the life of the loan -- not in the year you refinance -- unless the loan is for home improvements. This means that if you paid a certain number of points, you would have to spread the tax deduction for those points over the life of the loan. If, however, the refinancing is for home improvements -- or a portion of the loan is for this purpose -- you may be able to deduct the points -- or a portion of the points -- under certain circumstances. Check with the IRS regarding the current rulings on refinancing, particularly if you are using the new loan to make home improvements. 

Different Loan Options

If you are thinking about refinancing your mortgage, you might want to consider other types of mortgages. For example, you might want to look into a 15-year, fixed-rate mortgage. In this plan, your mortgage payments are somewhat higher than a longer-term loan, but you pay substantially less interest over the life of the loan and build equity more quickly. (Of course, this also means you have less interest to deduct on your income tax return.) 

You also might want to consider refinancing if you have an adjustable rate mortgage with high or no limits on interest rate increases. You might want to switch to a fixed-rate mortgage or to an adjustable rate mortgage that limits changes in the rate at each adjustment date as well as over the life of the loan. 

If you decide to apply for refinancing with a particular and if you do not want to let the interest rate "float" until closing, get a written statement guaranteeing the interest rate and the number of discount points that you will pay at closing. This binding commitment or "lock-in" ensures that the will not raise these costs even if rates increase before you settle on the new loan. You also may consider requesting an agreement where the interest rate can decrease but not increase before closing. If you cannot get the to put this information in writing, you may wish to choose one who will. 

Most s place a limit on the length of time (say, 60 days) they will guarantee the interest rate. You must sign the loan during that time or lose the benefit of that particular rate. Because many people are refinancing their mortgages, there may be a delay in processing the papers. Therefore, you may want to contact your loan officer periodically to check on the progress of your loan approval and to see if additional information is needed.

Second Mortgages

If you are like most homeowners, you probably have a first mortgage loan on your home. As you make monthly mortgage payments and the value of the home increases, your interest in the property (called "equity") grows. After a while, some homeowners may wish to borrow against the equity in their home to get cash, to make home improvements, to educate their children, or to consolidate personal debts. Because such loans are in addition to the first mortgage on the home, they are commonly called second mortgage loans. 

Second mortgage loans are different from first mortgages in several ways. They often carry a higher interest rate, and they usually are for a shorter time, 15 years or less. In addition, they may require a large single payment at the end of the term, commonly known as a balloon payment. 

Traditionally, second mortgage loans are offered with a fixed loan amount and a predetermined repayment schedule. Some s now offer lines of credit that allow you to obtain cash advances with a credit card or to write checks up to a certain credit limit. These often are called "home equity lines" because the equity in your home is collateral for the amount of credit you request. As you pay off the outstanding balance, you can reuse the line of credit during the loan period. 

Second Mortgage Repayment

Some second mortgage loans may extend for as long as 15 or 20 years; others may require repayment in one year. You will need to discuss the repayment terms with the s and select one who offers terms that best suit your needs. For example, if you need to borrow $20,000 to make repairs on your home, you may not want a loan that requires you to repay the entire amount in one or two years because the monthly payments may be too high. 

Second Mortgage Costs

Many companies will charge a fee for lending you money. The fee is usually a percentage of the loan and is sometimes referred to as "points." One point is equal to one percent of the amount you borrow. For example, if you were to borrow $10,000 with a fee of eight points, you would pay $800 in "points." The number of points s charge varies, so it may be worthwhile to shop around. If the fee seems too high, you may be able to bargain for or find a lower fee. Be sure to get the amount of the fee in writing before you take the loan. Many states limit the amount of fees a may charge on a second mortgage loan. You may want to check with your state's consumer protection office or banking commissioner to determine whether there is a limit in your state. 

Home Equity Credit Line

If you need to borrow money, home equity lines may be one useful source of credit. Initially at least, they may provide you with large amounts of cash at relatively low interest rates. And they may provide you with certain tax advantages unavailable with other kinds of loans. (Check with your tax adviser for details.) 

At the same time, home equity lines of credit require you to use your home as collateral for the loan. This may put your home at risk if you are late or cannot make your monthly payments. Those loans with a large final (balloon) payment may lead you to borrow more money to pay off this debt, or they may put your home in jeopardy if you cannot qualify for refinancing. And, if you sell your home, most plans require you to pay off your credit line at that time. In addition, because home equity loans give you relatively easy access to cash, you might find you borrow money more freely. 

Remember too, there are other ways to borrow money from a lending institution. For example, you may want to explore second mortgage installment loans. Although these plans also place an additional mortgage on your home, second mortgage money usually is loaned in a lump sum, rather than in a series of advances made available by writing checks on an account. Also, second mortgages usually have fixed interest rates and fixed payment amounts. 

You also may want to explore borrowing from credit lines that do not use your home as collateral. These are available with your credit cards or with unsecured credit lines that let you write checks as you need the money. In addition, you may want to ask about loans for specific items, such as cars or tuition.

Second Mortgage Repayment and Length

Be sure you understand how much your monthly payments will be and what they cover. Your should be able to give you this information in advance. With some loans, you will be required to make monthly payments on the principal and interest. With other loans, you may be required to pay interest only on the borrowed amount; in these loans, your monthly payments will not reduce the principal amount of the loan. With such a loan, you will be required to pay back the entire borrowed amount at the end of the loan period. These loans are popularly known as "balloon loans." If your loan has a balloon payment, you should consider how you will arrange to repay the entire amount when it becomes due. 

On "home equity lines," the does not have to give you the exact amount of the monthly payment, but must explain how it is figured. This is because the borrowed amount will vary and your outstanding balance will change if you use the line of credit. However, if your monthly payment term is 5% of the outstanding balance and your outstanding balance is $5,000, your minimum monthly payments would be $250.

Second Mortgage Rates

If you have a fixed-rate loan, the interest rate is set for the life of the loan. However, many s offer variable rate mortgages, also known as adjustable rate mortgages or ARMs. These provide for periodic interest-rate adjustments. If your loan contract allows the to adjust or change the interest rate, be sure you understand when the has the right to change the interest rate, whether there are any limits on how much the interest or payments can change, and how often the can change the rate. You also should know what basis the will use to determine a new rate of interest. 

Title Insurance

Buying any kind of real estate could very well represent the largest single investment a person ever makes. And real estate, like every other thing of value, is worth protecting. 

A policy of Title Insurance is a contract of indemnity between the insured and the insuring company relating to the title to the land described in the policy, protecting the insured against loss of damage by reason of defects, liens or encumbrances of the insured title existing at the date of the Policy and not expressly excepted from its coverage . 

The Policy is issued after a complete search and examination of the public records that shows the condition of the record title, including any money obligations outstanding against the property, easements and other matters which may affect the rights of ownership, possession and use of the property. 

Risks Not Covered

The standard owners policy and standard mortgage policy are based on public records of the recording district in which the land is located. It does not insure against matters which would only be disclosed by actual inspection or survey of the property. It does not insure against certain matters not shown by the public records such as unrecorded easements, liens or money obligations; unrecorded utility rights of way, public or private roads, community driveways and other types of encumbrances, or against the rights or claims of persons in possession of the property which are not shown by the public records. 

Different Kinds of Policies

Owners Policies are issued to real estate owners. Purchasers Policies are issued to purchasers of real estate under contract. Mortgage Policies are issued to mortgage s. In addition there are several other special forms of policies. There is a type of policy to meet the requirements of almost any form of real estate transaction. 

Reissue When Refinance or Sell

The coverage of your policy is against all matters that appeared of record up to the date of issuance of your policy. Since that time many documents may have been recorded, some of which may affect the title to your land. Taxes and assessments may have accrued and be unpaid. There may have been actions in court affecting your title. The purchaser is entitled to have full information and protection as to the condition of the title right up to the date of his purchase. In addition, there may be matters of record which would prevent either the seller or buyer from selling, buying, or mortgaging land until such matters have been cleared. These items include such things as federal tax liens, judgements, incompetencies, divorce actions and other conditions which the title search may disclose. 

Title Insurance Protection

Title Insurance insures that the "record" title, is good subject only to the exceptions expressly set out in the Policy. lt also insures against certain matters which do not appear of record, such as forgery, identity of parties, incompetence of former owners, interest of missing heirs, and status of individuals not having the "right" to sell property. 

Protection Against Matters Not Of Record

Upon application, the issuing company may specially cover matters which are disclosed by a physical inspection and/or a survey of the property, subject to any exceptions which the inspection will determine to be proper. An additional risk premium is charged for this type of coverage. Insurance of this kind is called 'extended coverage'. 

When is the Policy issued?

An owner's policy protects only the owner while a Mortgage policy protects only the holder of the mortgage on the property. Separate policies are required to protect both interests. Special rates are available when both Owner's and Mortgage policies are applied at the same time. 

The Owners Policy of title insurance usually is issued after the deed to the buyer is 'delivered' and recorded. A Purchasers Policy is usually issued after the contract has been executed by both parties or after the signed contract has been recorded. The mortgage policy of title insurance is usually issued after the mortgage or deed of trust has been properly executed and recorded. 

Determining Policy Premium

Title Insurance Premiums are determined by the amount and type of coverage provided. Unlike other insurance premiums, however, the title insurance premium is paid only once as the policy is effective for so long as title or "ownership' remains in the name of the insured, or his heirs or devises. Rates are filed with the insurance commissioner who regulates the activities of title insurers.