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5: Get Lenders to Work for YouKeep in mind that the smaller the steps, the greater the lag time when there is a sudden jump in interest rates. (Of course, a sudden decline would not be felt as quickly either.) Most people want a mortgage with small steps.
Should You Get a Balloon Mortgage?
"Balloon" in real estate finance means nothing more than a single mortgage payment (usually the last) that is larger than all the others. For example, you might get a second mortgage for $10,000 that is all due and payable in three years. During the three-year period, you might pay interest only. If the interest is 6 percent, you pay $50 a month. However, at the end of the three years, you still owe the full $10,000. (Remember, you were paying interest only.) That last pay ment, for the full principal, is the balloon.
Any mortgage can incorporate a balloon. We'll discuss several of the more popular ones in Power Tip 40.
Be wary of mortgages with balloons. When they come due, you need to have the money to pay them off. That may mean you will either have to sell the property or refinance. It's usually a good idea to insist on a clause in a balloon mortgage that provides for automatic refinancing (even if it's at a higher interest rate) at the balloon, just in case.
Should You Get a Biweekly Mortgage?
In a biweekly mortgage, the borrower makes a payment every other week instead of the traditional monthly payment. Since there are 52 weeks in the year, a payment every other week results in 26 "half payments" or 13 full payments. With a biweekly mortgage, therefore, each year you make the equivalent of 13 monthly payments instead of 12.
Biweekly mortgages are set up so that the extra payment each year goes to principal. Thus, over the life of the loan an amazing amount of interest is saved. As a result the mortgage can be paid off years early. In almost a painless way, you can cut almost a third off the time it takes to pay off a 30-year mortgage.
The biweekly mortgage allows many people to painlessly and effortlessly increase their principal payments. However, keep in mind that a biweekly mortgage is not for everyone. It works best when you are salaried, getting paid on a weekly or biweekly basis. You can easily budget your money to take care of the payment that way and probably won't feel the extra expense very much. On the other hand, if you're paid monthly or work for yourself, the biweekly setup can be a disaster. You won't have the money handy on a biweekly schedule.
The time to establish a biweekly mortgage is when you first get financing. Look for a lender that will set the program up for you. (Not all lenders will.)
If you already have a mortgage or find a lender that won't do this for you, you can set up a biweekly program yourself. First, however, be sure your mortgage contains no prepayment penalty (described in Power Tip 39) .
It couldn't be easier. Every two weeks simply deposit half the mortgage payment into a checking account. Then once a month pay your mortgage payment from this account. (You can set up the system electronically with some banks so the deposit will automatically come from your paycheck and the payments will automatically go to the lender.)
At the end of a year, you should have the equivalent of an extra month's payment in the account. Now, simply send this to the lender, specifying that it must go to principal, not interest. (If you don't specify the purposes, the lender very likely will just consider it the next monthly payment.) You've added the equivalent of a monthly payment to your principal and have made a significant step toward paying down your mortgage.
Of course, there are companies that will do this for you for a fee. However, why pay someone else to do what you can easily do for yourself?
Should You Go for an Electronic Mortgage?
If you are a prime borrower you may be able to get a mortgage, including funding, within 3 days. This is incredibly fast, since the typical mortgage takes 20 to 45 days to secure.
Fast mortgages are basically conforming loans. They are underwritten electronically through Freddie Mac and Fannie Mae. They are handled primarily by computer.
Many mortgage brokers, including some that are on-line, can handle these types of mortgages. The procedure is essentially the same as for any mortgage. After you fill out an application, a credit report is secured and you are scored. If you meet the profile requirements, the underwriter indicates that you will be approved. It's then a matter of getting a mortgage lender to move quickly.
When asking about an electronic mortgage, whether in person or on-line, ask specifically for "automated mortgage underwriting." If the lender doesn't know what you're talking about, go to a different source.
What About Government-Insured or Guaranteed Loans?
The VA (Veterans Administration) has a guaranteed loan program and the FHA (Federal Housing Administration) offers an insured program. Usually these agencies don't actually loan money. Instead they either guarantee or insure a mortgage that you obtain through the lender (in the event you default on the payments).
Qualifications are stringent. The VA requires you to be a veteran of military service during certain time periods. (Check with the VA for the current periods.) For the FHA, you must qualify almost as rigorously as an applicant for a conforming loan-that is, you must be a prime borrower.
The advantage of these mortgages is the low down payment, or in the case of a VA loan, no down payment. The disadvantage, at least in the past, has been the low mortgage amount, although the loan amounts allowed are rising.
In the past these loans have been assumable-that is, transferable to a new borrower-with a catch. Unless the person who assumed the VA loan was also a veteran, you remained liable for repayment, even if the new borrower didn't make the payments! Recently, FHA loans have become more difficult to assume, with the new borrower required to qualify as if applying for a new loan...