LOAN FAQs
Please refer to this page to answer some of the most commonly asked questions about Lake Tahoe Mortgages and North Lake Tahoe Real Estate.
What is a “No Income Documentation” Loan?
How Does a Zero Cost Loan Work?
Is a Home Equity Line a good idea?
How Does 100% Financing Work?
What are the Pros and Cons of an Interest Only Loan?
How Does an Interest Only Loan Work?
What is an Intermediate Adjustable Rate Loan?
What is a “No Income Documentation” Loan?
This type of loan does not require a borrower to supply any documentation about their income. No tax returns, pay stubs, W-2 or 1099 statements, no income proof at all.
Lenders realize that a borrower’s income can fluctuate and sometimes be difficult to document. Self employed individuals, those that rely on tip income and many retired borrowers may have income that is inconsistent from year to year. Those that have unpredictable overtime or bonus structures are also examples.
Normal lender guidelines for qualifying do not allow for unpredictable income, so the no income doc loans fill this void. The lender mitigates their risk by making sure the other areas of a borrowers file are strong such as:
Solid credit history
Ample liquid reserves (money in the bank)
Larger down payment or equity in the home
Depending on the circumstances, the lender may also charge a slightly higher rate. These loans are very common in Lake Tahoe. Make sure you are working with an experienced mortgage lender who has access to and experience with this type of financing.
How Does a Zero Cost Loan Work?
A true zero cost loan exists when the lender pays for all the non recurring closing costs associated with a purchase or refinance. These costs are not financed into a larger loan amount, they are paid by the lender directly.
The lender is able to pay the closing cost by charging a slightly higher interest rate. Over time you will be paying for the closing costs by way of a higher monthly payment. Generally, the larger the loan amount the easier it is for a lender to pay your closing costs.
Non recurring closing costs are defined as those one time costs associated with the particular transaction. They include but are not limited to: appraisal fee, title and escrow fees, processing and underwriting fees, notary and recording fees.
Recurring fees or prepaid items are not generally paid on a zero cost loan. They include interest on the loan, property taxes and home owners insurance. Costs you pay whether or not you refinance.
In many situations, no cost loans are a great way to save money and increase tax benefits.
Is a Home Equity Line a good idea?
Home Equity Lines of Credit or HELOC’s can be an excellent way to access the equity in your home. A HELOC acts much like a credit card, but is secured against real estate in second position to your primary mortgage. You only pay interest on the amount you have borrowed and you can pay the line down to zero at any time. In most cases the interest is tax deductible.
HELOC’s have become very popular in the last three years, because the interest rates have been very low. Most HELOC’s are adjustable and tied to Prime with no annual caps. In 2004 the Prime Rate was at 4% and very attractive. Today Prime is at 7.5% and will probably move up another .25% in 2006. People forget Prime was 9.5% less than four years ago.
I like HELOC’s over the short term (less than a year). If you need longer to pay the HELOC off, consider a new first mortgage with cash out. HELOC’s lose their benefit as rates move up.
Talk to an experienced mortgage professional before applying for a HELOC or to discuss your current HELOC.
How Does 100% Financing Work?
Financing 100% of the purchase price of a home has become very popular in recent years. Yes, lenders will actually allow you to buy a home with no money down.
Obviously the lender is taking on a ton of risk. For this risk, they require the borrower to be well qualified, with a great credit rating and ample monthly income. In some cases they may also charge a higher interest rate to compensate them for the extra risk.
100% financing is typically done in one of 3 ways:
1. The 100% is split into 2 pieces – 80% on a first mortgage and 20% on a second mortgage.
2. A straight 100% first mortgage with an additional private mortgage insurance premium (PMI)
3. A straight 100% first mortgage with tradable securities pledged as additional collateral.
Examples 1 and 2 are a common way for first time buyers to get into a home. The maximum amount of financing is normally restricted to $500,000.
Example 3 will allow loans over 2 million, provided the borrower is willing to put 40% or more of the loan amount into an account that the lender will hold as collateral. An ideal option for those who don’t want to liquidate investments for a down payment.
What are the Pros and Cons of an Interest Only Loan?
Interest only loans are quickly becoming the loan of choice for the informed borrower.
The Pros of an interest only loan include:
· Lower monthly payment with the option to pay more to buy down principal
· Qualify for more loan or loans, because of the lower payment
· Payments to principal can immediately lower your monthly payment
· If you choose not to pay principal, you can use the savings to pay off other debt or invest elsewhere
· Investing elsewhere may earn equal or better rates of return, and improve your financial stability
The Cons of an interest only loan include:
· Paying more interest over time
· After the interest only period is over (normally 10 years) the payments can be larger because you begin paying principal and interest over a 20 year period
· The temptation to spend the monthly savings can get you in trouble
Interest only loans add flexibility, allowing you to decide where to invest the monthly savings. To maximize the benefits, this loan requires planning and discipline. Managed properly, this loan is a great tool to increase your wealth.
How Does an Interest Only Loan Work?
An interest only loan gives the borrower the option to pay only the monthly interest due on the loan for a fixed period of time. After the fixed interest only period is over, the borrower is required to pay the lender both interest and principal for the remainder of the loan. Interest only loans are normally 30 year loans.
Example: $400,000 - 5 year interest only loan with a rate of 5% for 30 years.
The interest only payment for the first 5 years would be $1,667. The payment in years six through 30 would be $2,338.36.
One advantage to an interest only loan is the lower initial payment, which can enable a borrower to qualify for a larger loan or simply save money during that initial period. A down side is, in year six, your loan amount is the same and your monthly payments are larger because you now need to pay back the loan in 25 years.
The interest only loans have become extremely popular in the past five years. Managed properly, this loan can be a great option for most borrowers. As always, talk to an experienced Mortgage Professional to see if an interest only loan is right for you.
What is an Intermediate Adjustable Rate Loan?
This type of loan has both a fixed rate and adjustable rate component and has a 30 year term. The fixed rate component occurs first and can be for a period of 3, 5, 7 or 10 years. After the fixed period the loan converts to an adjustable for the remainder of the 30 years.
In most markets the shorter the fixed-period, the better the rate. A 3 year intermediate is usually a lower rate than the 5 year and so on. Lenders are usually willing to give you a better rate for a shorter period of time, because they know your rate will adjust to current market after the fixed period is up.
After the fixed period, the rate becomes variable and can fluctuate depending on the market conditions. The rate will have caps on how high or low it can go over the remaining loan term.
These intermediate loans can be a great alternative to the higher rate 30 year fixed. The payments are lower, allowing borrowers to qualify for a larger mortgage and statistically, the average time people keep their mortgage is now under four years, so why pay the higher 30 year fixed rate.
Bottom Line: Talk to an experienced mortgage professional who will help you determine if the Intermediate Adjustable is right for you.
What is a “Prepayment Penalty”?
A “prepayment penalty” is part of a contractual agreement between the borrower and the lender stating that a fine will be assessed to the borrower if the mortgage is paid off within a certain time period. A common prepayment penalty period is between 1 to 3 years and the fine is usually 6 months interest.
There are two types of prepayment penalties:
- Hard Prepayment Penalty: Without exception, a penalty will be incurred by the borrower if the mortgage is paid off within the prepayment period.
- Soft Prepayment Penalty: A penalty is charged to the borrower if the mortgage is refinanced or 20% of the principal is paid in one year. However, with the soft prepayment penalty, the fine is waived if the mortgage is paid off by selling the property.
A prepayment penalty is an option for borrowers when obtaining a mortgage loan. Although it is not suitable for everyone, borrowers can benefit from a prepayment penalty by receiving lower interest rates.
A professional mortgage planner can review your current loan to determine if you have a prepayment penalty, if you have met the time requirements, and if the loan is appropriate to meet your financial goals. If you are considering a new purchase, a mortgage planner can advise you of the pros and cons of a prepayment penalty to determine if it is the best option for your mortgage needs.
If you would like more information, or would like to schedule a free consultation with a mortgage planner, please call Marc at (775) 833-1014.
Impounds, also known as escrows, are funds collected for the purpose of paying future taxes and insurance premiums. A portion of the funds are collected at closing, and also monthly with the mortgage payment. The collected funds provide for the payment of property taxes and insurance such as fire, flood, and mortgage insurance. Impounds belong to the borrower and are held in a non-interest bearing trust account until the taxes and/or insurance premiums become due. The lender cannot use these funds for any other purpose.
Impounds are estimated figures, therefore lenders usually collect more than needed. The monthly payments for taxes and insurance are calculated based on current figures.
Impound requirements vary by lender. Some lenders only require impounds on LTVs 90% and over. If the LTV is 89.9%, impounds might not be required. However, borrowers should be aware that lenders in Nevada usually offer a lower interest rate if impounds are attached to the loan.
For more information on loan options and requirements, call Marc at (775) 833-1014.
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