There is no better time than now to invest
in your home. Interest rates are down and the stock market
is very volatile, making real estate investment an attractive
If you are borrowing money to invest in
your home, two basic considerations are:
- How much mortgage can I afford?
- What types of loans are available?
To qualify for conventional loans, housing
expenses should not exceed 26% to 28% of your gross monthly
income. For example, if your annual gross income is $48,000,
your gross monthly income is $4000 ($48000 / 12 months) and
$4000 x .28 = $1120. This means that you could probably qualify
for a mortgage loan with monthly payments of $1120.
Lenders will also consider your total monthly
costs. Total monthly costs, including long-term debt, should
not exceed 33% to 36% of your gross monthly income. Long-term
debt is any expense that extends 11 months or more into the
future. Using the same example, $4000 x 36% = $1440. So the
total of your monthly housing expenses PLUS any long-term
debts each month cannot exceed $1440.
It is important to remember that these
ratios may vary from lender to lender and each application
is handled on an individual basis, so the guidelines are just
that -- guidelines.
The LTV ratio is the amount of money you
borrow compared with the price or appraised value of the home
you are purchasing. The higher the LTV ratio, the less cash
home buyers are required to pay out of their own funds. So,
to protect lenders against potential loss in case of default,
higher LTV loans (80% or more) usually require a mortgage
There are numerous loan options available
for financing your home remodel or addition. The three most
common are fixed rate, fixed rate balloons, and adjustable
rate mortgages. Talk with your financial advisor or lending
institution to learn about all of your options.
Fixed Rate Loans - Both interest
rate and payment remain the same over the term of the loan.
The loan period is usually 10, 15, 20, 25, 30, and 40 years.
As the name implies, the interest rate and payment structure
due not change over the life of the loan. This type of financing
is recommended for borrowers who intend to stay in their house
for a long period of time.
Fixed Rate Balloons - Both interest
rate and payment remain the same until the loan is due. Usually,
the entire loan amount is due in either 3, 5, or 7 years.
Balloon programs tend to have the lowest rates, because they
need to be paid in full or refinanced at the end of the term.
This type of financing is recommended for borrowers who know
they will be leaving their current house in either 3, 5, or
Adjustable Rate Mortgage (ARM) -
Both interest rate and payment remain the same for a fixed
time period, usually 1, 3, 5, 7, or 10 years. At the end of
that period the rate can rise at fixed intervals. The amount
the rate can rise, or margin, is predetermined (normally 1/2%
to 2% per rise). The intervals are normally 1, 3, 6, or 12
months. Typically there is a cap on the margin, which determines
the highest the rate could ever go. The advantage of an ARM
is that it allows you to get a lower rate, for a known period
of time, while you watch the market to see if and when fixed
rates get better. ARM's are recommended for those borrowers
who intend to stay in their house for a fixed period and have
taken the time to factor in the margin, to determine that
they would not be better off with a Fixed Balloon or even
a Fixed Rate.
Typically second mortgages fall into one
of the two following categories:
Equity Seconds - Equity seconds
are second mortgages that use the equity you have in your
house as the basis upon which a lender loans you money. Most
lenders will require an appraisal in order to establish your
homes value and the equity contained therein. Borrowing with
an equity second normally allows you to obtain a better rate
due to the fact that the money borrower is secured on property
you have ownership in.
Over-Equity Seconds - Over-equity
seconds are second mortgages that lend you money over and
above the value of your house. Over-equity seconds are commonly
known as "125's" or "115's" because they
allow a lender to loan you money at 125% or 115% of your homes
value. Requirement of appraisal is based upon the amount of
money borrowed. Typically, if you plan to borrow over $35,000
on an over-equity loan, an appraisal is required. Borrowing
with an over-equity second allows you to obtain a loan when
a personal loan may have not been possible.