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Now is the time to invest in your home.

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 option.

If you are borrowing money to invest in your home, two basic considerations are:
  1. How much mortgage can I afford?
  2. What types of loans are available?
How much mortgage can I afford?

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 loan-to-value (LTV) ratio and how it determines the size of your loan.

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 insurance policy.

What types of loans are available?
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 7 years.

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.

Second Mortgages


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.
Use the loan payment calculator below to see what your mortgage payments will be at different loan amounts. This tool is for estimation only.

Loan Payment Calculator

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