Just wanted to go over some basic mortgage programs with you today, some mortgage programs every home buyer should understand, understand that’s available to them so they completely understand their options. Some things, some of these you may have heard of, some of these you may not have. Let’s start right at the top. I think the most common throughout the country is our FHA or Federal Housing Administration loan program.
It allows for a minimum of 3.5% down. You’re looking at about $3,500 down for every $100,000 you spend. That’s the easiest way to look at it. It allows for a credit score as low as 580. If you’re in the 600s or 700s, you’re in great shape, but you can purchase a home with a credit score as low as 580. Some of the benefits of having a 600+ credit score is the rates start to become a little bit better for you, the mortgage interest rate becomes a little bit better for you. Mass Housing. Here in Massachusetts, in Boston, you can also purchase a home with 3% down. Mass Housing does require you to go through a firs time home buyer’s program where FHA’s does not. Mass Housing does have a few income restrictions. You can only make so much money before you are no longer qualified to use the Mass Housing program.
Again, 3% down so about $3,000 for every $100,000 you spend on your home. $300,000 home, roughly $9,000 down payment. Conventional mortgages. If I can backup just a second, one of the downsides to the FHA program is there is a fee that you pay for using such a low down payment program. It’s called primary mortgage insurance. It’s something that you pay for the use of this program. It’s a fee that you pay every month, roughly. It can range from $100 to $400 a month depending on the size of your mortgage. In some cases, it may make a lot of sense for you to forego the FHA and put a little bit more down, go 5% down. You can do a conventional mortgage program with 5% down; owner-occupied conventional program with 5% down. As long as you plan to occupy the residence you can usually get in.
The rates may be a little bit higher than the FHA or Mass Housing, but again, if you were making a little bit too much money for the Mass Housing and you don’t like the idea of the PMI or primary mortgage insurance on the FHA, conventional may be the way to go. Again, your rates can be a little bit higher, but the total mortgage itself may be a little bit lower after you reduce or pull out the primary mortgage insurance payment. Conventional, you can also go conventional and purchase an investment property. Investment property, you would probably need 20% to 25% down depending on which mortgage lender you received.
Conventional programs go anywhere from a 5% owner-occupant to a 25% investment property. The VA loan programs. If you are a veteran, and I believe if you are a family member of a veteran, you can also use the VA program which requires nothing down at closing. You can actually purchase a home with zero down for your veteran status. You really want to check the VA housing website. I would google, I don’t know what the exact URL is, but I would google Veterans Administration Housing Loan Programs or Mortgage programs. I’m pretty sure the website would pop right up. There’s a great opportunity for you, yourself, a family member, or if someone of your friends is a veteran, definitely inform them about this program.
Last but not least is your 203K. A 203K allows you to buy property that needs a little work. You purchase a property, looking at a property, and let’s say you’re going FHA. You look at that property and if there is a missing stove, if there is peeling paint, if there are holes in the wall, FHA is not going to approve that loan. They want the house to be move-in ready, immediately ready to occupy. 203K steps in and says, “This house is right on the verge of being a good property but it needs a little work. It needs a new kitchen. It needs a new bathroom. It needs paint. It might need a roof.” The 203K allows you to purchase the property and also get rehab funds at the same time.
Let’s say, for instance, you’re purchasing a property at $200,000. The purchase price will be lent to you and then additional $30,000 to fix up your kitchen, your bathroom, and some other things that are needed to be done. You really want to, if you’re going to go through 203K program, you want to make sure that your lender has experience with the 203K loan. You do have to get a contractor involved. That contractor would need to submit bids to make sure that the money is being appropriated correctly. There’s a lot more involvement when they’re going to be giving you rehab funds as well.
FHA, Mass Housing, conventional, VA, and the 203K loan are your basic mortgage program.Read more
First talk a little bit about what equity is. Equity is the value that you have in your home, the difference between the market value of the property and the debt on the property. If you have $100,000 home, a home that’s worth $100,000, you owe $60,000 on that home, you have $40,000 in equity. Simplest explanation, 100,000 minus $60,000 in debt. If you sold the property today, you’d walk away with $40,000. Million dollar home, you have $300,000 in debt, you have $6, $700,000 in equity. One million, pay off the 300,000. The equity that remains is 700,000, which is yours.
Let’s talk a little bit about how to use home equity loans and home equity lines of credit to tap into the equity in your home and to accelerate your wealth building process. First, let’s talk about home equity loans. A home equity loan you borrow at a fixed amount. The payments are fixed. Your interest rate is fixed. The payments are fixed. You get a lump sum today and you are basically making payments over the 10, the 15, the 20-year term of the home equity loan, so you know what your payments are every month, and it’s predictable. No closing cost is listed on this screen, but please pay attention to that. You’re never going to take out a mortgage and have there be no cost. A lot of times, it’s just rolled into the back end. You take out 100,000, but your mortgage goes up by 103,000 or 104,000. There are always going to be costs there. Just pay attention to what they are and how does it affect your overall loan.
Interest, usually tax deductible. As of right now, the current laws in the United States allow for interest on mortgages to be tax deductible. The word usually is thrown in there because who knows if those laws are going to change in the future, but as of right now, interest on mortgage or your mortgage interest expense is tax deductible.
What is the difference between a home equity loan and a home equity line of credit? A home equity line of credit, you do not receive a lump sum. Basically, what you do is you’re basically taking $100,000 and tying that up. You basically are using the equity almost as a credit card. In that sense, you charge or you write a check for $5,000 and then you pay off that $5,000. Now you have $100,000 in available credit once again. You buy a car with your line of credit, and you spend $25,000 on that car. As you slowly pay off the $25,000 loan, that credit becomes available again. It’s like a credit card. It’s a more revolving line of credit than it is a loan. A loan you get a lump sum, payments are equal over the term of the loan. The line of credit acts more like a credit card, and also your interest rates are variable. They are usually capped or tied to an index.
You’ll have, I would say, if you start off with a 6% interest rate, it may be capped at 9, but over the life of this home equity line, you may not know exactly what your payments are. Your payments are going to be based on how much you spent or how much you borrowed and what the interest rate is at that particular time. Why would you use one versus the other? I’ll give you two examples of how they are used by investors to accelerate wealth building. Let’s say, for instance, I have a neighbor who wants to sell their property to me. They’re in no particular rush. I am very interested in the property. It’s maybe a multifamily and I know it’ll cash flow if I can just get in and rehab the property and put it back on the market with some new tenants. I’m going to tell my neighbor, “I’m going to take some equity out of my home, and I’m going to now use that equity as a down payment for a new mortgage so I can buy your property.”
In that case, I’m going to go after the home equity loan. I have a purpose. I already know what my purpose for taking this equity out of my home is to go purchase a new home. I would rather my payments be fixed so I can calculate them and I know what they are every single month. I”ll have two mortgages to worry about, two additional mortgages to worry about, the home equity loan, plus the new property loan. I’m most likely going to use the home equity loan as a down payment for my new loan to purchase my neighbor’s property. Depending on where you are in the country or how much equity you have in your home, if you have enough, you can borrow the entire purchase price from your home equity loan.
Why would I use the home equity line of credit? I do not have a neighbor who’s looking to sell, but I know I want to buy and investment property in the future. I want to have access to the cash. I know that when I make an offer on a property, a lot of times, I have to move quickly. I want to have access to the cash immediately and be able to write a check with no going to the bank. I already want my funds to be available so I can move quickly, and I do not know my purpose as of yet. I’d probably be in that situation be looking for a home equity line of credit that I can take, borrow against my house, and in anticipation of using that for some future purpose.
To sum it up, I would say home equity loan is I understand my purpose. I’m going. My purpose is there. I have an existing need for this money or an existing want. I’m going to go take out the loan. I’m going to make my payments fixed and predictable. I know that I want to do something in the future, but I’m not quite sure what it is just yet, but I want to have access to quick cash, I’m probably going to use the home equity line of credit to do that in the future.
One other way that you can tap into your home’s equity that’s not exactly listed here is doing a cashout refinance. Let’s say you have a house. It’s worth $500,000, and you owe $200,000 on that piece of property. Instead of having two mortgages, instead of having your first existing mortgage and then a home equity loan on top of that as a second mortgage, you basically do a cashout refinance. You want to pay off the existing 200,000 and then take out an additional 100,000 or 50,000 or whatever it may be into one new mortgage. My new mortgage is going to be 300,000, paying off the old mortgage of 200,000, and putting $100,000 into my pocket. That is called a cashout refinance of your mortgage, and that is another way that you can tap into cash, as well.
Hopefully, this was helpful. If you are looking for mortgage brokers that you would like to speak to about home equity loans or home equity lines of credit, we work with some of the best in the business, especially here in Boston. Please click on the link below in the video description. Fill out the quick form. Tell us what you’re looking for. We would love to connect you with some of the people that we work with on a regular basis. Thanks for watching.Read more
Cheryl Ricketts and Kate Brennan of The Mandrell Company take you through “10 Things Every Landlord Must Do Find Great Tenants”. While the information is geared toward Boston area landlords, must of the tips and tricks can be used anywhere in the state of Mass. For more information or for questions, you can contact them at Kate@MandrellCo.com or Cheryl@MandrellCo.com.Read more