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Home Equity Lines of Credit (HELOCs) EXPLAINED

Home Equity Lines of Credit (HELOCs) EXPLAINED

In previous weeks, we have broken down the most popular mortgage loans, and shown you how ARM loans work. For Part 3 of our “Mortgage Loans EXPLAINED” series, we dive into the Home Equity Line of Credit (HELOC).

 

What is a home equity line of credit?

 

A home equity line of credit, or HELOC, is a second mortgage that gives you access to cash based on the value of your home. You can draw from a home equity line of credit and repay all or some of it monthly.

With a HELOC, you borrow against your equity, which is the home’s value minus the amount you owe on the primary mortgage. You can also get a HELOC if you own your home outright, in which case the HELOC is the primary mortgage rather than a second one.

In either case, you could lose the home to foreclosure if you don’t make the payments.

 

How does it work?

 

Much like a credit card that allows you to borrow against your spending limit as often as needed, a HELOC gives you the flexibility to borrow against your home equity, repay, and repeat.

Most HELOCs have adjustable interest rates: this means that as baseline interest rates go up or down, the interest rate on your HELOC will adjust too. For more information on adjustable-rate loans, click here.

As with a credit card, you only pay interest on the amount of money you use, not the total amount available to borrow.

 

How do you qualify for a home equity line of credit?

 

Exact requirements will vary depending on your lender, but here are the general requirements to qualify for a HELOC:

  • A debt-to-income ratio of 40% or less.
  • A credit score of 620 or higher.
  • A home value of at least 15% more than you owe.

 

How to get a home equity line of credit

 

The process of getting a HELOC is similar to that of a purchase or a refinance on a mortgage. Here are the steps you’ll follow:

  1. Determine whether you have sufficient equity using a HELOC calculator.
  2. Once you have an idea of what you can borrow, call Sharp Loan.
  3. Gather the necessary documentation as advised by your lender.
  4. Once you have completed these steps, apply for the HELOC.

At this point you will receive disclosure documents. Read them carefully and make sure the HELOC will fit your needs. For example, does it require you to borrow thousands of dollars upfront (often called an initial draw)? Do you have to open a separate bank account to get the best rate on the HELOC? Consult with your lender if you are unsure.

The underwriting process can take anywhere from several hours to a few weeks, and may involve getting an appraisal to confirm the home’s value.

The final step is the loan closing, at which point the paperwork is signed and the line of credit becomes available.

 

How much can you borrow with a HELOC?

 

The maximum amount of your home equity line of credit will vary based on the value of your home, what percentage of that value the lender will allow you to borrow against, and how much you still owe on your mortgage. Two quick calculations can give you an idea of what you might be able to borrow with a HELOC.

Say you have a $500,000 home with a balance of $300,000 on your first mortgage and your lender will allow you to access up to 85% of your home’s value. Multiplying the home’s value ($500,000) by the percentage the lender will allow you to borrow (85%, or .85) gives you a maximum amount of $425,000 in equity that could be borrowed. Subtract the amount you still owe on your mortgage ($300,000) to get the total amount you can borrow with a HELOC — $125,000.

 

How do you pay back a home equity line of credit?

 

A HELOC has two phases: the draw period and the repayment period.

During the draw period you can borrow from the credit line by check, transfer, or a credit card linked to the account. The length of the draw period varies but is commonly set at 10 years.

During the repayment period you can no longer borrow against the credit line. Instead, you pay it back in monthly installments that include principal and interest. With the addition of principal, the monthly payments can rise sharply compared with the draw period. The length of the repayment period varies but is commonly set at 20 years.

At the end of the loan, you could owe a large lump sum — or balloon payment — that covers any principal not paid during the life of the loan. Before you close on a HELOC, consider negotiating a term extension or refinance option so that you’re covered if you can’t afford the lump sum payment.

 

Is a HELOC Right for You?

 

Do you think a HELOC could be the right choice for you? Do you still have questions? Contact us below to learn more!

 

Adjustable-Rate Mortgage (ARM) Loans EXPLAINED

Adjustable-Rate Mortgage (ARM) Loans EXPLAINED

Last week we gave an overview of some of the most popular mortgage loans. Now we’re back to talk about another: the adjustable-rate mortgage.

As the name suggests, an adjustable-rate mortgage is a home loan with an interest rate that adjusts over time based on market conditions. This type of mortgage comes with a 30-year term. The initial interest rate stays fixed for a specified number of years at the beginning of the loan term before it adjusts for the remainder.

 

Advantages of an ARM Loan

  • The biggest advantage of an ARM is the initial fixed-rate term, which, as mentioned above, can provide you a lower initial rate and monthly payment than other loans.
  • If you plan to move or sell your house within a few years, you can reap the benefits of a low fixed rate and sell the home before it adjusts.
  • If interest rates fall, you’ll be able to reap the benefits without having to go through the costs or paperwork of a refinance.

 

Disadvantages of an ARM Loan

  • While your interest rate may go down, it could also rise. If your interest rate increases, you’ll have a higher monthly payment that you may not have prepared for.
  • Some ARMs may have a prepayment penalty. Speak to your lender and make sure you understand the terms of the loan before you move forward.

 

ARM vs. Fixed-Rate Mortgage

  • Fixed-rate loans are most commonly offered as 15- or 30-year terms or custom-term loans. ARMs are typically 30-year terms.
  • Your starting rate may be lower for an ARM than a fixed-rate mortgage.
  • Your monthly mortgage payment may be more affordable in the first few years of an ARM.

 

How Does an ARM Loan Work?

Once the fixed-rate term ends on an ARM, the interest rate typically adjusts annually. This new rate is determined by adding the index (an economic indicator used to calculate interest rate adjustments for ARMs) to the margin (a fixed percentage point predetermined by your lender that is used to determine the interest rate for the entire life of the loan).

While this may cause the interest rate to increase, there are caps on how much it can increase. These caps are presented in a series of three numbers: initial cap/periodic cap/lifetime cap.

  • Initial cap: This cap is the maximum amount the interest rate can adjust the first time it’s changed after the fixed period.
  • Periodic cap: This cap puts a limit on the interest rate increase from one adjustment period to the next. The initial cap and the periodic cap may be the same or different.
  • Lifetime cap: This cap puts a limit on the interest rate increase over the life of the loan. All adjustable-rate mortgages have a lifetime.

Here’s an example of a common rate cap: (2/2/5). This means that your interest rate can only change by up to 2% the first time it adjusts. Each annual rate change after that is limited to 2% each year. Throughout the rest of the loan term, the highest the interest rate can go is 5% higher than the fixed rate. So, if your original rate was 3.5%, your interest rate can only go up to 8.5% during the life of your loan.

 

Different Types of ARMs

The structure of an ARM is presented with two numbers. The first number is how long your fixed-rate period will last. The second number is how often the rate will change every year. Here are the most common ARMs:

5/1 ARM

A 5/1 ARM has a fixed rate of interest for the first 5 years of the loan. After that, the interest rate will adjust once annually over the remaining 25 years.

7/1 ARM

A 7/1 ARM has a fixed rate of interest for the first 7 years of the loan. After that, the interest rate will adjust once annually over the remaining 23 years.

10/1 ARM

A 10/1 ARM has a fixed rate of interest for the first 10 years of the loan. After that, the interest rate will adjust once annually over the remaining 20 years.

 

Is an ARM Loan Right for You?

Do you think an ARM loan could be the right choice for you? Do you still have questions? Contact us below to learn more!

 

Popular Mortgage Loans: Pros & Cons of Conventional, FHA, VA, and USDA

Popular Mortgage Loans: Pros & Cons of Conventional, FHA, VA, and USDA

Applying for your first mortgage loan can be an intimidating task. If you aren’t an experienced real estate professional, how are you supposed to know which loan is right for you? Fear not, because we’re breaking down the differences between each of the major loan types.

 

Conventional Loan

Conventional mortgage loans are the most common kind available (as the name would suggest), as well as the most popular. They are funded by private lenders, unlike the government-backed loans that are next on this list. They are a beneficial choice of loan for buyers with a stable income, good credit, and enough money for a moderate down payment.

Pros:

  • The total loan amount after fees, insurance, and interest will often be lower than other types of loans
  • Flexible repayment options (adjustable rates, shorter terms)
  • No upfront mortgage insurance fee

Cons:

  • Must pay for private mortgage insurance if your down payment is below 20%
  • Stricter qualifications (credit score, debt-to-income ratio) than other loans

Requirements to qualify:

  • A credit score of at least 620
  • A debt-to-income ratio below 43%
  • A 3% minimum down payment

 

FHA Loan

FHA loans have been helping people become homeowners since 1934. How is it done? The Federal Housing Administration (FHA) – which is part of the U.S Department of Housing and Urban Development (HUD) – insures the loan, so your lender can offer you a better deal.

Pros:

  • Low down payments
  • Low closing costs
  • Easy credit qualifying

Cons:

  • Lower loan limits
  • Must pay a monthly mortgage insurance premium for the life of the loan

Requirements to qualify:

  • A 3.5% down payment if your credit score is 580 or higher
  • A 10% down payment if your credit score is 500-579
  • A debt-to-income ratio of 50% or less
  • Documented, steady employment and income
  • Must live in the home as your primary residence
  • Must not have had a foreclosure in the last three years

 

VA Loan

The VA home loan was created in 1944 by the United States government to help returning service members purchase homes without needing a down payment or excellent credit. This historic benefit program has guaranteed more than 24 million VA loans, helping veterans, active-duty military members, and their families purchase or refinance a home. VA loans are issued by private lenders, such as a mortgage company or bank, and guaranteed by the U.S. Department of Veterans Affairs (VA).

Pros:

  • $0 down payment available
  • Private mortgage insurance not required
  • Lower interest rates than many other loans

Cons:

  • This option is only available to veterans, service members, and select military spouses
  • Must pay VA funding fee (can be financed into loan)

Requirements to qualify:

Like all home loans, VA mortgages can be complex. If you’re ready to start your VA loan, check your eligibility, or have specific questions on the VA loan, talk with a Veterans United Home Loans specialist today.

 

USDA Loan

USDA loans are mortgages backed by the U.S. Department of Agriculture as part of its USDA Rural Development Guaranteed Housing Loan program. USDA home loans are putting people in homes who never thought they could do anything but rent.

Pros:

  • Rates are usually the lowest available
  • $0 down payment available
  • Seller can pay closing costs

Cons:

  • Geographic restrictions
  • Private mortgage insurance included
  • Income limits

Requirements to qualify:

  • Home must be in a qualified “rural” area (typically defined by the USDA as having a population of less than 20,000)
  • Must not make more than 15% above local median salary
  • Must live in the home as your primary residence
  • Steady job and income, proven by tax returns
  • FICO credit score of at least 640 (this number can vary by lender)
  • Debt-to-income ratio of 41% or less in most cases

 

With this guide, you should have the knowledge to make an informed decision about the right loan for your goals. If you have further questions on the subject, you can always discuss it with a trusted real estate professional.

 

Need help with a home purchase or refinance? Contact us below!

 

4 Ways to Save for a Down Payment: Buying Your First Home

4 Ways to Save for a Down Payment: Buying Your First Home

 

Is there anything that says “I achieved the American Dream” more than buying a home for your family? Homeownership in the modern age sometimes feels like an impossibility, and one of the biggest hurdles for most people is saving the money for a down payment. Luckily, there are some tried-and-true ways to make this dream a reality.

 

How Much Should I Save?

Conventional wisdom says that you should put 20% down when buying a house – but this isn’t the right solution for everyone, nor is it your only option. In fact, with a conventional loan you could be eligible to pay a much lower percentage upfront (as low as 3% depending on your financial situation). If you qualify for either a VA or USDA loan, you could skip the down payment entirely! Sharp Loan offers conventional loans, VA loans, and USDA loans. Fill out the contact form below to learn more.

There are still benefits to saving for a higher down payment, however. Putting more money down means that your interest rate will be lowered accordingly (saving you a lot of money in the long-term). And if you put at least 20% down, you won’t have to pay mortgage insurance either!

 

Ways to Save

Try these 4 tips to help you conquer that down payment!

 

1. Create a Budget

When was the last time you took an in-depth look at your finances? Even if you are normally a conservative spender, you might still find new ways to save. Online budgeting tools like Mint or PocketGuard can automate a lot of the work for you by connecting to your bank/credit card accounts and sorting your expenses into different categories, as well as offering live updates of your debts and assets. This allows you plan more effectively for your savings goals, and to spot areas for improvement in your spending!

 

2. Lower Your Expenses

Once you have a budget, it’s time to weed out your excess spending. Most people overspend in at least one category – whether it’s a few too many Postmates deliveries per month, a daily Starbucks drink, a gym membership that hasn’t been used since 2016, or more streaming service subscriptions than necessary. It happens to the best of us! Even small cutbacks in your spending can make a big impact on your savings.

 

3. Automate Your Savings

If you receive your paychecks via direct deposit, then you probably have the option to automatically send a percentage of your earnings to your savings account each time you get paid. You can also set up a monthly recurring transfer with your bank that does the same thing. This allows you to build savings consistently without the temptation to spend the extra cash elsewhere. If you’re not sure how much of your paychecks to put into savings, trying using the amount you saved by budgeting in the two previous steps!

 

4. Pay Down Your Debts

It might seem strange to spend your savings on other debts (student loans, auto loans, etc.) while trying to get a mortgage loan, but it can actually save you time and money in the long run. By improving your debt-to-income ratio before you apply for a mortgage, lenders might be able to offer you lower down payment requirements and interest rates!

 

Summary: Ways to Save for a Down Payment

If you take full advantage of the methods described above, you will be able to fulfil your American Dream in no time, and buy a home when you’re ready!

 

Need help with a home sale, home purchase, or refinance? Contact us below!

En español:

4 maneras de ahorrar para un enganche: Comprar su primera casa

 

¿Hay algo más que diga “he alcanzado el sueño americano” que comprar una casa para su familia? El ser propietario de una vivienda en la era moderna a veces parece un tanto imposible, y uno de los mayores obstáculos para la mayoría de la gente es ahorrar dinero para el enganche. Afortunadamente, existen algunas maneras comprobadas y verdaderas de hacer este sueño una realidad.

 

¿Cuánto debo ahorrar?

Los conocedores dicen que hay que dar un 20% de enganche al comprar una casa, pero no es la solución adecuada para todo el mundo ni la única opción. De hecho, con un préstamo convencional usted podría ser elegible para pagar un porcentaje más bajo de enganche (tan bajo como 3% dependiendo de su situación financiera). ¡Si califica para un préstamo VA o USDA, usted podría omitir el pago inicial por completo! Sharp Loan ofrece préstamos convencionales, préstamos VA y préstamos del USDA. Complete el formulario de contacto a continuación para obtener más información.

 

Sin embargo, ahorrar para un pago inicial más elevado sigue teniendo sus ventajas. Poner más dinero significa que su tasa de interés se reducirá en consecuencia (ahorrándole mucho dinero a largo plazo). Y si da al menos un 20% de enganche, tampoco tendrá que pagar el seguro hipotecario.

 

Formas de ahorrar

¡Pruebe estos 4 consejos para ayudarle a obtener el enganche!

 

  1. Crea un presupuesto

¿Cuándo fue la última vez que vio en profundidad sus finanzas? Incluso si normalmente es un gastador conservador, puede encontrar nuevas formas de ahorrar. Las herramientas de presupuesto en línea como Mint o PocketGuard pueden automatizar gran parte del trabajo por usted al conectarse a sus cuentas bancarias / de tarjeta de crédito y clasificar sus gastos en diferentes categorías, así como ofrecer actualizaciones en vivo de sus deudas y activos. Esto le permite planificar de manera más efectiva para sus metas de ahorro y detectar áreas para mejorar sus gastos.

 

  1. Reduzca sus gastos

Una vez que tenga un presupuesto, será hora de eliminar su exceso de gasto. La mayoría de las personas gastan de más en al menos una categoría, ya sea unas cuantas entregas por Postmates por mes, una bebida diaria de Starbucks, una membresía de gimnasio que no han utilizado desde 2016 o más suscripciones a servicios de transmisión de las necesarias. ¡Nos pasa a todos! Incluso los pequeños recortes en sus gastos pueden tener un gran impacto en sus ahorros.

 

  1. Automatice sus ahorros

Si recibe sus cheques de pago a través de depósito directo, entonces probablemente tenga la opción de enviar automáticamente un porcentaje de sus ganancias a su cuenta de ahorros cada vez que le paguen. También puede establecer una transferencia periódica mensual con su banco que haga lo mismo. Esto le permite acumular ahorros de manera consistente sin la tentación de gastar el dinero extra en otro lugar. Si no estás seguro de cuánto de su sueldo debe destinar al ahorro, pruebe a utilizar la cantidad que ha ahorrado al elaborar el presupuesto en los dos pasos anteriores.

 

  1. Pague sus deudas

Puede parecer extraño gastar sus ahorros en otras deudas (préstamos estudiantiles, préstamos para automóviles, etc.) mientras intenta conseguir un préstamo hipotecario, pero en realidad puede ahorrarle tiempo y dinero a largo plazo. Al mejorar su relación deuda-ingreso antes de solicitar una hipoteca, los prestamistas podrían ofrecerle requisitos de pago inicial y tasas de interés más bajos.

 

¡Si aprovecha al máximo los métodos descritos anteriormente, usted será capaz de cumplir su sueño americano en muy poco tiempo, y comprar una casa cuando esté listo!

 

¿Necesita ayuda con vender una casa, comprar una casa o con el refinanciamiento? ¡Póngase en contacto con nosotros a continuación!

6 Tips for Selling Your House in Summer

6 Tips for Selling Your House in Summer

 

So, you’re putting your home on the market. You researched the process endlessly online, found a good real estate agent, and you’re preparing to show your house to prospective buyers. You’ve thought of everything. Right?

 

Don’t start booking those open house appointments just yet! August has arrived, and we’re in peak summer season. As such, there are some unique challenges (and opportunities) that you need to be prepared for, and we’ve put together a list of tips to help.

 

1. We all enjoy a nice summer day, but no one likes spending time inside a stuffy, sweltering house. You need to keep the inside of your home as cool and breezy as possible. If you have central AC: now is not the time to conserve electricity – blast that air conditioner! You may even want to have an HVAC technician service it beforehand to make sure it’s running at full efficiency. If you don’t have central AC: fans are your best friend. Place them around your house strategically to create a cross breeze, allowing hot air to vent out and cooler air to replace it. Depending on the severity of the heat in your area, you might even want to consider installing window-mounted air conditioner units.

 

2. Make sure to keep your blinds and curtains drawn prior to showings, but fling them open once prospective buyers start arriving. Your house will look great with bright, natural lighting. Don’t forget to wipe down those windows first though – any streaks or smudges will be very noticeable.

 

3. First impressions are everything. Houses look their best in the summertime, but that also means drawing more attention to any aesthetic issues. Make sure there is no peeling or cracking paint on the exterior and that the front door is in pristine condition. The landscaping should look as flawless as possible, so make sure all plants (especially the lawn!) are trimmed, weeded, edged, mowed, and so on. Spend at least a week beforehand watering everything regularly to avoid dead spots in your yard.

 

4. Have a few cold drink options available for visitors. Ice water is a must, but people will also appreciate classic summer refreshments like lemonade, iced tea, or soda.

 

5. Make sure to plan ahead if you have a larger family with kids home for summer break. You may find that keeping the house tidy for your showings is more of a challenge. Consider asking a friend or family member to watch the kids for the day – or better yet, get them involved! They could pitch in with cleaning, or even be given tasks like passing out flyers or offering cold drinks to your guests if they are old enough.

 

6. If you have a decent backyard, make it a focal point of your showings. Spruce up the patio space with tables and chairs, umbrellas, and even a grill if you have one. Let people imagine themselves entertaining guests there. If you have a pool, then play that up too! Get it cleaned and arrange some lounge chairs around it for maximum effect.

 

If you made it this far then rest easy. By taking these seasonal factors into consideration, you will ensure that your house dazzles any prospective buyers that come your way.

 

Need help with a home sale, home purchase, or refinance? Contact us below!