Question: Where do you think interest rates are going? How much longer do you think they will be at historical lows?
Answer: While the Federal Reserve has pledged to keep rates low through 2014, it’s not practical to try and predict how long rates will stay at their current historically low levels. One thing to also keep in mind is potentially tougher qualifying guidelines that may be coming due to legislation related to the Dodd Frank Act, which implemented financial regulatory reform. If you have the chance to take advantage of today’s low rates and low home prices, do it now.
Q: With all the refinancing options and second mortgage and home equity lines out there, how can consumers who need to consolidate bills, take out cash or complete renovations determine which route would be their best option?
A: First, consider the rate on your first mortgage. If you’ve refinanced in the last couple of years, you probably have a low rate and would be better off leaving your first mortgage alone. In this case, I would look at either a fixed-rate second mortgage or a home equity line of credit (HELOC). If you expect to take more than two to three years to pay off the loan, I would recommend a fixed-rate second mortgage over the HELOC, which is almost always an adjustable rate. If you expect to need money over a period of time such as for college tuition, a HELOC might make more sense because you pay only on what you use (like a credit card). A HELOC is also good if you expect to receive large amounts of income sporadically (like bonuses or commissions) and are in a position to pay it down in large increments, which would then free up the line for future use. Conversely, if your first mortgage has a relatively high rate or if it has an adjustable rate, then consider refinancing it and getting the cash out you need in a new larger first mortgage. Each person’s situation is different, so your decision should be based on your own individual circumstances.
Q: I can’t afford a 15-year mortgage. However, are there any other loan programs that would help me pay off my loan faster?
A: You have several options. Many lenders offer 20-year loans, or even loan terms between 15 and 30 years. So you may be able to find the “sweet spot” in terms of a payment that you can afford that still lets you pay off your loan sooner than 30 years. Another option to consider is to get a 30-year loan and either pay extra each month (your loan officer should be able to give you different payback figures) or, if you get paid every other week, look into a biweekly payment schedule (but check to see if your lender will charge you extra fees for this). Over the course of a year, this can essentially allow you to make an extra month’s payment, which will reduce your payback period by about six to eight years. Also, there may not be much difference in rates between a 30-year loan and a shorter-term loan such as 20 or 25 years. Lastly, a 30-year loan gives you the lowest contractual payment, which means that if you hit a rough patch, you could fall back to your “minimum” scheduled payment and resume paying more later when your situation improves.
Q: If I don’t have a 20 percent down payment, do I automatically have to pay mortgage insurance, or is there a way to avoid it?
A: One of the ways to avoid mortgage insurance if you have less than 20 percent for a down payment on a home is to explore the option of a second mortgage that makes up the difference between the cash you have and the maximum 80 percent first mortgage. Call around to find a lender who may be willing to make you a second mortgage that goes beyond 80 percent. These will usually be local lenders, and you shouldn’t confine your search to the big banks. Check out a credit union where you are eligible for membership, or a local finance company. Sometimes you can also negotiate with the seller of the property to do the second mortgage as well. Your realtor can help you with this.
Q: What loan products are available for Hawaii’s self-employed wannabe homeowners?
A: Self-employed borrowers face challenges that salaried and hourly wage earners don’t have to deal with, such as income that fluctuates from year to year, or a business that is considered new with less than two years of income history, or even the complexity of owning multiple companies. Your best bet is to find a local lender that has what is known in the industry as “portfolio” loans, which are loans that the lender keeps in its portfolio as opposed to selling them to investors. Keeping the loan in the lender’s portfolio means that the lender makes the qualifying rules and may be more liberal or accommodating in how it looks at self-employed income situations. Besides the local banks, look at other local lenders such as credit unions and finance companies. Also consider checking with the institution where you have your business accounts; since you have a history with them, they may be more flexible in trying to help you.
Q: Some real estate professionals encourage would-be homeowners who don’t have a 20 percent down payment to put off buying until they have saved that amount. What do you think?
A: Depending on how long you expect to be able to save the 20 percent for the down payment (not to mention closing costs, which could be another 3 percent of the loan amount), I wouldn’t wait to get the 20 percent down payment before attempting to buy. There are several options available, such as Federal Housing Administration, Veterans Affairs and other government loans that will lend 95 percent to 100 percent of the value of a property. In addition, private mortgage insurance is another viable option for borrowers. Also, second mortgages that go beyond 80 percent of the value of the property are a possibility. Lastly, many loan programs allow for “gift” funds for part or all of the down payment, so you may be able to get help from family for your down payment as well. If you can afford the payments and love the property, I would not wait. Prices could go up, rates could go up or both could increase. It’s better to take the sure thing if you can afford it.
Q: Do I have to be a cash buyer if I want to buy a home that needs too much work to pass a conventional inspection, or is there a loan program that would help me fund the purchase?
A: There are different programs available. For example, FHA offers their 203(k) rehab program, which by virtue of its low down payment requirement (as little as 3.5 percent) makes it ideal for first-time homebuyers who may not have much down payment. The FHA 203(k) program will impose certain controls on the borrower, and if you want more flexibility, consider finding a lender with a “portfolio” program that allows for properties with minor to major repairs. Some lenders will also offer a land loan program as an alternative to lending on a property with severe repairs, but rates and terms will normally be higher than conventional mortgages. There are also a few portfolio lenders that will use more than one property as collateral on your loan, allowing equity from the “good” property to help purchase the “repair” property and to even borrow enough money to complete the repairs.
Q: What financing options still are out there for buyers who don’t have perfect credit and/or a 20 percent down payment?
A: You don’t have to have “perfect” credit to get an 80 percent loan. Many borrowers have had past blemishes on their credit reports but still have a high enough credit score to qualify for conventional financing. Most lenders and programs will normally require a minimum score of 620; however, minimum scores do vary by lender, so it is best to ask. A lot of your score depends on how long ago you were late as well as recent credit usage trends. In addition, Federal Housing Administration, United States Department of Agriculture and Veterans Affairs loan programs will lend above 80 percent of the purchase price even if you have a lower score, so you may want to look at those programs first if you do not have much down payment and your payment history is inconsistent. Another option is to get a second mortgage from the seller to make up the difference in down payment if your first mortgage lender will not go up to 80 percent due to your credit score.
Q: In Hawaii, what minimum credit scores do homebuyers typically need?
A: The typical minimum credit score for most lenders is 620, although this is by no means a universal figure. If your lender can’t help you, ask them who may be able to help you, since Hawaii is a small community and we often know which lenders have certain niche programs.
