No Closing Cost Mortgage

A home equity loan closing cost appeal usually carry a lower initial interest rate than a home equity loan, but its rate fluctuates according to the prime rate, so there is always more of an interest rate risk. Unlike a HEL, where your monthly payment is a set amount, a HELOC enables you to borrow funds as needed and repay as little as interest only each month.

 

When deciding between a Home Equity Loan against a Home Equity Line of Credit, first we need to determine what the money is being used for and how much money are we going to need. Generally, a HELOC (Home Equity Line of Credit) is a better choice for ongoing cash needs, such as college tuition payments or medical bills.

 

Home equity loan allows you to draw money whenever you need money, capped at a fixed limit. There is generally a minimum payment due each month, with the option to pay off as much of the line as you want. The two most popular types of home equity loans are called “open” and “closed.” The “open” loan or a line of credit sometimes called a HELOC.

 

In this loan usually the interest rate is variable tied to the prime rate and the term of the loan can range from five to thirty years. Because the rate is variable the payment amount is as well which might be problematic. Lenders often offer a special starting rate as an added enticement. The other type of loan is a “closed” loan where the amount is a fixed amount for a fixed period at a fixed rate with set payments so at the end of the term the loan is paid off much like a regular installment loan.

 

The rates and term of the loan are usually fixed but because the extra money is unsecured the rates are generally higher than a regular first or second mortgage rate but still lower than credit card rates. With a home equity loan, there are also closing costs that you need to take into account. This refers to the money paid at closing to the lender. It may include one or more of the following fees: a loan origination fee, points, appraisal fee, title search and insurance, survey, taxes, credit report charge and other costs assessed at conclusion.

 

One of the variations which have broad appeal is the 125 home equity loan so selected because the borrowers can get up to 125 % of the current combined loan to value (CLTV). This type of loan is mainly appealing to first time home buyers who may need to spend extra money on furniture, home improvements, landscaping, etc.

 

The extra money can be used for debt consolidation, medical expenses, or college tuition as well .There is such a wide variety of loans you can get using the equity in your home as collateral that it can be confusing. But if you do a little research you can find one that is just right for you and your needs.

With the 40 year mortgage becoming increasingly common in states such as California, where high home prices make mortgages less affordable for the average home-buyer, the latest mortgage product has been rolled out-the 50 year mortgage.

During the 1980s, mortgage interest rates in America topped 18%, prompting the introduction of the 40 year mortgage. The 40 year mortgage increased in popularity again in 2005, when Fannie Mae introduced a program to offer these extended-term mortgages. In 2007, approximately five percent of all mortgages are 40 year mortgages, with that figure reaching 25% in high-cost housing markets such as on the West Coast. With the 40 year mortgage becoming a more main-stream product, the 50 year mortgage has been introduced. While this type of mortgage further reduces the monthly cost of loan repayments, there are some definite disadvantages involved.

The Pros

The main advantage of choosing a 50 year mortgage is a fairly obvious one-the extended terms of the mortgage make monthly repayments lower, and it means that owning a home becomes more affordable. There’s not always a huge difference between the monthly repayment on a 40 year mortgage and on a 50 year mortgage, but those few dollars can mean the difference between affording your own home now and having to wait a few more years to save a larger down-payment.

One of the important things to note about the 50 year mortgage is that after the first five years, the interest rate is adjustable. That means after the fixed-rate period is over, your interest rate can increase and decrease along with current market rates. This is one of the aspects of the 50 year mortgage that keeps that initial interest rate so low. If you’re looking for a low-cost mortgage with a view to refinancing within five years, the 50 year mortgage can be a good way of approaching this.

Finally, the 50 year mortgage is typically a safer way of affording a home if you’re unable to afford a conventional 30 year fixed-rate mortgage. Options such as interest only loans or balloon mortgages offer initial lower payments, but these come with some very risky drawbacks. Unlike other low-initial-cost mortgage options such as the interest-only mortgage, there’s no possibility that you’ll end up with negative amortization with a 50 year mortgage. This makes it a much safer way of achieving a lower-cost mortgage.

The Cons

Of course, the 50 year mortgage has some drawbacks of its own. Tacking that extra ten years onto the terms of the loan means you add a big chunk of interest, making the total cost of the loan significantly higher. That 50 year long will reduce the amount you must pay each month, but over the life of the loan it’s going to cost you. In addition, the interest rate on a 50 year mortgage is typically slightly higher than with a 30 year or even a 40 year mortgage. Longer terms mean increased risk for the lender, and you pay for that risk with extra percentage points on your interest rate. It may not be much-less than 1%-but even that adds several thousand dollars to your loan total.

Another disadvantage with the 50 year loan is a result of the way in which mortgage payments are structured. All conventional mortgages are front-loaded with interest, meaning that the first years of repayments are almost all interest, and you don’t start paying off a significant amount of principle immediately. The longer the terms of the mortgage, the longer it takes to build up equity in your home-more than twice as long to build up just 20% equity in comparison to a 30 year mortgage.

A related problem with this very slow build-up of equity occurs in cases where your down-payment is less than 20% of the home’s appraised value. In these cases your lender typically requires you pay for private mortgage insurance until you reach that 20% equity figure. With a 50 year mortgage, it’ll take much longer to reach 20%, so you’ll be paying extra for private mortgage insurance for much longer than with any other type of loan.

What does this mean for Home-Buyers?

For people who find that the 30 or 40 year mortgages aren’t affordable, the 50 year mortgage can make the dream of home-ownership a reality, but these mortgages are best used with a view to refinancing as soon as possible. The 50 year mortgage shouldn’t be considered a long-term loan, simply because those extended terms are so expensive in the long run. As long as you’re planning to refinance within five to ten years, the 50 year mortgage is a good alternative to riskier low-cost products such as the interest-only mortgage.