Home Equity Loans: What They Are and What They Can Do for You

Home Equity Loans

Home Loan

If you’re a homeowner, you know that with every mortgage payment you make, you’re building equity in your home. Equity is the amount of your home you own at a given point in time. Every time you pay toward your mortgage loan’s principal, you are building that amount of equity. The longer you’ve been paying on your mortgage, or the more your home has gone up in value (or both), the more equity you will have.

One of the benefits of building equity is that it is an asset. You can borrow against your equity with a home equity loan or line of credit.

What is a Home Equity Loan?

home equity loan is a loan from a lender, such as a bank, credit union, or mortgage broker, for an amount less than or equal to the available equity in your home. Sometimes called a home equity installment loan, these loans typically have fixed rates, predictable and stable monthly payments, and a fixed term, usually between five and 30 years of repayment.

Home equity loans are disbursed in a lump sum, and people tend to use them for large expenses such as home repair or remodeling, college tuition, medical expenses, a wedding, a large purchase, or even to buy a second home or vacation home.

Another term for a home equity loan you may have heard is a second mortgage. You already have your first (primary) mortgage on your home that you got at the time of purchase. A home equity loan is secured by the equity in your home. That lender now owns part of your home until you pay off the loan.

When you take out a home equity loan, you now have two mortgages: the first one from the time of purchase, and the second one for the equity you borrowed. Just like with your primary mortgage, if you default on a home equity loan, the lender can foreclose and take possession of your house.

How Does a Home Equity Loan Work?

Home Loan

The terminology for a mortgage or home equity loan can be confusing, leading many people to ask “How does a home equity loan work?” and “What can a home equity loan do for me?” At TwinCity Lending, we specialize in first and second mortgages, and we can guide you through the process of choosing, qualifying for, and closing on a fixed-rate home equity loan.

Home equity loans work much like your primary mortgage. Your lender must determine your ability to borrow or your creditworthiness. To do so, they will evaluate your income, expenses, debts, and payment history. They will also consider your FICO, otherwise known as your credit score.

Determining your home’s current value is an integral part of the home equity loan process. Your lender will require a new property appraisal to obtain the amount your home is worth. The appraiser will look at the condition of your home, any upgrades you have made, and the sales price of comparable properties in the area that have recently sold.

With the appraisal in hand, your lender will then determine how much equity you have available in your home. Subtracting the balance on your mortgage (how much you still owe on your home) from the appraised value provides the calculation for the amount of equity you have. Depending on your creditworthiness and your lender’s standards, you may not be able to borrow the entire amount of equity you have.

Your lender will then ask how much of this equity you would like to borrow. This amount adds to the balance of your current mortgage and then gets divided by the home’s appraised value to obtain the combined loan-to-value (CLTV) ratio. How high or how low this percentage is will determine whether you are eligible for the loan or what your interest rate will be. A lower CLTV will qualify for a lower interest rate, and vice versa.

Since a home equity loan is a mortgage, you will have to go through closing a second time. That means a new title search to ensure there are no other liens or encumbrances on your property. There also may be origination fees or other closing costs. Often, these get rolled into your new loan, so you typically do not have to bring any cash to closing.

Fixed-rate home equity loans have a specific rate that is fixed (stays the same) over the entire term of the loan. That means that the interest rate will not increase (or decrease) according to the market. A fixed-rate home equity loan is predictable, as you have the same payment amount due every month for the entire loan, which assists with your budgeting. It is also stable since it does not swing with the market. The rate that you qualify for will be based on your credit-worthiness, the length or term of the loan, and the combined loan-to-value of your mortgages and your home.

What Can Home Equity Loans Do For You?

Home equity loans often have lower interest rates than other types of debt, especially credit cards. A fixed-rate home equity loan can be an excellent choice for debt consolidation and paying off higher-interest loans. They are also commonly used to pay for college tuition or a wedding for your children, or another large expense. Some people borrow against their home’s equity to get the down-payment to purchase a vacation home, retirement home, or even a rental property.

Unlike other types of debt, mortgage interest is generally deductible on your federal income taxes, so there may be some tax advantages for you to use a fixed-rate home equity loan for your borrowing needs.

Let TwinCity Lending Help

We have helped hundreds of Minneapolis and St. Paul area homeowners navigate the home equity loan process. We are standing by to help you, too. Our friendly and knowledgeable staff will help you determine how much equity you have to borrow, and what type of loan will be right for you. Contact us today to see if a fixed-rate home equity loan will help you with your financial plans and life goals.

How to Find Out How Much “Home” You Can Afford

Money Saving

Home Loan

Buying your first home is an exciting step that probably also leaves you feeling slightly unsure of how the process unfolds. Planning for your first home requires the completion of several steps before you actually close.

If you are in the process of buying a home, you might be wondering: “How much mortgage can I qualify for?” Determining not only how much you can qualify for, but how much you can actually afford is an essential first step toward purchasing a home.

When buying a home, you first prepare by getting pre-qualified for a mortgage. This will help you understand the amount a lender is willing to loan you, as well as give you an idea of what your payments might look like. You’ll look at different types of mortgages available to you, and determine your best fit. As you find the right loan for you, you might also wonder: “How much house can I afford (FHA or conventional)?” Like all loans, FHA and conventional loans offer different terms, interest rates, and down payments.

If taking steps toward buying your home is feeling overwhelming, or you first want to find out what you can qualify for and what you can afford, TwinCity Lending is your local choice for assisting you in finding the mortgage that fits your needs and lifestyle. Whether refinancing or purchasing your first home, we are ready to make the process simple and even enjoyable.

When it comes to finding out how much “home” you can afford, we can provide you with options and information that will help you determine the right choice for you.

Understand Ratios

Farting

There are several ratios that your lender will use to determine how much of a mortgage you qualify for. Understanding how they will be calculated will help you decide what you can afford. Don’t let these ratios confuse or intimidate you, they are simply a way for lenders to make sense of your financial picture. The formula for determining the ratios is straightforward and is an effective tool for reflecting your financial situation.

Front-End Ratio

The first ratio lenders use is known as the front-end ratio. This ratio reflects your new mortgage payment as a percentage of your gross income. Once you know the ratio your lender uses, you can divide your annual gross income by 12 (months) and then multiply that answer by the ratio your lender uses. The number from that equation reflects your total maximum mortgage payment.

Back-End Ratio

The next ratio used to determine what you can afford is the back-end ratio. This ratio is calculated using the amount of monthly debt payments you have. For instance, you’ll need to add up items like your car payment, credit card payments, student loans, and any other loan debt. Expenses such as utilities and groceries are not taken into consideration when calculating your debt.

To calculate the back-end ratio, you will divide your annual income by 12 (months) and then multiply that number by your lender’s back-end ratio. Next, you subtract your monthly debts from that number, which results in your back-end ratio maximum mortgage payment.

Using the Ratios to Figure Out What You Can Afford

Once you figure out both ratios, using the lower number will give you a realistic idea of what you can afford. Your lender will use the back-end ratio when it comes to approving you for the loan.

Be Realistic

Money Saving

Just because you can have the mortgage your lender offers doesn’t mean you have to spend up to that amount. If you feel a lower payment is more manageable, then you can decide on a lower monthly payment, and look for a house that falls within your budget.

Buying a house is exciting and a momentous step for your future, but you want to be able to live comfortably, and enjoy your new home without stressing over the payment. When shopping for a home, be sure to stay within your budget, and you’ll have a successful home buying experience.

Use Your Lender’s Calculators and Expertise

Your lender’s website typically offers online calculators on their website to calculate your potential mortgage payment, affordability of a home, tax savings, and more. These are useful tools when it comes to planning and preparing to purchase a home. TwinCity Lending offers various calculators on their website to assist you in your home buying decisions.

In addition to online resources, working with your lender to devise the perfect plan of action when it comes to buying a home is invaluable. Having someone you can rely on and trust throughout the process will make your home buying experience enjoyable and less stressful.

Let TwinCity Lending Make Your Home Purchase Simple

At TwinCity Lending, you’ll find experienced mortgage professionals ready to walk you through the lending process, whether a refinance, first-time home purchase, or reverse mortgage. We are available to help you answer the question: “How much mortgage can I qualify for?” and so much more.

We specialize in low-interest home purchases and refinance loans by keeping overhead costs low. We enjoy working directly with our clients to understand their goals and needs in order to provide the best solutions available for their lending needs.

If the home buying process seems overwhelming and you have concerns about where you should start, let us walk you through your home buying adventure to relieve the stress and uncertainty. We are here to provide you with expert information, exceptional service, and the loan that’s right for you.

Contact us today and let’s start working on a plan to help you purchase the home of your dreams or refinance your current home to reflect your current situation. The home buying process doesn’t have to be worrisome and instead can be enjoyable and simple. We look forward to working with you, providing the right lending option for your home. Count on us to guide you through every step and help you achieve lending goals!

15 Year Fixed Rate or a 30 Year Fixed Rate: What’s the Difference?

Buy Home

Home For Sale

If you are like most Americans, your head starts spinning a little bit when you think about mortgages. Everyone knows you need a mortgage to buy a house, but what kind, at what rate, and what terms should you choose?

If you are looking to buy a house and have questions about mortgages, contact TwinCity Lending. We will help you navigate the mortgage landscape to determine how much home you can afford, and what type of loan will be the best for you.

What Does “Fixed Rate” Mean?

Most mortgages today are fixed-rate loans, which means that you borrow money at a specific interest rate that is ‘fixed’ or will not change over the life of the loan. This contrasts to adjustable rate mortgages, in which the interest rate adjusts based on the loan’s terms or the market.

Fixed-rate loans can be in a variety of terms, or lengths of the loans, but the most common terms for a mortgage are 15 years and 30 years. A 15-year loan has 180 payments, and a 30-year has 360 payments.

With each of these mortgages, your interest rate never changes. However, the amount of interest you pay differs greatly between a 15-year and a 30-year term. You’ll pay more than twice the amount of interest over the life of a 30-year mortgage as you would with a 15-year mortgage for the same dollar amount. The trade-off? The 30-year mortgage has a lower monthly payment. You pay less per month, but for twice as long.

Generally, a 15-year fixed rate mortgage means a lower interest rate but higher monthly payments. A 30-year fixed rate mortgage has a higher interest rate but lower monthly payments.

What is a 15-Year Fixed Rate Loan?

Paper Work

A 15-Year fixed rate loan is an excellent choice if you can afford a higher monthly payment and want to pay off your mortgage quickly.

There are many benefits to a 15-year fixed rate loan. Generally, these loans have a lower interest rate. You pay less in interest over the duration of the loan, and you will pay off your mortgage much faster. You will build equity more quickly, as well.

However, there are some negatives to consider. Because the loan is shorter, the payment will be higher, and you must meet stricter debt-to-income requirements. As a result, you may qualify for a smaller loan amount, which then correlates to a lower-priced house or a higher down payment.

What is a 30 Year Fixed Rate Loan?

The positives of a 30-year loan are substantial. Mortgage payments each month will be lower, which will give you more flexibility in your monthly budget for other expenses. A lower monthly payment often makes home-ownership possible for many people, allowing them to qualify for a loan. A 30-year loan can also be a way to purchase a larger or more expensive home or to make a smaller down-payment.

There are some cons to a 30-year loan, though. With the longer term loan, the interest rate tends to be higher than a shorter term loan. As a result, you will pay significantly more in interest charges over the life of the loan. You will also build equity at a much slower rate, which can create difficulties in a housing downturn or if you need to sell the home within the first few years of the mortgage.

Should You Choose 15-Year or 30-Year Fixed?

Buy Home

Knowing whether a 15-year or 30-year loan is right for you depends on your monthly budget, your upcoming expenses, your goals, and your short-term and long-term plans. Let’s look at an example of the difference between a 15-year and a 30-year fixed rate loan.

Bob wants a $200,000 mortgage to buy a house.

If he takes out a 30-year fixed rate loan with a 4.10% interest rate, his monthly payments will be around $966, without real estate taxes, homeowners insurance, or any mortgage insurance. At the end of the 30 years, Bob will have paid $347,903 for his $200,000 house. The $147,903 is interest paid.

If he chooses a 15-year fixed rate loan, he can generally obtain a lower interest rate. Let’s use 3.20%. Bob’s monthly mortgage will be $1,400 per month, also without real estate taxes or insurance. At the end of the 15 years, Bob will have paid $252,087 for the house.

This 15-year loan costs $434 more per month than the 30-year loan, but it is only 180 payments instead of 360 payments. With the 15-year loan, Bob will pay the house off sooner, and save $95,816 in interest. However, his budget might not be able to afford the higher monthly payment, especially if he also has credit cards, student loans, or child care expenses.

So, when should you choose each option? To answer that, you will need to look at where you have the most significant concerns, as well as how long you plan to be in the house. If your income fluctuates or is based on commissions, consider the 30-year fixed rate loan for the lowest monthly payment possible. If you are a first-time homebuyer without a large down payment saved up, a 30-year mortgage may be the best option. If you have many other debts, such as student loans, a 30-year mortgage will give you more money per month toward your other expenses.

If, on the other hand, you have a more stable income and fewer other monthly expenses, a 15-year fixed rate loan might be the better option. If you can afford the higher payment, choosing the 15-year saves you money over time because the interest rate is usually lower, as is the total amount of interest paid.

Call TwinCity Lending

At TwinCity Lending, our job is to help you navigate the mortgage qualification process and get you into your dream house. We will help you calculate all the options so you can make an informed choice about your loan and be in control of your finances every step of the way.

Whatever type of mortgage you are interested in, give TwinCity Lending a call. We will get to know you and your specific needs. We’ve helped hundreds of area homeowners qualify for a home with favorable rates and terms that fit their needs and budget. We’re here to help you, too. Give us a call, and let’s get started.

Financial Hardships and Getting a Loan: It “Is” Possible

Loan

Loan

If you’re one of the nearly 25 percent of Americans who have a credit score below 600, you are not alone. You may be despairing that the financial hardships you have experienced in the past are making it impossible to buy a home. Fear not, however, as there are many home loans for bad credit that can help you buy your dream home and start building equity.

As an independent mortgage lender, TwinCity Lending has access to a broad range of mortgage loans, including those that are available for people with bad credit. In other words, we know how to get a home loan with bad credit. If you’ve been worried that you’ll never be able to buy a home because of your not-so-great credit, take heart. It is absolutely possible to become a homeowner even if you have had financial hardships that weakened your credit rating.

Find a Mortgage Lender Who Helps People with Bad Credit

If your credit isn’t perfect, it’s important to find a mortgage lender who is willing to work with you to buy a home. Big banks often stick with conventional products that are harder for people with average or below average credit scores to qualify for. Credit unions, community banks, and independent mortgage lenders such as TwinCity Lending specialize in helping all prospective buyers, including and especially those with lower credit scores.

Check Your Credit Report for Errors

Credit

Your mortgage lender looks at your complete financial picture, but your credit score is a large part of it. A surprising number of people have errors on their credit reports that adversely affect their credit scores. Obtain a copy of your credit reports from the three major reporting agencies (Equifax, Experian, and TransUnion) and review it for mistakes. You can get a free credit report annually at https://www.annualcreditreport.com/.

Don’t fall prey to other sites that charge you fees to access your credit reports. Get in the habit of doing this once per year to be sure any negative activity that isn’t yours hasn’t been erroneously reported.

If you notice something odd on your report, follow the steps online or by telephone to make a dispute. Credit reporting agencies are legally obligated to investigate your disputes and make changes if an error is found.

Pay Your Bills on Time

Often a poor credit score is due to your payment habits. If you’ve been late on any bills recently, your creditors can report you to the credit agencies and lower your credit rating. If you’re more than 30 days late, your credit score is dinged, and it’s worse if you are 60 or 90 days late.

To improve your credit-worthiness, get all of your accounts to current status and keep them that way. Set up a payment calendar, reminders on your phone, automatic bill payment, whatever it takes to not be late on payments again. In just 90 days of on-time payments, you can improve your credit score.

Lower Your Balances

Allocate some of your budget to pay down outstanding balances on your revolving debt, especially credit cards. Doing so will improve your debt-to-income ratio and make it easier for you to qualify for a loan or obtain a lower interest rate.

Save Money for a Down Payment

Save Money

Even if your credit history is poor, lenders will be more willing to approve you for a loan if you have a larger down payment. The more you can put down, the less money you will have to finance, which makes a lender look at you more favorably. Some lenders will let you get the money from your down payment from a family member as a gift, but others may not view that favorably.

Look Into Government-Backed Loans

If you’re looking for home loans for bad credit, several loan programs are designed to help people who have never bought a home or who have less-than-stellar credit become homeowners. The federal government backs these loans, so there is less risk to the lender.

Each of these programs has specific requirements, but your mortgage lender can fill you in on the specifics. Three common government-backed programs for potential homebuyers are Federal Housing Administration (FHA), US Department of Agriculture (USDA), and Veterans’ Administration (VA) loans.

FHA Loans: If you’re looking for how to get a home loan with bad credit, FHA loans were designed for you. Since they are backed by the Federal Housing Administration, mortgage lenders use these loans to help people with credit scores as low as 580 buy a home. An FHA-backed mortgage often only requires a 3.5% down payment.

USDA Loans: This government program assists middle-income Americans with buying a home in rural or suburban areas. USDA loans have very low down payments, more flexible credit requirements, and allow you to fold closing costs into the loan. All these benefits mean that if your credit isn’t great or you have no cash saved up, it is still possible to buy a home.

VA Loans: If you’ve been an active-duty member of the US Armed Forces for 90 continuous days, you may qualify for a VA loan. These loans require no or very low down payments and have less strict credit requirements.

Get Private Mortgage Insurance

insurance

If you have bad credit and do not have a 20 percent down payment to purchase a home, you can make yourself more attractive to lenders by obtaining private mortgage insurance. These monthly insurance premiums (usually paid as part of your mortgage payment) insure you against a potential loan default.

Getting mortgage insurance increases your mortgage payment, but it usually decreases the down payment your lender will require, sometimes eliminating it altogether. When you have paid your mortgage balance down enough, the mortgage insurance premiums will no longer be required.

Let TwinCity Lending Help You

At TwinCity Lending, we specialize in helping people purchase their dream home, even if they have poor credit. We will assess your creditworthiness honestly, and find opportunities for you to get approved for a mortgage. Our professional staff has a can-do attitude and will go the extra mile to ensure that we can find a loan option for you.

We will also work with you to make yourself more favorable credit-wise, so you can get the best deal possible. Give us a call today to get started. We won’t judge your past financial hardships. We will fight for you to become a future homeowner and relieve you of the worry about qualifying for pre-approval.