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A Little Lesson on Loans
By: Jon Galanty
The opportunity to spend money is everywhere. There is no shortage of places that will take your cash. In fact, to keep the money flowing out of your wallet, banks and merchants continually come up with easier ways for you to spend it.
But when it comes to borrowing money, suddenly the cash pipeline doesn't operate so smoothly. Money becomes a more complex issue with documents and terminology that practically require you to have both an MBA and Law degree to fully understand.
Before you get dazed by the paperwork and lost in the legalese of loan products, here is a quick lesson on loans.
1) The Basics
When you get a loan, you are borrowing money with a promise to pay back the original amount (principal) plus an extra amount as a fee (interest) for the privilege of borrowing. The amount you pay in interest is normally a percentage of the loan amount -- the interest rate.
Example: If you borrow $100 with an interest rate of 10%, you will pay back $110. That consists of the $100 principal plus $10 interest.
2) Loan Categories
From a broad perspective, loans fall under one of two categories: a) Installment loans and b) Revolving Credit loans.
a. Installment loan:
The installment loan is probably what most people think of when talking about a loan. Money is borrowed from the bank in one lump sum and normally paid back in installments, or increments, over a set period of time. The sum paid back can include both the principal plus interest or the payments may contain interest only with the principal being paid all at once in the last loan installment, known as a balloon payment.
Loans that fall under this category include mortgages, personal loans, and auto loans.
b. Revolving Credit loan:
Revolving Credit (also called Revolving Line of Credit or Credit Line) is a loan where a lender allows someone to borrow money up to a specific limit, called the credit limit, whenever money is needed. The borrower draws down the credit limit every time an amount is borrowed. The borrower can use as much of the credit as he or she wants. When a repayment is made, the available credit rises by the paid amount.
Example: Borrower gets a credit limit of $1000. $100 of the credit is used to buy merchandise. The credit limit now decreases by $100 to $900. A day later, the borrower decides to borrow another $100 decreasing the credit limit to $800. Next month, borrower pays back the $200 plus interest and the credit limit goes back to the full $1000.
Loans that fall under this category include credit cards, home equity line of credit (HELOC), and business lines of credit.
3) Rates
As you already learned, the interest that you pay is calculated as a percentage of the principal amount. Some loans have a fixed interest rate while others have an adjustable rate of interest.
A loan with a fixed interest rate means that the interest you pay stays the same throughout the life of the loan.
The adjustable rate loan, ARM, on the other hand, has an interest rate that can fluctuate from period to period. That means a borrower can expect to pay more or less interest as the rate fluctuates. The rate's movement is tied to indexes that track a basket of interest bearing investments. As the interest rates of the index moves up or down, the interest rate on your loan is adjusted accordingly.
There you have it. You just completed your lesson on loans. Now that you have a grasp of the basics of loans, you will be better prepared to understand the minute details of the loan that you need.
Are you a Victim of Predatory Lending Practices?
By: Kenneth M DeLashmutt
Help is available to borrowers who have claims against Predatory Lenders. Lenders all over the country are violating the Truth in Lending Act and other State laws regulating mortgage lenders and mortgage brokers.
If you are a victim of predatory lending or mortgage lender fraud, you may be able to void the mortgage and apply 100% of your payments to principal. You may also be able to recover money damages.
If the answer to any of the following questions is "yes," please get out your mortgage closing documents and audit your loan documents for violations.
1. Have you repeatedly refinanced your loan? Was the last refinance within the last 3 years?
(A common predatory practice is "flipping," which involves "repeatedly refinancing a mortgage loan without benefit to the borrower, in order to profit from high origination fees, closing costs, points, prepayment penalties and other charges, steadily eroding the borrower's equity in his or her home.")
2. Did you increase rather than lower your rate upon refinancing?
3. Are you paying an interest rate in excess of 9.5%?
4. Was the loan obtained to pay for home improvement work that was not done properly, or even at all?
5. Have you had problems with the mortgage company regarding untimely posting of monthly payments? Sudden increases in payments? Adding amounts to your balance for insurance, "property preservation," or other "advances"? Does your principal balance never seem to go down?
6. Were you charged high closing costs (points and fees) on the mortgage?
7. Did the terms of the mortgage change to your detriment at the last minute before the closing?
8. Did the lender pay money to your mortgage broker (look on your HUD-1 Settlement Statement for a "premium" or POC (paid out of closing) "YSP" or "yield spread premium")?
9. If you have an adjustable rate mortgage, were any adjustments done improperly? Can you even tell if the adjustments were correct or not?
10. Does your loan contain a prepayment penalty?
11. Do you believe you were treated unfairly by your mortgage company? Has correspondence with the mortgage company gone unanswered? (Mortgage companies have a statutory obligation to respond to complaints and requests for explanations of accounts. Often, they don't. Each failure may entitle you to $2,000. If your claim against the mortgage company may exceed the number of monthly payments you allegedly missed, the mortgage company may not be able to prove that you are in default.)
12. Did all collection letters sent to you by debt collectors comply with the Fair Debt Collection Practices Act? (Up to $1,000 more if they did not.)
13. Did you (or anyone who has an ownership interest in and lives in the house) receive a "notice of right to cancel" that was not completely filled out?
14. Did you receive your copy of the loan documents at the closing (as opposed to being sent to you later or did the closing agent send you signed copies at all)?
15. Did you sign a document at the closing stating that you were not canceling?
16. Did the closing occur by mail, or at your home, or in another city?
There is a common assumption (among judges, borrowers, and the public) that mortgage companies do not desire to foreclose and acquire real estate. This assumption is no longer well founded.
There are an increasing number of "scavengers" that buy bad debts, including mortgages, for a fraction of face value and attempt to enforce them. Such entities profit by foreclosure.
"Mortgage sources confide that some unscrupulous lenders are purposely allowing certain borrowers to fall deeper into a financial hole from which they can’t escape. Why? Because it pushes these consumers into foreclosure, whereupon the lender grabs the house and sells it at a profit." Robert I. Heady, The People’s Money, "Foreclosure, You Must Avoid It," South Florida Sun-Sentinel, Feb. 25, 2002. In addition, if the loan is guaranteed (by private mortgage insurance or the government), a mortgage company may find it more profitable to foreclose and make a claim on the guarantee.
© Kenneth M DeLashmutt
You have permission to publish this article electronically or in print, free of charge, as long as the bylines are included. A courtesy copy of your publication would be appreciated.
Loan Origination Requirements
When a person is seeking a loan to purchase a home, the lender will usually require some down payment to make sure the borrower has something "at stake" in case the borrower runs into some financial difficulty and thinks about maybe not making timely payments. Many years ago, 20% of the purchase price of the property was considered a normal down payment, the acceptance of government backed loans and mortgage insurance companies has reduced this down payment requirement to as little as 3% of the property purchase price required as down payment, or in some very good credit cases even 0% down. We'll discuss this more later down this page, but for now, remember that when the loan was originated, the lender felt the loan amount was somewhere between 3 and 10 percent below the property value at that point in time.
Who Owns the Loan?
With the exception of smaller regional lenders, most lenders in today's environment do not originate and service their own loans. Most loans today are originated by one lender, using guidelines provided by the institution to whom they would like to sell the loan. Then the loan (note) is sold to that secondary lender who will continue to service the loan, meaning collecting monthly payments, maintaining any escrow accounts for property insurance and property taxes, and interface with the borrower regarding the borrower account. It is very common with home loans for the home loan to be originated with one lender, the note serviced by a different lender, and ownership of the note held by a third lender or financial institution. While the servicing lender is, for most intents and purposes, the foreclosing lender, their procedures for completing the foreclosure and handling the property post-foreclosure will be dictated by the institution owning the note.
Mortgage Insurance and Loan Guarantees
Lenders are often guaranteed against loss on their notes by Housing and Urban Development (HUD), the Veterans Administration (VA), or one of many mortgage insurance companies. When a new home loan is originated with less than 20% down payment, the originating lender qualifies the borrower using the requirements of the guaranteeing agency. The loan isn't funded using any money from these agencies, they are acting in a capacity more like insurance, where they collect a fee and only get directly involved when something bad happens, which in this case would be a default in payments, and a possible foreclosure. If a default in payments occurrs, the guaranteeing agency will require the lender to follow certain steps to try to make the loan performing once again. If those attempts are unsuccessful, then the guaranteeing agency will have requirements for the lender to follow through the foreclosure process. Post-foreclosure, the guaranteeing agency will reimburse the lender for either all, or most of the loss incurred on the foreclosed loan.
Apply For A Mortgage – Keys When Applying For A Mortgage Online
By: Carrie Reeder
Applying online for a mortgage is very fast and easy. Just make sure of a few things before you start to look for places to apply to. Here are some tips to keep in mind when searching for a mortgage company to help you online:
- Apply with many different brokers, but make sure the online application or inquiry that you fill out will not allow them to pull your credit - If they ask you to describe your credit, it is likely that the broker is not going to pull it. If you enter your social security number, it is likely that they will pull your credit. If you do not enter your social security number, usually, that makes it so that they cannot pull your credit. They eventually will need to pull your credit, but you want to make sure you have narrowed down the broker that you want to work with before they pull your credit.
- Enter the information on your application accurately – If you are not accurate on your application, this will slow down the approval process. State your income accurately. Sometimes people will inflate their income on their application in hopes that this will help their approval process. What this does is give the broker a false sense of your situation. The mortgage application and approval process will go much smoother if you are accurate in stating your income and assets and credit history before you get into the approval process.
- Determine if the company you are applying with is reputable – Ask yourself a few questions about the website you are on. Does it look professionally made? Is there contact information available? What kind? On the application or inquiry you are filling out, look in the web address bar and see if the page you are on starts with https:// instead of http://. The “s” means that the page is secure. Is the company affiliated with other companies? Did you find the company from a recommendation from another site? Analyze these factors before you apply. They are not guarantees, but they can help you avoid submitting your information to companies or websites that are not legitimate.
Equity Loans Let Homeowners Borrow on the House
Unbiased Financial Information Provided by Financial Finesse
The greatest component of personal wealth in America is home equity.
Your home may hold the key to achieving many of your financial goals. Ilyce Glink, a syndicated real estate columnist and author of 100 Questions Every First-Time Home Buyer Should Ask, reports that the younger you are when you buy a home, the wealthier you will be in your lifetime. It's true that the greatest component of personal wealth in America is home equity.
Special loans let you convert the equity in your home into cash to pay for things like a car, your child's college education and home improvements. Some borrowers use the loan to consolidate debt or take advantage of an investment opportunity. Before you join the ranks of home equity enthusiasts, make sure you understand the basics of borrowing "on the house."
Home Equity Loans Come in Two Forms
There are two types of home equity loan: term, or closed-end (also known as a second mortgage), and line of credit. Closed-end loans provide borrowers a lump sum of money at a fixed interest rate to be repaid in equal monthly installments over a specified loan term (typically 10 to 15 years).
A home equity line of credit (HELOC), on the other hand, charges a variable interest rate and functions like a big credit card. You have a minimum payment due each month based on how much of the credit line you've used. You can draw on your line of credit whenever you want to, using checks provided by the lender. At the end of the term, which could be anywhere from five to 20 years, you must pay off the full balance. At that time the lender will choose whether or not to renew the loan.
Rates on home equity loans and lines of credit are influenced by many factors, but generally tend to be lower than rates on non-mortgage loans.
The big attraction to home equity loans is the fact that, for many borrowers, the interest charged is tax deductible (just the way it is on your first mortgage). This can result in huge savings, and is the reason so many homeowners use a home equity loan to consolidate non-deductible, higher-interest debt like credit cards and auto loans.
Borrower Beware
While tax deductibility is a huge reward, there is a risk that comes with home equity loans as well. Because the collateral for a home equity loan is -- you guessed it -- your home, there is some danger of losing it.
Doreen Woo Ho, president of the home equity division of a national lender, cautions that homeowners who choose to borrow against the equity in their home must be fiscally responsible. "Anytime a home is used as collateral, a homeowner runs the risk of losing it if they fail to make the loan payments," says Woo Ho.
Because you're putting your home on the line when you take out a home equity loan, borrowers may want to steer clear of a newer breed of loan often referred to as the "no-equity" loan, which lends more than 100 percent of the value of the property. Borrowing more than your home is worth might sound like a good deal now, but finding yourself unable to make payments on a sum of money that exceeds what you could sell the home for if you had to is no picnic. And because these hybrid loans combine a home equity loan and an unsecured personal loan, they may charge a higher interest rate and not qualify for full tax deductibility.
How to Qualify
The most important qualification is that you have equity in your home (usually because you made a large down payment, have made improvements or additions, or have owned the property for a number of years). You typically need at least 20 percent equity to get the lending institution's lowest rates.
Homeowners who choose to borrow against the equity in their home must be fiscally responsible.
The lender will also consider your credit score, income, and debt-to-income ratio. However, the underwriting requirements tend to be much less stringent for a home equity loan than they are for a first mortgage.
You can apply for a home equity loan with the same lender who carries your first mortgage, but it isn't necessary. Most credit unions and banks offer home equity loans, and there are many Web-based brokers that will help shop your loan application out for the best rates.