Your Questions About Home Loan Interest Rates

Sandra asks…

What are the pros and cons of 100% Owner Financing?

Is it the same as a 30 yr fixed rate home loan? Is the interest rate usually higher? There is a house I am interested in but I dont want to call and be an idiot not knowing how Owner Financing works?

John answers:

Owner financing means the owner is carrying the mortgage. You won’t get a deed to the property until you have paid off the property completely (i.e. Financed with a bank, or won the lottery). The owners normally finance you at subprime interest rates (since if you had great credit you could probably get financing on your own). The contracts normally go for 1 year. I would be smart and ask for at least a 2 year contract. The reason why – when you pay your payments on time, you are building credit history. A bank is more likely to finance you if they see that you were on time or EARLY (early is better) for your owner financing payments. A 2 year contract (or longer) will just build up more credit history, and it should build up more of a down payment. Talk to the owner about prepayment penalties – ideally you should be paying $100 or more OVER the monthly payments to lower the amount of money you have to finance. This will also help you when it comes time to refinance.

Remember – you should be LIVING at no more than 65% of your income, so buy accordingly. One major reason why there are so many foreclosures today is because people were buying more house then they could afford. And put money away – you should have AT LEAST 6 months of living expenses stashed away in a savings account. This will also help you when it is time to refinance.

Finally, if your credit is really bad – consult with a credit repair specialist. Often times you can find them in the real estate sections of your local newspaper. They shouldn’t cost more than $300-$400, and can greatly increase your credit score. This should be done while you are in the midst of the owner financing contract (or at least 3-4 months before you plan to finance a home).

P.S. Be sure to protect yourself. Besides always wearing a condom, make sure you have a property manager or set up an escrow account for your monthly payments. Ensure that your payments go to the monthly mortgage, insurance, and taxes first – and to the homeowner last. This way if he goes belly up, the mortgage on your home won’t. And keep copies of the contract and records!

Mandy asks…

Who determines interest rates on FHA home loans?

Hello I wanted to know if the Bank,Credit Union, or FHA determines the interest rate of a FHA Loan? I filed bankruptcy in 2011 and my 2 years discharge will be up in July 2013. So far my 3 fico scores are 687,653,&632. I have tried to contact a loan officer with my credit union and he was kind of snobby acting. Then I called another Credit Union to get some advice and the loan officer never called me back. So i talked to a Loan officer at US bank and he was very nice and helpful and treated me like a human being despite my past financial problems. however I been told that it would be better to get home loan through credit union. Is this true?

John answers:

FHA rates are set by the market, and lenders can charge what the market will bear. FHA sets the standards for approval but has no input on the interest rate or fees charged by the lenders.
You really can’t make a general statement that any one type of lender is the best. I work for a mortgage banker and our company handles the mortgages for a handful of area credit unions, so if they think the credit union is the best it really means they think we are. When I worked for a broker we tried to have a variety of lending sources since no single lender had the best programs across the board. U.S. Bank was always a first class organization to work with.
You are only a little more than 3 months away from qualifying for an FHA loan, which also means the same amount of time for some loan officer to be fortunate enough to work with you. If you called me right now I would offer to review your credit report to look for ways to get your median score to 660 or above sou you would qualify for better pricing when the time comes. There are many caring and professional loan officers available so you don’t need to waste your time on a jerk that won’t return your calls.

Susan asks…

I need financial assistance or i will lose my home and my husband?

We have a home loan with Liberty that has been in arrears. They offered to write the arrears into the loan so that we now do not have to kill ourselves paying the arrears as well as the monthly repayments. We need to get onto a loan with a normal lender and a cheaper rate how can we do this? Looking at a loan value ratio of 90%. We can afford the loan on a normal interest rate just not on 12%. We had some severe financial problems in the past and we have now got rid of everything and are focusing on the home loan. Please someone help.

John answers:

Do not follow their advise. They are trying to earn more interest not only on your monthly arrear payments, but also on the late fees etc. Look, I cannot give you a good answer on this, because I do not have much info on your overall finances.

But 12% interest rate is really suicidal. First there are non-profit credit bureaus that can help you , and i mean non-profit ones. They can most likely negotiate a better rate for you even with your lender. If you see a brick of wall, but always resort as last thing to Bankruptcy. This is not the best solution, but it could be your only solution.

Hope that helps, and good luck.

Lisa asks…

Should I purchase a Home now or wait and approve my credit score?

I applied for a home loan and was approved, but was given a rate of 10% that I know is very high. My credit score was a 600. Should I clear out some things in my credit and boost my score and try again in a few months, or should I continue to purchase the home in which I have a contract at the going 10% interest rate and refinance in a year or so?

John answers:

Forget the credit score hoopla. The more cash you have to put down on a house, they less risky your loan is, and the lower your payments will be. Simple economics. Your “score” is not going to mean much.

Ruth asks…

Get a home equity loan for home remodel or pay cash?

I’m thinking of remodeling couple of small bathrooms in my house. Probably will cost around $50,000.

I have the cash to pay for it, but would it be better if I get a home equity loan to pay for it?

I own my house and mortgage is payed off. I figured with low interest rates, I can get a tax break on the interest for the home equity?

What do you think?

Thank you for any advise.

John answers:

50k is a lot to pay for bathroom remodeling. Consider putting that money toward upgrading to a better house.

But your real question is whether to pay cash or get a loan.
Part of this depends on what you would do with the cash if you got a loan. In a savings account? Let’s say that you have that 50k in a savings account. (If you have other savings, I’ll imagine that it is in a different account just to keep this simple.)
The choices are:
50k debt incurring interest and 50k savings earning interest
versus
nothing in your savings account.

The interest rate on the debt will be greater than the interest rate on the savings. Yes, you get a tax break on the interest that you are incurring, but that is only a fraction of the interest.

So, unless your post-tax earnings on the savings are greater than the cost of the loan minus the value of the tax break, it’s better to pay cash. Remember that if you pay 2k in interest in a year, your tax break is not worth 2k. It is worth your tax rate times 2k.

Plus, there is a hassle factor. Getting a loan takes time and effort.

I vote pay cash. (And see my first comment about the high cost of a bathroom remodel.)

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