All posts by Joe Walsh
Private Mortgage Lending Criteria
Private mortgage lenders will qualify and approve applications for financing slightly different from a traditional institutional lender.
First of all, someone seeking a private mortgage for either residential or commercial purposes has likely been unsuccessful securing mortgage financing with an institutional lender. While a private lender’s application process will be much more streamlined than a traditional mortgage lender, they still are going to want to know what the money will be used for and the circumstances that lead to the need for financing.
Few lenders, including privates, are interested in high maintenance borrowers, so the back ground story of the applicant will be brought into consideration.
Second, the resale potential of the property as well as the property value are equally important to a private lender. If there is good equity available to secure a private mortgage, but the resale market in the area is thin and hard to predict in terms of timing and net realizable value after sale, then a private lending source may still pass on the deal.
Third, while an individual credit score or credit profile is not always scrutinized or even looked at by privates, there are a number of private lenders who will take a look at your credit background to determine if you’re someone perhaps struggling with their cash flow, or someone who habitually doesn’t pay their bills and is constantly in arrears.
Once again, private lenders are looking for borrowers whose intention is to pay their bills on time and honor the conditions of the mortgage. Even applications with strong property values may still have a hard time securing private financing if there are indications that the potential borrower may not have the best intentions towards managing his or her financial commitments.
That being said, there are private lenders that will still finance people with really bad credit histories provided that the property values and the resale market supports the lending decision. These mortgages will also be granted at higher rates with higher closing fees, and any failure to make payments will be dealt with swiftly to the full legal rights of the mortgage provider.
Private lenders typically will also want to inspect the property themselves and may also conduct their own appraisal of market value.
Most private lenders work through mortgage brokers to access the market with each lender typically being very regional in terms of properties they will consider financing. Part of the reason for a small nearby market area is the development of first hand knowledge of the market and property values.
If you are trying to locate or secure a private mortgage, I recommend that you give me a call so I quickly assess your options and go over them with you to determine the best course of action.
Reverse Mortgage Pros and Cons
As our population continues to age on a relative scale, there is more interest in reverse mortgage for retirement planning.
For those of you interested in a reverse mortgage program, here are some of the pros and cons you may want to consider.
Pros
- A borrower that received a reverse mortgage will retain home ownership and will be allowed to continue living in their residence for as long as the mortgage is outstanding. All the benefits of home ownership will basically be retained by the owners.
- Because the property value is likely going to rise over time, the net cost of loan will be offset by property appreciation effectively reducing the overall cost of the loan in the process.
- The monies received from a reverse loan program is not considered income for tax purposes as all funds are being provided through a debt instrument. For seniors utilizing loan advances to help pay for their living, the mortgage funds will have no impact on Canada Old Age Pension, Canada Pension Plan, or Quebec Pension Plan.
- In the event that a borrower chooses to utilize funds from a reverse mortgage for investment purposes, the resulting interest payments generated by the mortgage will be tax deductible. However, interest costs cannot be deducted for tax purposes until the mortgage has been paid off.
- There are no restrictions with respect to the borrower’s use of funds other than the lender will not pay directly pay property taxes on behalf of the borrowers.
- There are no payments due or payable on the mortgage until the last borrower passes on, sells the property, or the home becomes unoccupied.
Cons
- Depending on the interest rate in effect over time, the interest costs can accumulate quite quickly against the remaining equity in the home.
- The related administrative fees associated with reverse mortgages are higher than conventional mortgages, making the overall cost of financing higher.
- If the property does not appreciate during the time of the mortgage, there could be very little equity left after sale and mortgage retirement, leaving very little in the way of inheritance to heirs of the borrower(s).
If you would like to get more information on a reverse mortgage or would like to discuss different scenarios that relate to yourself or a family member, then I would suggest that you give me a call and we can go over everything together.
Mortgage Approaches To Debt Consolidation
Debt consolidation via mortgage financing has become a very common form of consumer debt management over the past few years.
With the presence of lower interest rates and the development of insured and uninsured mortgage programs that will allow funds to be used for debt consolidation purposes, consumers are now utilizing their home equity to get their debt under control.
There are a few different mortgage approaches that can be taken when considering debt consolidation. In order to determine which approach is the best for a given situation, the borrower must first determine the time line over which the consolidated debt will be repaid.
Debt for consolidation is typically for built up credit card, term loan, and line of credit balances for unsecured credit facilities. Debt consolidation is considered because the borrower has found that repayment is either not happening fast enough or not at all, and whatever money is put towards the debt is being eaten up by interest payments.
If the intention of the borrower is to repay the “to be consolidated” debt off in say five years or less, then there are a few different mortgage approaches to consider.
First, if it makes sense to refinance the existing mortgage without incurring significant repayment penalties, then this would be a solid option to get the lowest possible interest rate available to the applicant, provided that the related mortgage had fairly generous prepayment privileges written into it to allow for faster repayment of the consolidated debt. Its not uncommon to see mortgages today that allow you to pay down the principal by up to 25% of the outstanding balance each year.
Second, if refinancing does not make sense for whatever reason, then a second mortgage or line of credit could be taken out. For an amortized second mortgage, the amortization period could be set up according to the projected repayment period, which in the example being used was 5 years.
If a secured line of credit was taken out, the line of credit would effectively be open and would allow principal repayment at any time.
And if a borrower’s credit could not support either of the first two options discussed, then a private second mortgage could be considered. Keep in mind, however, that private mortgages are typically for no greater than one year and receive interest only payments during the term for the most part. That being said, there are private mortgage lenders that will allow you to make monthly principal payments and can provide interest terms of two to three years.
So if you’re considering a private mortgage for your debt consolidation strategy, make sure you’re working with a residential mortgage broker who has access to private lending sources that can provide you with the debt repayment flexibility you need.
For help with a debt consolidation scenario, I suggest you give me a call so that I can quickly assess your situation and go over the most relevant options with you.
Click Here To Speak With Mortgage Broker and Debt Consolidation Expert Joe Walsh.
Private Mortgages Are Also Bridge Loans
Most private mortgages are bridge loans by definition in that they are for a short period of time, typically only for one year in duration, and have a finite end point.
While both consumers and business owners may use a private mortgage as a primary source of financing if they have bad credit and/or can’t provide proof of repayment, the best potential use of private mortgages is to complete a real estate transaction within a short period of time. Once ownership is achieved, the borrower will be able to take more time to secure longer term financing options that can retire the private loan.
One of the key characteristics of private mortgages is the speed in which one can be put into place. In some cases, private lenders can get a mortgage in place in a matter of days, especially if there is a financial incentive for them to accelerate the process.
To provide a comparison, a traditional mortgage will typically take 10 business days to close once a mortgage commitment has been issued and signed back. With a private mortgage, if the deal is straight forward and easy to verify, some private lenders can get everything done and funds issued in less than a week.
Because private lending sources are typically individuals working through their own business lawyer, and focused on placing their own money, both decisions and administration related to mortgage registration and disbursement can get completed much faster than an institutional mortgage lender.
Even though the cost of speed can be significant, if the deal you’re trying to close is highly profitably or has the potential to generate significant returns over time, then paying a high placement cost may end up being trivial in the big scheme of things. Too often individuals are unsuccessful closing deals within tight time requirements because they are overly concerned with the short term cost of money versus the overall amount of money they may lose or miss out on earning if the deal falls through due to a lack of available funds.
And even if you have lined up a cheaper source of capital that will satisfy your requirements into the long term, if there are any delays in securing the funds, you could still run out of time and lose out on your deal.
In many ways, private mortgage loans can be the ideal bridge loan for many potential deals. The key decision is whether to use private funds as an initial financing choice to get the deal closed, versus a contingency plan that you will call on to rescue a deal if traditional sources of financing are slow to emerge or get closed.
If you have a deal that requires a private mortgage, I recommend that you give me a call so that I can quickly provide available options for you to consider.
Conditions & Requirements of Institutional Construction Loans
Construction loans approved and issued by institutional lenders will have both the construction loan and the take out or completion mortgage approved at the same time so that one will be paid out by the other at the completion of the project.
While there can be variations among lender programs, here’s what a fairly standard construction financing program looks like as well as its major requirements and conditions.
- The borrower needs to have clear title to the land or building lot prior to or at the time of the first progress draw. No project draws will be advanced until title has been secured.
- A maximum of 4 advances are permitted during the construction process. The first advance will take place after the foundation has been completed. This is estimated to represent 15% of the total project. The second advance will take place when the structure is fully enclosed and can be secured from entry (approx. 40% complete overall). The third advance takes place when the drywall is completed (approx. 70% complete overall). The fourth and final stage takes place at the completion of the overall project (100% complete).
- For each draw, your lawyer will be required by the Lien act to withhold 10% of the construction costs. The amounts held back are paid out 45 days after the date of substantial completion if there are no liens registered. If liens are registered, the hold back funds will be retained until the outstanding liens have been resolved.
- The construction mortgage registration and all construction progress draws are administered by the borrower’s lawyer and all related draw costs (legal feeds, appraisal, inspection fees, etc.) incurred will be the responsibility of the borrower.
- The interest cost during the construction period will likely be between prime plus 2% and 4%. The interest cost incurred will be deducted from the borrower’s bank account via preauthorized payment on the first of each month. The construction mortgage payments are calculated by applying the interest rate to the amount drawn. These payments are interest only.
- When the construction project has been completed, a pre-arranged take out or completion mortgage will payout the construction loan at the time of completion. This process is triggered by the issuance of an occupancy permit at the time of the final draw.
- Completion mortgage loans are typically approved at a variable interest rate that can be converted to long term fixed interest rate at any time without additional cost once construction is complete.
- For borrowers not on a municipal water supply service, water potability and septic certificates must be provided to the mortgage lender prior to advance of the first scheduled draw. This condition can be met by the borrower obtaining title insurance whereby the related policy covers off the water and septic requirements. If these conditions are not met, the lender will retain a $5,000 hold back amount until the certificates are provided.
- While under construction, builder’s risk insurance needs to be in place and a completed survey or title insurance will also be required prior to any advance being made from the first draw.
Once again, the above is will not apply exactly to all construction mortgage lender programs, but it does provide you with a good overview of the structure of institutional construction loans and their related conditions.
If you would like to review your financing options for a construction project, please give me a call and we will go through your situation together.
Click Here To Speak With Construction Mortgage Broker Joe Walsh.
Refinancing With Bad Credit Mortgages
Bad credit mortgages can be used to refinance your existing debt, but potentially at a higher price that what you’re paying on your mortgage today.
Many times an individuals credit will fall off based on a certain events such as job loss and sickness which can result in the accumulation of debt and negative impacts to credit profiles.
The individual may have been able to secure their existing mortgage at excellent rates, but are now facing higher rate refinancing options due to the fall off in credit rating and perhaps reductions in cash flow.
If you situation is similar to the above, then bad credit mortgage refinancing may be the most likely option for getting your cash flow under control and saving a further slide against your credit.
While a new first mortgage will likely be at a higher rate of interest, it is still likely to be substantially lower than credit card interest rates if that is the type of debt you’re trying to consolidate.
Even a private mortgage with interest rates in the 9% to 14% range can still provide for beneficial refinancing, provided that you have an exit plan for the refinanced debt at the end of the private mortgage interest term which is typically one year in length.
At the very least, bad credit mortgage refinancing is going to buy you time to figure out how you plan to deal with your debt load in the longer term. Not only can this stop collection actions from taking place, but it also can reduce the level of stress that is associated with a high debt load and money strapped cash flow.
And once the credit cards get paid down or off, your credit score can start to improve, increasing the chances of getting better financing options in the near future and avoiding complete credit destruction brought on by a lengthy period of loan arrears and potentially personal bankruptcy.
Also keep in mind that bad credit financing options should never be considered as long term solutions due to the higher cost of financing your going to pay. But for relatively short periods of time, they can be the best solution available to you.
If you have bad credit and would like to discuss refinancing options through a bad credit mortgage product, please give me a call so we can go through your situation together.
Bad Credit Mortage Loan Options
Even if you have bad credit, there are still options for you to consider for securing a property mortgage.
When looking for mortgage programs that consider bad or poor credit, the first thing to focus on is what currently shows on your actual credit score and credit profile. There are varying degrees of weak credit, and understanding your own credit profile in more detail can help locate suitable lenders.
For instance, a credit score that is below 650 may be considered to be bad credit by many lenders, but there are still institutionally based mortgage providers that will consider credit scores between zero and 650. The key is to focus on the lenders that are the most relevant to your credit profile and ignore the ones that will not be able to supply any bad credit mortgage options.
There are basically two ways for you to better understand your credit. First, you can contact either of the two credit bureaus that provide Canadian credit reports (Equifax and Trans Union) and get them to send you a copy of your credit report. You have the right to receive a copy of your credit report for free from these agencies. However, the free report does not include your score, which is typically an essential credit scoring element of most mortgage lenders.
To get a copy of your credit score, you need to go to either Equifax or Trans Unions website and purchase a credit report package that includes your credit score. At the time of writing, the approximate cost was $24.00. Not only does this allow you to see basically what a lender will see when you make an application, but because you made the request, the credit inquiry does not have any negative impact on your credit score (excessive credit inquiries requested by lending institutions on your behalf are considered by the credit reporting agencies to be negatives against your credit profile and can actually reduce your credit score).
The second method to better understanding your credit is to apply for financing through an experienced mortgage broker. Once you provide written permission, the mortgage broker can access your credit report and provide you with the most relevant options that relate to your credit profile. At this point, any application you may make will only be to a relevant lender who’s criteria match up with your credit history and score.
For the average person with bad credit, the process of finding relevant lenders can be daunting. This is where a mortgage broker can provide excellent value to your search process.
If you’re trying to figure out your bad credit mortgage loan options, then I recommend that you give me a call and we can go through your situation together can see what options are available to you.
A Canadian Insured Mortgage Verus A Sub Prime Mortgage
So what is the difference between an insured mortgage an a sub prime mortgage?
Depending on who you’re talking to, the answer is typically nothing.
By definition, an insured mortgage provides protection to a mortgage lender to extend mortgage financing to individuals carrying a level of risk that would not allow them to secure a mortgage without insurance.
Based on the above, an insured mortgage is also a sub prime mortgage.
So, yes we do have an active sub prime market in Canada administered by the Canada Mortgage and Housing Corporation (CMHC). Insured mortgages allow many Canadians to own a home much faster, which stimulates both the building and real estate markets.
And despite what you may have been hearing about the sub prime market collapse south of the border, the Canadian insured mortgage market continues to operate in Canada and is expected to do so into the foreseeable.
Because of the shear size of the market, it needs to be watched closely to make sure the portfolio stays healthy and program adjustments take place if the overall risk level becomes unhealthy for the country as a whole.
And while insured mortgage programs have their supporters and detractors related to their overall impact and risk to the overall economy, they do exist and provide tremendous value to the individual consumer who would not be able to own a home without an insured loan.
Because they are sub prime in nature, there is a higher rate of default, and that default risk is basically carried by the Canadian taxpayer to a large extent. This is the trade off that goes with greater access to credit. Many would argue that the CMHC programs have been a resounding success, and, properly managed, should continue to provide the same opportunities for home ownership to all Canadians.
The key to keeping what many would consider a highly valuable tool viable for future generations is strong economic policy and whatever program adjustments may be required from time to time to avoid the slippery slope our neighbors to the south got on and are still trying to recover from.
If you’re interested in learning more about insured mortgages, I suggest you give me a call and I’ll do my best to get all your questions answered.
Click Here To Speak Directly With Mortgage Broker Joe Walsh.
Keys To Cottage Mortgage Financing
If you’re looking to acquire a cottage and need cottage mortgage financing to complete the purchase, then here are some things to consider.
First of all, cottage mortgage lenders will focus their programs on different regional areas. Cottage markets can be very different one province to another, and even within the larger provincial cottage areas. This is due to the fact that each cottage region is its own distinct market with potentially different resale market dynamics that can impact the lender’s view of the underlying security for the mortgage.
So while you may be looking in a market that provides great deals, it may not have the same amount of mortgage program selection as other areas.
For higher loan to value mortgage financing and low mortgage rates, the cottage property needs to have residential zoning, an electric or gas heating system, and access to all weather roads. The more your target property conforms to what we would characterize as a traditional residential development, the more mortgage programs will be available for you to consider.
So if you’re seeking 95% cottage mortgage financing and prime plus interest rates, then you need to be targeting properties in solid resale markets where the developments are well established and provide year round access and living.
If you’re interested in a more obscure property, say something with a large square footage, sitting on a large acreage with some form of shared access among neighbors, then it becomes even more important that the target property is in a well established market in order to still be able to obtain high leverage and excellent repayment terms.
As you start to drift away from the established markets, your mortgage options can drop dramatically and even though you may be able to lock down a great deal subject to financing, keep in mind that the down payment and cost of financing could both be higher than you anticipated.
While cottage financing tends to be a well serviced mortgage market for the most part, there can still be challenges in getting the mortgage terms and conditions you’re looking for. This is where the help of a mortgage broker can truly be invaluable to you.
If you’re looking to purchase or refinance a cottage or resort property, I suggest that you give me a call so that we can go over your options and determine your best course of action.
Self Employed Mortgage Requirements
Self employed mortgage requirements can vary from mortgage lender to mortgage lender, but here are some general guidelines to follow if you’re seeking or considering this type of mortgage financing.
- The property in question needs to be owner occupied with purchase financing available to a maximum of 75% of the purchase price or appraisal value, whichever is lower.
- Most institutional programs for self employed mortgages are for a home purchase only and cannot be utilized for refinancing purposes.
- The typical maximum amortization period you can expect to secure is no greater than 35 years.
- While the minimum beacon score can vary among mortgage lenders and their related programs, for self employed mortgages, the applicant score needs to be 720 are higher if declared income cannot be verified by acceptable third party documentation.
- The credit profile of the borrower(s) cannot have any previous bankruptcies on file and it also must show a minimum of three years of credit activity with at least three different sources of credit.
- Applicants must provide copies of their most recent notice of assessment from the Canada Revenue Agency to show that there are no income taxes owing.
- Stated income must be determined to be reasonable and comply with the debt servicing requirements of the mortgage program.
- The applicants must provide at least two sources of third party documentation to show at least three years of continuous self employment.
- The down payment of at least 25% needs to be verified before any funds can be advanced and no secondary forms of financing are allowed on the property.
Once again, these are not absolute guidelines by any means, but do provide the basic requirements one can expect from institutional lenders that consider self employed mortgage applications.
If you cannot meet the qualifications listed, there may still be mortgage programs that you can apply for, but they are likely going to be for higher rates.
If you are seeking a self employed mortgage program or just looking for more information, I suggest you give me a call so that we can go through your situation in detail and answer any questions you may have.
Click Here To Speak With Self Employed Mortgage Broker Joe Walsh
Defining Bad Credit Mortgage Financing
While there are no hard and fast rules that apply to all mortgage lenders with respect to bad credit mortgage financing, here are some unofficial rules to consider.
The first aspect of bad credit is a low credit score and by a low score I’m referring to a FICO score issued by one of the two major credit reporting bureaus in Canada (Equifax or Trans Union) that is below 650. This is a typical cut off point for an institutional lender, but there are still variations among this group.
The credit bureaus receive monthly reporting information from participating lenders with respect to their borrower payment performance over the last month. Most of the information is for loans, lines of credit, and credit cards that are unsecured.
The information collected by the credit bureaus, along with an individuals personal profile, are used to calculate a credit score which ranges from 300 to 900. The information provided is displayed and calculated as is, so if there are any errors or omissions in the information, the credit bureau still reports the information as provided.
When you have a score below 650, you will automatically not be eligible for certain mortgage programs offering the lowest market rates. As your credit score drops even further, there will be more programs that you will either not qualify for, or will charge higher rates of interest as a result of what they view to be a bad credit or higher risk profile.
There are times that a low score is caused by an error or omission in the credit reporting and if you can verify information is recorded in error, you may be able to still take advantage of certain mortgage programs and rates that would otherwise be unavailable due strictly to the credit score.
Bad credit can further relate to the near term activity in your credit report. For instance, if you had credit problems in the past, but have worked hard to rebuild your credit and are just short of the required level of credit of a given lender, there may be opportunities to still secure excellent lending rates and terms.
However, if your credit score is low, and your near term credit performance shows some combination of late payments and delinquent accounts, then your bad credit is going to force you into higher risk mortgage lenders which can include private money lending sources that are less concerned with your credit profile and more concerned with the quality and value of the real estate security.
That being said, even private lenders can steer away from bad credit mortgage scenarios where the borrower is always late or in default as this can indicate future payment problems that they would prefer to avoid.
If you think you have bad credit, I recommend that you give me a call so that I can quickly provide you with your options for bad credit mortgage financing.
Insured Mortgages For New Immigrants With No Credit
Even if you’re a new immigrant to Canada with no established credit with one of the major credit bureaus, you still can qualify for an insured home mortgage if you meet the following requirements.
- You have to been granted landed immigrant status by Immigration Canada.
- The bank will need to be able to verify your source of down payment and the estimated closing costs as well as your source(s) of income to support the repayment of the mortgage and the payment of related costs such as property taxes.
- Records showing payment of rents and two other monthly payment obligations. The rent verification information will need to include bank statements and a letter from your landlord stating when you moved in, the monthly rental amount that was paid, and the payment history.The other two types of payments can be for such things are telephone, cable, power and can be verified by bank statement or paid invoice. All payments must have been made on time, or your application for mortgage will be declined.
If you can’t show the 12 month payment histories mentioned above, then you will need to provide 6 months of bank statements from your main account or a letter of reference from a recognized financial institution.
- To be classified as a new immigrant for the purposes of obtaining an insured mortgage, you must have moved to Canada in the last 36 months and been employed on a full time bases for at least 3 months.
- If you are using a guarantor, their income will also need to be verified.
For individuals that fit these criteria, insured mortgages can be secured for up to 95% of the property value as long as the down payment comes from the borrowers own sources. For loan to values less than 95%, the amount put down greater than 5% can come from a relocation subsidy or be a gift from an immediate family member.
The debt service requirements that apply are the same as those applied to conventional mortgages. All foreign held debts will be added to the total debt service calculation while all foreign rents earned will be excluded from the calculations.
Amortization periods can be as high as 35 years in length with fixed and variable rate mortgage terms available.
Please be reminded that the above requirements are for informational purposes only and do not exactly represent any particular lender program.
If you would like assistance with locating and securing an insured mortgage, I recommend that you give me a call so that we can go through your situation together and determine the best course of action.
Click Here To Speak With Mortgage Broker and Insured Mortgage Specialist Joe Walsh
Home Equity Mortgages From Traditional Banks
Home Equity Mortgages have been created for those individuals that can’t confirm their income by traditional methods, but still demonstrate that they possess a strong lending profile.
While the home equity loan programs from traditional lenders such as banks have some variation among the different programs, most of the criteria for qualifying are very similar.
The main distinctions made within these mortgage programs by institutional lenders relates to the subcategory of borrower. Once an applicant determines which sub class they fit into, then the rest of the related lending criteria can be identified.
More common subcategories include Salaried Applicants, New Immigrants, and Self Employed.
For salaried applicants where the borrower cannot confirm all their income available for mortgage payment servicing, the traditional lenders will consider a maximum loan to value of 50%. The minimum 50% down payment as well as the closing costs need to be confirmed prior to the advancement of funds. There can also not be any secondary mortgage charges placed on the property without the prior written consent of the lender.
To qualify as a Canadian immigrant, the home equity mortgage applicant must have landed immigrant status or proof from Immigration Canada that an application has been made and received. The credit profile of this sub category must be supported by an international credit bureau, a letter of reference issued by a banking institution from their country or origin, or proof of cash deposits large enough to cover the required down payment and at least 6 months of scheduled debt serving payments and property taxes. The maximum loan to value tends to be 65%. For new immigrants to secure loan to values up to 75%, the applicant must further provide evidence of liquid assets equal to at least 50% of the total purchase price of the property.
A Home equity loan for the self employed requires the applicant to have a credit score of at least 720, have no previous personal bankruptcies on report, a minimum of three years credit activity reported on one of the major credit bureaus with at least three different trade accounts, and at least two sources of third party verification that the applicant was indeed self employed for a period of at least 3 years. The loan to value for qualified individuals can go up to 75%.
Once again, please keep in mind that the above serves as a generic guideline and should no way be viewed as the specific requirements for all institutional lenders providing home equity mortgages.
If you’re considering a home equity mortgage, or would like to know more about them, I suggest that you give me a call so that we can go over your options together and decide on the best course of action for you and your family.
Click Here To Speak With Mortgage Broker and Home Equity Specialist Joe Walsh
Refinance Mortgage When It Makes Sense
In Canada, the interest rates for new mortgages has never been better going into 2010, so you’d think that the refinance mortgage process designed to secure lower rates would also be most appropriate at this time.
While this could very well be the case, current interest rates are not the only elements that can dictate the ideal time to refinance.
The reality of the refinancing process is that it should only be undertaken if there is a positive economic benefit in doing so. And just because current interest rates are at record low levels doesn’t guarantee such a benefit.
Situations where the refinance mortgage process does likely make a lot of sense is when the mortgage holder currently is working with a floating rate or has a fixed term rate that is near maturity. In these situations, the borrower is able to avoid or minimize the most expensive aspect of mortgage refinancing and that’s a prepayment penalty incurred from paying out the existing mortgage by the newly created mortgage.
On the flip side, mortgages with fixed term interest rates where substantial time is left on the fixed interest period can make the process of refinancing completely uneconomical. That being said, a significant prepayment penalty does not automatically mean that there is no ability to save money through the refinance process.
The calculation to determine the related economic benefit needs to includes the costs of refinancing as well as the cost savings generated by a new mortgage over the time of the chosen interest term. If the overall math works out, then a refinance process would make sense to complete. If the math doesn’t provide a positive result, then other scenarios should likely be considered.
Fixed interest rates can be considerable based on the way they are calculated. Lenders are required to lock in their sources of funds prior to extending a fix interest rate offering. So if a borrower pays out a fixed term mortgage before completion of the term, the penalty serves to cover the cost and profit the lender would have received if the mortgage went to term.
Most residential mortgage prepayment penalties are the higher of 3 months interest penalty or interest differential, which calculates the difference between the existing fixed term mortgage rate and the lenders posted interest rate for the same period of time. This is why the prepayment penalty, in many cases, can eliminate most or all of the benefit of the refinance mortgage process.
The key to determining what makes the most sense for a given situation is to work through your options with a mortgage broker. To that point, I would recommend that give me a call so that we can work through your options together and determine your best course of action.
Click Here To Speak Directly To Mortgage Broker and Mortgage Refinancing Expert Joe Walsh
Construction Loans For Home Renovation
Construction loans can be acquired for finishing your basement, adding a sun room, or completing some other type of smaller scale home renovation.
Because these types of projects tend to require less capital than full scale remodeling or actual home construction, the related construction financing will likely be much more straight forward to secure and manage.
If the project is going to be completed in a matter of a few weeks, then there will likely be one set of disbursements to consider, so a formalized draw schedule will not be required, greatly simplifying the overall loan administration process.
While these types of projects will likely increase the value of the home, the actual construction work is not going to create a significant risk to the long term value of the property making the financing process much simplier.
Typically, small scale home renovations are financed in one of the following four ways: 1) refinancing of the first mortgage; 2) second mortgage with a fixed interest term; 3) home line of credit; 4) an unsecured personal term loan or line of credit.
Depending on your level of income, debt load, and credit rating, you may just be able to get an unsecured term loan or line of credit to complete the work. If the repayment period is expected to be more than one year, you may want to set up a term loan and establish a set monthly repayment that fits your projected budget.
If the costs of renovations are expected to be paid for in less than one year, but an unsecured loan is not available or cannot be secured for a low enough interest rate, then a home line of credit where a second mortgage position is registered against the property would be the likely mortgage financing solution.
For a repayment period greater than one year, a longer term mortgage would be considered as a secured construction loan whereby a higher potential amount of borrowing and lower interest rates can be obtained.
The choice of refinancing the first mortgage or taking out a second mortgage will depend on the net cost comparison of the two options. Whichever solution creates the most net benefit is likely the one you should secure.
As the size and scope of the renovation project increases, so does the requirements of the lenders providing construction loans.
For more information on what construction financing approach you should be taking, I suggest you give me a call so we can go through your situation together and determine the best solution for your project financing needs.
Click Here To Speak To Construction Financing Expert Joe Walsh