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Home Loan FAQ - HLP

Home Loan FAQ

For most people, a home will involve the most significant financial transaction of their lives and becomes the centerpiece of our family life. Be sure to have all the information you need as you contemplate the obligations you are committing to with a home loan.

Mortgage interest is interest paid on a loan secured by a person’s primary home or a second home. The person or persons who are legally obligated to make those payments and make those payments are eligible to deduct the mortgage interest paid. The discussions leading up to the recent change in the tax laws threatened the home loan deduction, but currently, up to $1 million is deductible for a married couple and up to $500,000 for a single individual. There are special rules for some second home deductions that you may need to explore.

As the name implies, an assumable loan is one the buyer of property takes over from the seller with the lender’s approval. Not all home loans are assumable. Typically, only FHA and VA loans qualify. The buyer becomes obligated to make all of the payments the seller initially agreed to, just as if the buyer had initially secured the loan. There can be advantages or disadvantages with an assumable loan based on the specific circumstances at the time of the proposed transaction. Some issues to consider might include ensuring the lender releases the seller from future obligation, the current interest rate versus the existing rate on the note, and the fair market value of the home versus the amount of the mortgage.<

Do Home Loans Use Simple Interest?

The simple answer is yes, but the details are somewhat confusing. What the mortgage industry refers to as a “simple interest loan” is different from the conventional loan with which most people are familiar. With a traditional loan, payment is due at an established date each month, such as the first or 15th, for example. Each payment is the same, but differing amounts go to principal and interest as each month progresses. The simple interest loan calculates interest on a daily basis, so there can be a relatively large disparity in interest paid if payment were made, say on the fifth day of the month versus the 29th. This type of loan can be beneficial for those who prefer to and can pay their mortgage in bi-weekly installments.

Are Home Loans Compounded Monthly?

No, but there is one exception. A negative amortization loan adds unpaid interest which gets added to the principal. The payment due is less than the interest charged for the given period. One should enter into such an agreement only with extreme caution and a full understanding of the potential repercussions.

Are Home Loan Rates Going Down?

Anyone who has even a peripheral knowledge of finances understands that interest rates are cyclical. In essence, the question becomes: what is the current supply and demand for money in the economy? Recent years have seen unprecedented conditions that led to extremely low home loan rates. Although those rates have been gradually creeping up, they are still near historic lows. One major factor affecting rates is the action by the Federal Reserve Board, the bank in charge of establishing the country’s monetary policy. All indications are that there is nowhere for home loan rates to go but up.

Are Home Loans Non-Recourse?

If you want to distinguish between a recourse loan and a non-recourse loan, you need to look to the remedy the lender has in the event of default on behalf of the borrower. By the terms in a recourse loan, should the value of the home at the time the loan is called in be less than the outstanding amount due on the mortgage, the lender can seek to be made whole again by attaching other assets of the borrower, such as bank accounts for example. In contrast, with a non-recourse loan, the lender is limited to the value of the collateral, i.e., the home. The lender has no other remedy.

The following states are considered non-recourse by state law: Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington. If you live in other recourse states, look to the terms of your loan to determine your potential exposure.

Are Home Loans Hard To Get?

Without question, things are not as lax as they were during the heyday of the most recent housing boom. There is a lot of paperwork involved, and for many people, this alone makes getting a home loan a daunting task. But if you have a stable job, a good income, good credit, and either equity in your current home or another source of cash for a down payment, you should not face any significant obstacles. Of course, the more favorable those items are, the higher the likelihood you are to qualify for better loan terms.

Are Home Loans Public Record?

Real estate transactions are public record. Consequently, information concerning the sale of a property, the identity of the buyer and seller, and the amount of the mortgage is accessible to anyone. However, most states do not require the recording of real estate transactions, so the possibility exists of an unrecorded mortgage. The other specifics of the home loan, such as the interest rate or monthly payment, are not public.

Can a Home Loan be Transferred to Another Person?

A transfer of a loan to another is mostly the same issue as an assumable loan (see discussion above); however, the question often arises in everyday family situations. In a divorce, for example, one spouse, typically the wife with custody of the children, is awarded the former family home by the divorce court, and the husband receives other assets of similar value. As the husband no longer has an ownership interest in the house, he wants to transfer his obligation on the home loan to his wife alone, but the mortgage company says no. In many cases, the spouse receiving the marital cannot qualify alone to refinance.

The general rule for traditional home loans is all renovations and repairs must be complete before the time of appraisal, but there are a few options for people who are looking to make some repairs on their property. The FHA -insured Section 203(k) loan allows buyers to add renovation costs to their home loan. Additionally, Fannie Mae has a HomeStyle Renovation mortgage that enables financing rehab costs as well. Of course, with sufficient equity in the property, homeowners can use a home equity loan or line of credit to effect the necessary changes.

Can a Home Loan Include Closing Costs?

The loan can include closing costs as long as the value of the home with closing costs covered meets lender guidelines. Although the apparent advantage is having to be less out of pocket for the home purchase, the 2 to 5 percent typical for closing is that much more on which you will be paying interest. Loan-to-value ratios are essential in calculating the need for premium mortgage insurance.

Can a Home Loan Be Transferred To Another Bank?

To the extent you can qualify for a home loan from the new bank, the answer is yes. However, your existing loan documents may have some conditions that require you to have had the loan for a specified period before the lender can make any transfer or charge an assessment for an early payoff.

Can a Home Loan Be Canceled?

Once a home loan is funded and recorded, it is final and not rescindable. One possible exception could be the discovery of fraud in the application process.

Can a Home Loan Be Paid Off Early?

In the vast majority of conventional home loans, the borrower may pay the loan off early without any pre-payment penalties.

Can a Home Loan Be Taken Jointly?

Loans can and often are taken jointly with one or more other persons. One primary consideration to be aware of is the liability of each is for the entire loan amount, not merely his or her ownership percentage.

Another issue is some lenders do not offer loans to parties that are not blood relatives or related by marriage.

The dream of home ownership remains strong despite all the ups and downs in the economy. Getting your foot in the door, especially if you’re a first-time buyer, requires a solid understanding of the obligations and benefits of a home loan.

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