need help understanding the principles of owning a home financially...?

Question

i recently bought my 1st home, or rather got a loan (mortgage) for it and i get the basics of owning a home like taxes and insurance, etc. but a few things i am a little unsure about
1. equity what exactly is it and what is a loan against your equity?how many times can you take out your equity and when is a good time to do it, of course i know you have to add to the value of the home to build equity...
2. what does homestead mean when filing taxes? and why does that have an effect on getting your equity out of your house?
3. what is refinancing? and when is a good time to do it? and what factors are considered or help you in refinancing?
4. i have only had my house 14 months but already my loan has changed 3 times from the original lender, is this normal and what is it all about?

Answer 1

Congratulations on buying your first home! Owning a home is a good, if major investment. The key to it value is equity. In terms of home ownership the equity in your home is the difference between the market value of your home and the outstanding loans on your home. For example, let us say you bought your house a year ago for $200,000. Let's say you made a down payment of $40,000 and got a mortgage for the remaining $160,000. Now, during the last year lets say that real estate prices in your neighborhood rose 10%, plus through your monthly mortgage payments you have reduced your home loan by $6,0000. So lets put this all together; due to the rise in real estate prices your house is worth $220,000 (remember they rose in your neighborhood by 10%,) and outstanding mortgage is $154,000 (you have been paying it off,) so subtract the mortgage from your market value (220,000 - 154,000 = 64,000/
so your equity (answer to #1 - the monetary value of difference between the market value of you home and outstanding debt on the home) is $64,000. This equity is what you can use to get a second mortgage. Sometimes people do this in order to undertake major improvements to their home. For example, if you wanted to add a solar heating system to your home, this could cost about $50,000. Very few people have $50,000 sitting in the bank, but as we noted above you have $64,000 in equity in your (imaginary) home. You can use this equity to go to a bank and get a second mortgage for $50,000 (this is called a loan against your equity.)
Now once you sign a loan agreement, you are borrowing money against the value of your home and paying interest on that money. But interest rates change. So perhaps 3 years from now, interest rates have dropped. Your original mortgage was (we will pretend) at 6.5% and your (imaginary) second mortgage (that you used to install solar heating) was at 7%. But over these last three years interest rates have dropped (because we elected a Democratic president who rebalanced the budget and began to pare down the National Debt,) so now home loans are offered at 6%. You go to the bank and "refinance" your house by getting a new loan (at a lower interest rate) that allows you to pay off your two older loans. Sometimes, when owners refinance they also "take out" equity by increasing their mortgage, ( remember on your "imaginary" house you added your solar heating which adds value, you continued to pay off your mortgage, which decreases your debt, and, perhaps, real estate values continued to rise in your neighborhood, so when you come to refinance, the market value of house may have grown to $290,000 when you refinanced, so you may decide to have a $200,000 mortgage on your home.)
so in conclusion:
1) equity is the difference between the market value of your property and the outstanding debts on your property.
2) homestead is the legal term (from the old Homestead Act of 1862) for your title to your property.
3) refinancing is when you want to get a new loan (usually at better terms) on your property in order to: a) retire older loans at higher interest; b) "take out" some of the equity you have built in your home by paying off your loan and having property prices rise.
Here is a site for California (I don't know where you are) for preparing your homestead declaration:
https://www.1stoplegalforms.com/FormLs/LFL_0101.asp

And finally, yes it is normal for loan papers to be "sold" at discounted prices among financial institutions (this is exactly how a lot of giant finance house like Lehman Brothers or Goldman Sachs started out buying and selling loan papers.) This sale cannot change the terms of your loan, only the final receiver of the loan money. There is an especially big market in second mortgage papers. Companies like Fannie Mae make a lot of their money in this trade. Anyway, sorry for being so long, I hope this helps you a little, one word of advice - for your own economic interest, do not totally mortgage your property (always keep a margin of equity) this leaves you some "emergency" collateral, and helps ensure your title to the property. Good luck.

Answer 2

1. Equity is the amount of money your house is worth if you sell it now, minus what you owe on it. If you could sell for 150, and owe 100, then 50 is your equity. You can get second mortgages against your equity as long as you have some - but now you have to pay your first and second mortgage to keep your house. You do not have to improve the home to have equity, as long as housing prices rise.
2. Homestead is something you file with your state or county. You get a break on your property taxes if you are living in the house rather than having it as a rental. If the house is your homestead (where you are living) lenders think you will be more likely to pay back the note.
3. Refinancing is what you do to get a lower payment - generally because the interest rates have dropped from when you bought your home, or because you have paid for a long time and want a lower payment, and are willing to pay another 20 years rather than pay off in 15 like you would otherwise.
4. Lenders buy and sell mortgages all the time. I think 3 times in 14 months is a lot, but all it changes is who you make the check out to.

Answer 3

I want to answer that # 4 question first...

These mortgage companies keep buying each other's mortgages. That is why you don't see the same company for too long. They make money on mortgages by selling them to bigger banks or other financial companies. It became a joke how they manipulate your mortgage expenses all the time. It has to do a lot with the bigger banks getting bigger and bigger all the time.

So, when you take out a mortgage, within a month another company comes along and buys that mortgage. Your first company makes a profit on the sale of that mortgage. The next company gets bigger by adding it to it's books...and so on...with no end in sight. Amazing. It's become the only game in town

Now, back to the first three questions:

Many people today look to their home for additional income seeing the sorry job situation out there, and that is sad.

So, you have to wait awhile to see your home to (hopefully) increase in value, so you can borrow against the difference between your outstanding mortgage and the higher home value (from an appraisal, which will most likely cost you several hundred dollars to do).

Many people have to use home equity loans to finance expenses like their kid's education, home additions (they usually increase the home's value), or other big expenses.

A homestead is simply another word to use for homeowner.

Refinancing is the pain in the neck folks who keep bothering you at dinner time to try to get you a lower interest rate on your mortgage. Bear in mind, income taxes have a lot to do with home ownership, so beware anyone wanting to give you a very low rate, it may not work for your tax situation.

That's about it. Good luck!

Answer 4

Boy, you are not afraid to ask! (that's a good thing)

1. Equity is that portion of the home that represents personal value to you. The appraised value of your home, less all the obligations that you have against it, represents your equity. A loan against your equity is money given to you by a lender, using your personal stake, or equity in the home as collateral. For example, if you have a first mortgage of $100,000, and an appraised value of $200,000, you would have an equity of $100,000. A lender would typically loan you up to 80% of the home's value, or $160,000, so you could theoretically get an equity loan for $60,000. There is no limit to the number of times you can take out loans, but each transaction has a price tag. The lender will charge "points" or a fee for the transaction. Depending on several factors, like the amount of time you expect to keep the home, it may or may not be a good idea. It is tempting to suck out that equity, but wise stewards let it grow, knowing that the future is never certain.

2. Homestead, or the homestead exemption, is designed to give property tax relief to those whose property is their primary residence. Your homestead exemption, which must be filed on an annual basis, allows you to reduce the taxable value of your home by a certain amount ($25,000 for example) and saves you on your annual taxes. The money for your property taxes is ususally included in your mortgage payment, so your primary lender doesn't have to worry about a tax lien. Lower taxes means less obligation, so in a lender's eyes, you are entitled to borrow that much more money.

3. Refinancing is a process by which one lender buys out the previous one. The usual incentive for this process is a lower interest rate, or cashing in on the increased value of the home, or both. Refi can be very advantageous if the rate is much lower, and/or you have accumulated high-interest debt. The process is not free; the lender will charge a fee for the transaction that for the most part is added on to your new mortgage. Consumer debt that is costing you $1000 a month can easily be reduced to an amount of $200 or less when folded into a new mortgage. Factors to consider are the rate offered, the points and fees charged, the length of time you expect to stay in the home, and your long-term ability to meet the obligation.

4. To you and I, our mortgage is a big deal. To lenders, it is a tradable commodity, and within the rules of banking, may bounce around from one end of the planet to another. I have not been negatively or positively affected by these transactions to date.

Let me leave you with this thought: Real estate is not the "sexy" investment it once was, and there will be some upcoming shifts in the market that could affect your appraised value, and subsequent equity position. This would be a good time to be conservative with matters of equity loans.

Answer 5

1. Equity = the value of your home less the amount of debt
As you pay off your loan, you increase your equity. Similarly, as the value of your home increases, your equity increases.

2. YOu may be talking about a homestead exemption. Some taxing jurisdictions allow some part of the value of your home to be exempt from property taxation. For example, if you have a $100k house & a homestead exemption of $20k, you tax is the tax rate times $80k (instead of $100k)

3. Refinancing- replace your old mortgage with a new mortgage. You do it when the present value of getting a new mortgage is less than the present value of your existing mortgage & other obligations if any.

4. It is normal. the secondary mortgage market- where owners of existing mortgages & buyers of those mortgages transact- is one of the most active markets around. It is the reason why so many people can borrow so cheaply to buy their homes.

Answer 6

Equity is the difference between what the house is worth and how much you still owe on it. You can take out your equity any time you want and as often as you want, but there is a cost to it every time.
you do it.
I would try to never to use it, it only delays the the time it takes to pay off your house. On line go to a mortgage web site and use there mortgage calculator and play with the payment size. You will see how a extra 20 or 30 $ a month can take YEARS of the time it takes to pay off your Mortgage. The only time it pays to re fiance your mortgage is when you can get a lower fixed rate interest rate. Normally it has to be a full point to make it worth the new closing costs.
My mortgage changed twice in the first 6 months.
Good luck

Answer 7

1. Equity is the difference between the market value of your house and the loan amounts

2. Never heard of homestead

3. Getting a new loan to replace the current one. Kind of like an election where you vote out the incumbent and put a new one in office.

4. Yes loans are sold often to different servicers

Answer 8

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Answer 9

I think threre are alot of wuestions you have, and to be honest..I could write 4 pages to answer, but i think it would be smarter to just talk to you by phone...

My name is Jason Fry, I am a licensed Mortgage banker with Providential Bancorp.. I assist people every day with transactions similar to what you are asking about.. (home purchasing, refinancing)

It sounds to me the mortgage officer you worked with when buying your home didn;t thoroughly explain things for you...

I would be happy to give you all the necessary informaiton to answer your questions, and also be able to assist you in financing if you choose to refinance...

You can call meat 312-264-6448, or email me at [e-mail]

Good Luck, and dont hesitate to call, im a professional, and its what i do every day!!!

Jason Fry
Licensed Mortgage Originator
Providential Bancorp
312-264-6448

Answer 10

Hello -

I'm very impressed with the depth of your questions, and I'm also very glad to see that the community of Yahoo answers have responded in such detail.

There's a book by a gentlemen named Douglas Andrew called Missed Fortune 101, I'd like to suggest you read it. It is an enjoyable read and covers much of what I will briefly touch upon.

May I break from responding to questions 1-4 as they inter-relate so much, I'd like to cover them all in one response:

The reason that you've had your house only 14 months, but already the loan has changed 3 times is that it is an Adjustable Rate Mortgage (ARM).

It’s unfortunate that many borrowers are subjected to, what I consider, uncaring or “hungry” loan officers who really do not appear to have the customer’s interest at heart. In refinancing relatively new and even seasoned homeowners, I’ve seen too many abuses in loan charges and the types of loan programs in which borrowers are placed.

Included in “loan programs” is the requirement that the borrower pay a financial “penalty” for paying off their loan balance before a prescribed time. This is normally referred to as a “prepayment penalty”. The amount of this extraordinary fee is usually six month’s interest on 80% of the balance. For example, if a customer had a 9% loan with a $150,000 balance, the prepayment penalty would be $5,400 (.09 x 150,000 x 0.80 x 0.5). That sum would normally be added to the usual payoff balance.

The 9% rate may seem high to you at this time but usually loans with prepayment penalties are in the “sub-prime” and other non-conforming loan categories. Customers whose credit, income, or other qualifications are not up to par can obtain financing only in those loan categories. The 9% rate is actually on the low side -–rates of 10 to 12% are common on many of these loans.

I am not begrudging a lender’s economic need to include a fee for early repayment. After all, there can be significant up front, continuing expenses paid by the lender on these loans, and some form of recovery is justified. My disillusionment rests with the borrower not being fully informed about the details of the pre-payment penalty and its affects on future refinancing.

I have seen too many customers who did not even know they had a pre-payment penalty, or even where to look for the wording in their loan papers; or even how to calculate the amount.

I have seen too many customers on a 2-year fixed low rate with a 3-year pre-payment penalty, thus financially forcing the customer to remain in a loan for an additional year at an interest rate that has jumped 2 to 5 percent over the fixed rate. Do some lenders offer loan originators an incentive for putting a borrower in the above scenario? Yes, they usually do.

I have seen a Note document, which had a $500 “fee” for early payoff. There was none of the usual “Borrower’s Right to Prepay” type captions, just one sentence about the early pay-off fee buried in the note wording.

The prepayment penalty lasts for X number of years.
If the loan is refinanced before that date, there is a charge of Y dollars. The loan officer should run through a sample calculation.
The prepayment wording appears in the Note document, and to have the escrow officer locate the wording for the customer at closing. (Sometimes the penalty clause is obscured under an awkwardly worded caption, or appears an appendix to the Note document.)
The prepayment fee of $_____ may prevent them from refinancing to a lower rate, and explain why.
If they have the type of loan that is fixed at a relatively low rate for 2-years, that their prepayment penalty term may exceed the fixed rate term and place them in a high adjustable rate for the remainder of the prepayment penalty term. (These loans are called 2/28’s. After the fixed term of 2-years, these loans turn adjustable and have rates based on a high margin plus potentially very high index.)

Please check your loan documents, or call the person whom placed your mortgage and ask if you have a prepayment penalty. Also, you will want to see which index your ARM is tied too, and this would let us know if you should considering changing programs.

HELOC ( Home Equity Lines of Credit) rates have climbed to an average of 9.5% as the Fed grinds rates higher. Many have large balances on their HELOC, even if the rate on their current first mortgage is lower.

Here briefly are two of the indexes that your ARM might be tied too.

LIBOR (London Inter-Bank Offered Rate) loans move with our Fed Funds Rate, so they will pop up early in the year. MTA (Monthly Treasury Average) based loans will continue to creep higher, but stay well below LIBOR.

And speaking of ARM loans, Greenspan expressed a concern about the possible overuse of "exotic" ARM products, such as interest only loans or option ARM's. Yet when these loans are originated responsibly by an educated originator, they certainly can be a good fit for some clients...determining "suitability" of products for your clients is key. Understanding how these products work and explaining them properly remains very important this year as regulators may begin to analyze these loans much more carefully. Additionally, remember that 40% of all originations in the past several years have been ARM loans. Many hybrid ARM loans may be coming due soon, and LIBOR-based loans are seeing their rates moving higher as well. This provides a great opportunity for us to congratulate our clients on how much money has been saved using that strategy over the past several years, but help them consider if a new strategy may make sense for them now.

Bottom line on the Fed: The Fed Funds Rate hikes should end in 2006, with a possible turn towards rate cuts by year end or in early 2007.

It is important for you to know that as your home appreciates, it creates equity. Therefore if you take that equity out, it does not effect the value of your home.

In my opinion, you're better off taking as much equity out of your home and placing it into safe, secure investments. While I do not believe there's a housing bubble, and I will explain why in a moment, certain sectors might be different. The easiest way to safe guard yourself is to check your local job growth and unemployment forecasts. If jobs are available, and people are working, they will continue to buy homes.

Bubble talk

We will enter the fifth year of the anticipated housing bubble. Yes, for the past four years the media has beat the drum on a looming housing bubble. But all the media bubble hype has only served to hurt those buyers who were scared off from purchasing a home earlier and now see how much more those homes cost.

So is there a bubble? The simple answer is no. But some areas may cool a bit after a torrid run up, especially in the top tier of their price category.

However, a healthy jobs market and low mortgage rates will sustain a solid overall Real Estate market. Don't look for a bust in prices…just a slower rate of appreciation. I expect most of the country to see home prices appreciate by 4% to 7%.

But remember, unlike stocks, home prices do not have specialists or market makers. So many people pay or ask too much for their home. It is funny to see someone buy a home for tens of thousands over the asking price and then wonder why their home has not appreciated. Moreover, some purchase their home for say $300k and then try to sell it a year later for $400k. When no one bites, they say the market is soft. Bottom line, buy your home smart or sell your home reasonable.

Rates will rise a bit due to some inflationary pressure, but not too bad. Keeping rates at good levels will be continued foreign demand and asset reallocation. Our bonds look pretty good to foreigners, who are offered lower returns in their home country. And the Dollar has been stronger and may offer some bonus returns as the greenback makes further gains against most major foreign currencies. In fact, foreign buying accounts for almost half of bond purchases in the US.

When should you refinance and when is a good time to do it?

Do you have kids? Have you started a fund for their college? What about your retirement? When would you like to have the option to reach your freedom, when you could retire if you want too?

Your home is one of the largest financial transactions in your life time. It should be a part of your overall financial plan, not an after thought. That is why early on I suggested you read Doug Andrews book Missed Fortune 101.

It might be time to refinance right now, depending on your current loan and goals.

It is so wonderful that your questioning and learning what you should do next. Empower yourself and move forward. I have a website that provides nothing but free informtion to people like yourself at http://freemortgageinformationsoutherncalifornia.com

It is a totally free resource.

Kindest Regards,
Darren Meade