Mortgage Lowdown

– Pushpa Sathish, Staff Writer

Come February, and mortgage rates in the United Kingdom are set to rise by 0.25 percent following a rise in the base rate set by the Bank of England. Halifax, the nation’s largest mortgage lender, announced that its standard variable rate (SVR) for new customers will take effect immediately — 7.25 percent as opposed to the old 7 percent. Halifax’s customers on fixed-rate deals have nothing to worry about though — the new rates do not affect them in the least. Halifax follows the example set by Nationwide, the UK’s biggest building society, which is increasing its base mortgage rate from 6.49 percent to 6.74 percent. Both savings rates and tracker mortgage rates are also expected to go up along with the base rates. Money Guardian reports:

Stuart Bernau, executive director at Nationwide, said: "The changes we are making to our mortgage and savings rates are relatively straightforward and simple. We are pleased to be able to act quickly to make it clear to our members how they are going to be affected following the increase in the Bank of England base rate."

– By Pushpa Sathish, Staff Writer

Piggyback loans or mortgage insurance? That will be the question on most homeowners’ minds in 2007 because of a new law introduced by Congress, according to which mortgage insurance will be tax-deductible in the new year. Bankrate estimates an annual savings of $351 for a homeowner with good credit, in the 25 percent tax bracket, and a $180,000 mortgage. Collectively, homeowners across the US stand to save $91 million when they file taxes in 2008, according to the mortgage insurance industry.

Before you rejoice as a homeowner, let me add that the law comes with various strings attached.

• It has to be renewed by Congress next year for it to be applicable in the tax years 2008 and after.
• A full deduction comes only with an adjusted gross income of $100,000 or less.
• The deduction holds good only for those mortgages that are closed in 2007. Loans that are taken out with mortgage insurance in 2006 and before will have to be refinanced in 2007 to qualify for tax deduction on the premiums.
• According to Bob Walters, chief economist at Quick Loans, the new law is beneficial only if you itemize deductions. For a standard deduction, homeowners would have to have a mortgage of at least $130,000 to pay enough interest.

All things considered, homeowners now have the choice between  piggyback loans and a mortgage insurance as options to cover the risks on loans taken with their homes as collateral. Piggybacks, which have so far enjoyed the advantage of being tax-deductible, now have a competitor in mortgage insurance, with homeowners being left to judge for themselves as to the better alternative.

If you find a loan that seems almost irresistible, then tread carefully. Such loans usually come with caveats that are invisible initially but will drain you of your money slowly. Here are a few tips to help you understand how to get away from sub-prime loans:

If it’s too good to be true, then it ISN’T true: Your lender may make you an irresistible offer. Don’t accept it if you cannot afford the home. Tax advantage or not, remember: Always bite off only as much as you can chew. Never more.

Sell it: This is a painful and difficult decision to make. But if you have been forced into a corner thanks to that sub-prime loan you took and have no option left, you must not let sentimentality come in the way. If you can no longer afford your home, try to sell it before your lender forecloses. You may find that in the brief time you’ve lived in that house, property prices have appreciated, allowing you to repay your loan and still have some money left over.

–By Priya Jestin, Staff Writer

Let me confess — I’m tired of my debts. I wish I could pay them all off and be free. I don’t want to pay interest on my home loan, car loan, mortgage… the works. And it’s not like I cannot pay off at least some of my loans. So, why am I cribbing?

Because paying off my mortgage may not be such a good idea after all. Experts say that our home is like a piggy bank. The bank is full with money we’ve already put in. And we can take out this money with a home equity loan or we can put in more by taking an additional mortgage. And if you still think you have enough money to pay off your loan, you could try putting that extra money in a conservative investment.

We all know that home prices have shot through the roof and for most of us it is practically not possible to own a home. But it is only when these facts are expressed in figures do we realize the enormity of the situation. Today, the county’s median family would have to spend 54 percent of its income to afford the county’s median home. In 2000, the figure was 26 percent.

And the scariest part is that the scarcity of affordable housing is a deepening national crisis. And this crisis doesn’t cover only for inner-city families on welfare. The problem now affects people in higher income brackets and has even moved to the suburbs. One-third of Americans now spend at least 30 percent of their income on housing. The working poor have it even worse as half of them spend at least 50 percent of their income on rent! Washingtonpost.com reports:

Yet nobody in national politics is doing anything about it — or even talking about it. For most of the past 70 years, housing was a bipartisan issue. In recent decades, its association with urban poverty made it more of a Democratic issue. But now it is simply a nonissue. The current crunch falls hardest on renters in Democratic-leaning cities and metropolitan areas, but Democrats have ignored the issue as resolutely as Republicans. Neither Sen. John F. Kerry (D-Mass.) nor President Bush even bothered to propose affordable housing plans during the 2004 presidential campaign.

Read more: The Housing Crisis Goes Suburban

Fine you know how much your mortgage hurts your pay packet every month or how much money your gas is guzzling away. But do you know what percentage of your income should actually be allocated to these expenses? Chances are you probably don’t and are just paying money as and when the charges come up. And believe me, if you are deep in debt, probably is one of the biggest causes is — your inability to budget your income.

It is not enough to pay for services and goods. You should have an idea of how much is enough for housing or transportation. A good budget will even help you know if that home you want to buy will fall within your budget or whether you should go in for a lower budget home. But first you must know how to create a proper budget. Experts across the country agree that most consumers don’t know how to create a realistic budget.

One of the first things you must do is use the percentage method of calculating your mortgage amount. Most people usually allocate amounts subtracting from total income in lieu of percentages. This is quite frustrating. What you can do is use percentages as a guideline. For instance, your rent or mortgage (including insurance and taxes) should be about 27 percent of your income, minus taxes. Your outer limit should be 35 percent. If you are planning to buy a home whose mortgage rate will come to more than 35 percent, you should probably be looking around for a cheaper home.

Remember, even your mortgage lenders uses your gross income to determine how much house you can afford. So if you bring home $50,000, and you want your mortgage to stay at 27 percent, your mortgage should be about $13,500 a year, or $1,125 a month. This percentage is only a guideline and it all boils down to your comfort level.

Second mortgages and home-equity credit lines are on the upswing in Michigan, as they are across the nation. But here, they come at a dangerous price, as median property values in the state aren’t increasing as they are elsewhere in the United States. Freep.com reports:

The Census Bureau released data for publication today showing that Michigan’s median home values rose 19% in the last five years, compared with a national average of 32%. Meanwhile, 19% of Michigan homes have a second loan on them. Nationwide, 17% do.

Read more: CENSUS 2006: Home owners risking big debt

Are non-traditional mortgages good? Many people would have us believe that they are a prime cause of ruin and that if not managed properly, they can lead to your financial doom. Nothing could be further from the truth! Consumers today are an educated lot. They know the options available to them and make an informed choice when they go in for interest-only loans instead of traditional mortgages.

The best thing about an interest-only loan is that it gives you flexibility. During the first decade of your loan period, you can get away with paying only the interest part of the loan. That means, you get this long period to build up on your finances and allocate them to more necessary expenses that deliver better rates of return.

We are such a gullible lot that it doesn’t take too much effort on the part of a unscrupulous lender to fool us. This happens especially when lenders advertise rates, where they get away with all kinds of what most people would call "smoke and mirrors". Townhall.com reports:

Instead of advertising a rate that is under the market and stating it will cost one point (one percent of the loan, which is used to buy down the rate), they will smile and tell you the APR instead. They will not advertise a rate of 5.75% with a cost of one point, they will say 5.75% with an APR of 5.99%. Did you know that meant you were going to have to pay a point? Probably not.

Read more: Words today don’t always have a meaning

Most people who own a home first think of cashing in on their home’s equity when in need of funds. There are two ways you can cash in on your home — you could consider a second mortgage or a home equity loan. The problem arises when you cannot decide which of these types of financing will be beneficial to you. It actually boils down to your exact needs and your repayment capacity.

If you have a one time big expense to cover, you are probably better off with a second mortgage. However if you have recurring expenses, then you might not want a second mortgage because a home equity loan will work out better for you. The second mortgage is best for large amounts of money at once while recurring expenses like tuition are better paid for with a home equity line of credit. Bestsyndication.com reports:

You will also need to consider your ability to repay and which option will suit you best. A second mortgage can be financed similarly to your first mortgage, while the home equity loan can be paid back more like a credit card.

Read more: Second Mortgage Vs. A Home Equity Loan