What Is a Parent PLUS Loan?

Parent PLUS Loans | Are They Right for You? – SmartAsset

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Paying for college is a challenge, and rising tuition costs certainly don’t help. According to College Board, the average cost of a four-year private college has increased by more than $3,000 over the last five years. Scholarships, grants and work-study programs can help bridge the gap, but it’s best to have a robust savings to back you up. Since some parents don’t want their child to take on too many loans themselves, the federal government created Parent PLUS loans. They stand out from other programs thanks to a fixed interest rate and flexible repayment options. Here we discuss what exactly a Parent PLUS loan is, how it works and whether you should get one.

Parent PLUS Loans Defined

Let’s start with the basics. A Parent PLUS loan is a federal student loan offered by the U.S. Department of Education Direct Loan program. Unlike other Direct Loans and most student loans in general, Parent PLUS loans are issued to parents rather than students. Also eligible for issue are stepparents, dependent graduate students and other relatives.

Whoever takes out the loan holds the sole legal responsibility for repayments, regardless of personal arrangements. This is very different than a parent cosigning his or her child’s student loan. The maximum PLUS loan amount is the cost of attendance minus any other financial aid received, which could equal tens of thousands of dollars per year. For PLUS loans distributed between July 2018 and July 2019, the interest rate is 7.60%. As such, the decision to get a Parent PLUS loan should not be taken lightly.

Who Should Get a Parent PLUS Loan?

According to the Office of Federal Student Aid, about 3.5 million parents and students have borrowed a collective $83.9 billion using Parent PLUS Loans from the federal government. To qualify for a Parent PLUS loan, you must be the parent of a dependent undergraduate student, dependent graduate student or professional student enrolled at least half-time in a participating college or university.

You and your child must also meet the general eligibility rules for federal student aid, such as proving U.S. citizenship and demonstrating need. Male students must be registered with the Selective Service. As with other Direct PLUS loans, you usually can’t secure a Parent PLUS loan if you have an adverse credit history. The Department of Education won’t approve a borrower with charged-off accounts, accounts in collections or a 90-day delinquent account with a balance of $2,085 or more.

You shouldn’t apply for a Parent PLUS loan just because you qualify. In fact, it’s usually best if a student gets all of the Direct Loans he or she is eligible for first. These loans tend to have lower interest rates and fees. A parent could always help his or her child with student loan repayments, anyway.

You should really only apply for a Parent PLUS loan if your child needs more financial aid than he or she has received from other sources. It’s also important that both students and parents are on the same page about expectations and repayment plans.

Pros of Parent PLUS Loans

Flexible Loan Limits

Identified generally as “cost of attendance minus any other financial aid received,” Parent PLUS loans can be used toward tuition and fees, room and board, books, supplies, equipment, transportation and miscellaneous personal expenses. They do not have the same limits imposed on them as other federal student loans do. This makes Parent PLUS loans a great supplement if you have a mediocre financial aid package. Of course, you should still be cautious not to take on debt you won’t be able to pay back. Our student loan calculator can help you decide how much you should borrow.

Fixed Interest Rate

As with other federal student loans, the interest rate on a Parent PLUS loan stays the same throughout the life of the loan. It won’t alter based on national interest rates, the prime rate or other factors. Every July, the Department of Education sets the Parent PLUS loan interest rate based on that year’s 10-year treasury note. The fixed interest rate makes it easy for borrowers to predict expenses, make both short- and long-term financial goals and set a budget.

Multiple Repayment Options

Parent PLUS loans are eligible for several different repayment plans, one of which should work for you. This flexibility makes them one of the most accommodating programs for funding a college education. Check out your choices below:

  • Standard Repayment Plan: The most common option, which allows for fixed monthly payments for 10 years.
  • Graduated Repayment Plan: This starts with small payments that gradually increase over 10 years. In theory, this should coincide with growing income levels.
  • Extended Repayment Plan: This provides fixed or graduated payments over 25 years, as opposed to 10.
  • Income-Contingent Repayment: Borrowers pay 20% of their discretionary income or what they’d pay on a 12-year plan, whichever is lower. They also qualify for student loan forgiveness if they still have a balance after 25 years.

Cons of Parent PLUS Loans

Loan Origination Fee

Interest isn’t the only expense you’ll encounter with Parent PLUS loans. There’s also a loan origination fee. The fee amount is a percentage of the loan, and it varies depending on the disbursement date of the loan. For loans after October 1, 2018 but before October 1, 2019, the fee is 4.248% of the loan amount. That means that if you borrow $30,000 using a Parent PLUS loan, you’d pay a fee of $1,274.40.

This fee is proportionately deducted from each loan disbursement, which essentially reduces the amount of money borrowers have to cover education-related costs. Since many private student loans don’t have a fee, it’s worth looking into private options to determine which loan has the lowest borrowing costs.

Relatively High Interest Rate

Currently set at 7.60%, Parent PLUS loans certainly don’t have the lowest rate out there. If you have strong credit and qualify for a better rate, you might consider a different loan that will cost less in the long run. Direct Subsidized Loans currently carry a 5.05% interest rate, while Direct Unsubsidized Loans are at 6.60%. On the other hand, some private lenders have interest rates as low as 2.795%.

Limited Grace Period

Parent PLUS loan repayment normally begins within 60 days of loan disbursement, but borrowers have the option to defer repayment. This will last while their child is still in school and for six months after he or she graduates or if the student drops below a half-time enrollment status. Not only is this much less time than borrowers of other loan programs receive, but interest will also continue to accrue during the deferment period.

How to Apply for a Parent PLUS Loan

If a Parent PLUS loan seems right for you, file the Free Application for Federal Student Aid (FAFSA) at FASFA.ed.gov. Depending on the school’s application process, you will request the loan from StudentLoans.gov or the school’s financial aid office.

If you receive approval for a Parent PLUS loan, you will get a Direct PLUS Loan Master Promissory Note (MPN). You’ll have to review and sign the MPN before sending back. Funds are typically sent straight to the school, but you or your child may receive a check. All of the money must be used for educational and college-related purposes.

Tips for Your College Finances

  • Every state in the country offers one of more higher education tuition assistance programs called 529 plans. For many prospective college students and their families, this may be one of the best ways to overcome the incredibly high costs of a university degree. What’s better yet is that you can get a plan from any state, not just the one you reside in.
  • It’s extremely common for financial advisors to have some level of background knowledge in funding for higher education. The SmartAsset financial advisor matching tool can pair you up with as many as three such advisors in your area.

Photocredit: ©iStock.com/monkeybusinessimages, ©iStock.com/zimmytws, ©iStock.com/thodonal

Liz Smith Liz Smith is a graduate of New York University and has been passionate about helping people make better financial decisions since her college days. Liz has been writing for SmartAsset for more than four years. Her areas of expertise include retirement, credit cards and savings. She also focuses on all money issues for millennials. Liz’s articles have been featured across the web, including on AOL Finance, Business Insider and WNBC. The biggest personal finance mistake she sees people making: not contributing to retirement early in their careers.
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NBKC Mortgage Review: An Award-Winning Online Lender

Posted on January 13th, 2021

Today we’ll analyze NBKC Bank, formerly known as National Bank of Kansas City, which a depository that’s also big on home loans, funding billions in mortgages annually.

They refer to themselves as an “award-winning national mortgage company” thanks to their many accolades and numerous 5-star customer reviews.

Additionally, NBKC is a top-15 VA loan lender by purchase volume, and because they advertise less, they can pass the savings onto their customers via lower rates and fewer fees.

They also take part in the Costco Mortgage program. Read on to learn more about them.

NBKC Mortgage Fast Facts

  • Depository bank and direct mortgage lender
  • Founded in 1999, headquartered in Kansas City, Missouri
  • Offers home loans, checking/savings accounts, home equity loans, and more
  • Licensed in all 50 states and the District of Columbia
  • Funded more than $4.4B in home loans last year
  • Most active in California, Texas, and Washington
  • Takes part in the Costco home loan program

NBKC Bank, founded in 1999, is a full-service online bank and direct-to-consumer retail mortgage lender with a couple of branches in the Kansas City area.

They are also a nationally licensed bank and say they’re one of the few mortgage lenders out there that can fund VA and FHA loans in all 50 states and D.C.

This means you’ll likely be working with them from afar unless you happen to live in Missouri, or I suppose Eastern Kansas.

The good news is they have an awesome website that allows you to apply for a mortgage using the latest technology available.

Last year, the company funded about $4.4 billion in home loans, with about half used to finance a home purchase and the remainder for mortgage refinancing.

Roughly 60% of their loan volume was tied to conventional home loans, with about a third VA loans and the rest either FHA loans, jumbo loans, or non-QM loans.

NBKC does nearly 20% of their total loan volume in the state of California, and is similarly active in Texas and Washington.

Interestingly, they only do about 3% of total volume in their home state of Missouri.

How to Apply for a Home Loan with NBKC

  • You can apply for a mortgage directly from their website
  • First you need to create an account with NBKC
  • Then you can complete the app digitally from any device via a mostly paperless process
  • They offer on-site processing, underwriting, closing and funding for quick turn times

NBKC makes it simple to apply for a mortgage thanks to their clean and easy-to-navigate modern website.

To get started, simply visit their website, click on “Home Loans,” then click on “Apply Now.”

You’ll be prompted to create an account by entering your email address. Once verified, you can begin filling out a digital loan application.

They employ the latest technology that allows you to link financial accounts, scan and upload documents, and eSign disclosures and other paperwork.

Alternatively, you can contact one their loan officers directly by using the online directory (research them first if you want to work with one of the highest-rated individuals).

You can also chat with a rep on their website if you have general questions about home loans, or simply call them up on the telephone.

Or start by pricing out a loan on your time on their website, then if you like what you see, you can click on apply.

In summary, NBKC makes it easy to apply for a home loan from any device and their loan officers come highly-rated and with many years of experience on average.

Home Loan Programs Available at NBKC

  • Home purchase loans
  • Refinance loans: rate and term, cash out, and streamline
  • Conventional loans backed by Fannie Mae and Freddie Mac
  • Jumbo home loans that exceed the conforming loan limit
  • VA loans
  • FHA loans

You can get a home purchase loan or a refinance loan, including cash out refinances and streamline refis like the VA IRRRL.

NBKC has most of the major loan programs available, including conforming loans, jumbo loans, and government-backed loans like FHA loans and VA loans.

However, they don’t appear to offer USDA loans, which are used to finance properties in select rural areas across the country.

Of course, the loan types mentioned cover most borrowers, so it shouldn’t be an issue for the vast majority of applicants.

My assumption is they lend on all property and occupancy types, so you should be able to get financing for a condo/townhome, a vacation home, or a multi-unit investment property.

They also offer home equity loans, bridge loans, home construction loans, and real estate lot loans to borrowers in the Kansas City area.

It’s not clear if they offer home renovation products, such as the FHA 203k or Fannie Mae HomeStyle.

NBKC Mortgage Rates

One advantage to using NBKC is the fact that they openly publicize their mortgage interest rates.

So if you visit their website, you can generate real-time mortgage rate quotes for free, without speaking to anyone. And perhaps more importantly, without providing your contact info.

Once you input some basic details, like loan amount, transaction type, and state, it will populate a variety of interest rates with different lender fees.

You should be able to see rates for the 30-year fixed, 15-year fixed, and 5/1 ARM, along with varying discount points or lender credits.

From what I observed, their mortgage rates were fairly competitive, but maybe not the lowest among all online mortgage lenders.

Of course, all loan scenarios are different and you won’t know the exact rate until you speak to a loan officer about pricing and provide all your details.

In terms of lender fees, it’s unclear if they charge a loan origination fee, or processing and underwriting fees.

Be sure to inquire about these as well, as they make up your mortgage APR, which is what you should use when shopping among different lenders.

NBKC Mortgage Reviews

On Zillow NBKC Bank has a super impressive 4.93-star rating out of 5 from a whopping 10,000+ customer reviews.

A lot of the reviews indicated that the interest rate and/or closing costs were lower than expected, which is a plus if you’re looking for a good deal on top of quality customer service.

Similarly, they have a 4.7-star rating out of 5 on the LendingTree platform from nearly 5,000 reviews.

They also have a 99% recommended rate and landed in the top-10 for customer satisfaction in both the first and second quarter of 2020.

On Credit Karma, it’s more of the same, a 4.9-star rating out of a possible 5 from about 600 reviews.

NBKC was also ranked the best mortgage lender of 2020 by Best Company, beating out 156 other home loan companies.

So it appears they’re doing something right in the customer service department.

Additionally, they are an accredited company with the Better Business Bureau and have been since 2004. They currently have an ‘A+’ BBB rating.

To sum it up, NBKC seems to offer a good user experience, excellent customer service, and a good array of available loan programs.

Assuming their loan pricing is also up to snuff, they could be a good choice for your home loan needs.

NBKC Mortgage Pros and Cons

The Pros

  • You can check daily mortgage rates on their website
  • Can apply for a home loan without any human assistance
  • Offer a digital mortgage application (apply from any device)
  • Licensed in all 50 states and D.C.
  • Excellent customer reviews across all ratings sites
  • A+ BBB rating, accredited since 2004
  • Free mortgage calculators and mortgage glossary

The Cons

  • Only two branch locations (in Kansas City area)
  • Do not offer USDA loans
  • Unclear what lender fees they charge
Lock in a lower rate.

Source: thetruthaboutmortgage.com

Coronavirus Mortgage Relief: What Homeowners Need to Know

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Disclaimer

The Coronavirus Aid, Relief and Economic Security Act—also known as the CARES Act—is a $2 trillion stimulus package passed by the federal government. The goal of the CARES Act is to provide relief for individuals and businesses struggling with the financial fallout of the COVID-19 pandemic and resulting shutdowns. One of the components of the CARES Act is coronavirus mortgage relief.

This mortgage relief provides some options for homeowners, with federally backed mortgages, who can’t keep up with mortgage payments. The CARES Act also provides some relief for renters. Here’s a breakdown of some of the relief options available under the coronavirus mortgage stimulus.

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Who Is Covered by Federal Coronavirus Mortgage Relief?

The mandates under the CARES Act only cover mortgages that are federally backed. Federally backed loans are those that are guaranteed, insured or made by the Department of Veteran’s Affairs or the Department of Agriculture or meet one of the following other requirements:

  • They’re insured by the Federal Housing Administration or under the National Housing Act.
  • They have been purchased or secured by either the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation.
  • They’re guaranteed by the Housing and Community Development Act of 1992.

If you’re not sure if your mortgage is federally backed, call your mortgage lender to find out. With around 65% of mortgages protected by the new mandates, there’s a good chance yours is one of them.

Are People Without Federally Backed Mortgages Out of Luck?

The coronavirus mortgage stimulus mandated by the CARES Act doesn’t cover mortgages that aren’t backed by the federal government. But that doesn’t mean your mortgage company won’t offer some relief.

States are also enacting relief plans, and many include working with mortgage providers to provide some relief for homeowners. And many mortgage companies already have contingencies for working with people who are struggling with mortgage debt. You may be able to apply for relief that lets you skip a few months of payments or restructure your mortgage to make it more affordable. Contact your mortgage provider to see what is available for your situation.

Another option to consider is refinancing your mortgage to get potentially better rates. That can drop the total monthly mortgage payment.

What Should You Do If You Can’t Pay Your Mortgage Because of COVID-19?

The Consumer Financial Protection Bureau notes that it’s important to continue paying your bills, including your mortgage, if you can. If you’re struggling to make those payments because of income loss due to COVID-19, however, you should contact your lender as soon as possible. Waiting to deal with the problem can result in late payments, extra fees and negative items on your credit report.

What Mortgage Relief Is Offered Under the CARES Act?

The CARES Act provides two protections to help homeowners who are dealing with financial distress because of the coronavirus and related economic issues. The first is a foreclosure moratorium. That means that lenders of these loans cannot take action on foreclosures or begin new ones for at least 60 days from the time the act was signed in March 2020. This protection is also only available for federally guaranteed loans.

The CARES Act also provides a right to forbearance for covered mortgage holders. Forbearance is the option to stop making scheduled payments on a loan without incurring negative consequences. In this case, the payments would likely be added to the end of the loan, so you would simply pay them later.

You can request a forbearance of 180 days. You can also request a second forbearance of 180 days if you are still experiencing COVID-19-related financial distress. That’s up to 12 months of mortgage payment relief for those who qualify.

How Do You Get Coronavirus Mortgage Relief?

Start by calling your mortgage service provider and explaining your situation. Whether or not your mortgage is federally backed, this is the first step.

Be prepared to be on hold for a while. Many other people are attempting to access the same help, so you could wait for a while to speak to a customer service representative. You should also be prepared with the following information:

  • The reason you can’t pay your mortgage as scheduled
  • How long you may be in this situation
  • Your current income and expenses
  • Information about current assets, such as how much you have in the bank

Ask what options you have for mortgage relief. Then, follow any instructions provided by your lender for how to apply for the relief.

What Relief Do Renters Have Under the CARES Act?

The CARES Act also provides some relief for renters. For 120 days from March 27, 2020, landlords of certain types of properties can’t begin eviction procedures or charge fees because someone hasn’t paid their rent. The mandate covers all federally financed rental units. That accounts for around 28% of all rental properties in the nation.

Again, you should continue to pay your rent if you can. If you can’t, talk to your landlord immediately to find out what arrangements might be possible. But know that if you’re in a federally financed property, you can’t be evicted during this time.

Other Coronavirus Rent Relief Options

You may be able to create a partial payment plan with your landlord. If your landlord can’t or won’t work with you, reach out to your bank to find out about emergency COVID-19 loans. Many are offering short-term loans of up to $3,000 to provide financial relief to those impacted by the pandemic.

What Should You Do After You Receive Coronavirus Mortgage Relief or Work Out a Deal With Your Landlord?

Get any relief deal in writing. If there are errors or misunderstandings about it in the future, you can refer to the document.

If you get mortgage relief, still read your mortgage statement every month. That will help you see that the mortgage company is upholding their end of the agreement.

Whatever relief you get, consider monitoring your credit. That way you know if anyone has incorrectly reported a missing or late payment on your credit report. You can challenge the accuracy of a new negative item—which can cause your credit to be lower and impact the financial options you have in the future.

Consider signing up for your free Credit Report Card. You get your credit score and personalized recommendations on how to improve your score in the future.

Go to the COVID-19 Guide


Sign up now.

Source: credit.com

6 Steps to Buying a Preforeclosure Property

Everyone knows you can buy a foreclosed home below market value, but what about a preforeclosed home?

This article explains what a foreclosure is, how the process works, and tips for buying one.

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What is Preforeclosure?

Preforeclosure refers to the status of a home. This means the owner(s) are falling behind in their mortgage payments. The mortgage holder, or lender, then files a notice of default.

Between a notice of default and foreclosure court proceedings, the house maintains a preforeclosure status. A preforeclosure stage can last anywhere from weeks to a year.

Many homeowners try to negotiate creative options for paying their loan balance with their lender during this time. Doing so will keep the lender from costly foreclosure processes. Working out a payment agreement will also allow the homeowner to stay in their home and save their credit.

Another way to keep a home out of foreclosure is to sell while it’s in preforeclosure. Because the homeowner and lender are eager to avoid a foreclosure process, they’re often willing to sell their properties at a reduced price.

Sometimes, lenders will approve a short sale. This is where a home in preforeclosure is sold for less than the amount owed on the mortgage.

1. Research the Property

Notices of default are public record. As such, they can be found through the county recorder’s office or tax assessor’s office. If you’re ok paying for a search, you can even subscribe to the county’s legal newspaper.

If you’re planning to live in the preforeclosure home, you need to check out the neighborhood before purchasing it. What’s the value of other properties around it?

Preforeclosure properties are often in very good shape, and this could be a way to get your dream home at a discount!

By using county records and tax assessor’s information, you should be able to determine the purchase price of the home. By looking at recent sales in the neighborhood, you can find out how much neighboring homes are retaining or increasing in value.

You definitely want to drive by the place but don’t get too nosey. It’s possible the occupants are still living there. Snooping around someone’s home may not be the first impression you want to give!

2. Line up Your Financing

Securing your financing is vital. Checking out several financial institutions will allow you to get your best interest rate. Once you’ve secured funding, as your lender for a preapproval letter and make some copies of it.

Next, you need to determine your budget. Just because the bank says you can afford a monthly payment of $1,500.00 doesn’t mean you should. Crunch the numbers in your budget to determine how much you can realistically spend on a home.

Don’t Need Financing?

If you have enough cash to pay for the property, you’re at an excellent advantage! Offering cash for a preforeclosure will allow you to make a lower offer and remove all contingencies from your offer.

Most home sales involve mortgage lenders. This means if a buyer’s financing falls through for some reason, the home sale is off.

Removing this contingency from a home sale will make your offer much more attractive!

3. for Sale or Not for Sale

Many homes in preforeclosure are not for sale. Homeowners are likely still living in the house. This means you should exercise great tact when approaching the situation.

Some homeowners will be happy to negotiate a sale to avoid wrecking their credit score. Others may feel offended and embarrassed and won’t entertain the idea of negotiating a sale.

Either way, how you approach a potential sale is important!

Write a Letter

Consider sending a personalized letter. This is a non-threatening way to approach those living in a preforeclosure home.

The letter should include your name and why you’re interested in the home. Honesty and transparency are extremely important.

If you plan to live in the home and raise your family there, let them know. If you plan to flip it and sell for a profit, say so.

Maybe you’d like to turn it into a rental property. Would the homeowners be interested in staying and renting from you? Include your contact information and the best times to reach you.

A respectfully written and honest letter will communicate your intentions. Letters also avoid putting too much pressure on the homeowners.

Give a Call

If you’re more comfortable with a conversation, give the homeowners a call. You should plan out what to say and write down your main talking points before you dial them up.

The same rules apply here. Tell them how you found their home and information. Next, ask them if they have some time to visit with you about the potential sale of their home.

If they’re open to it, tell them a little about yourself and why you’d like to buy the home.

Ask to set up a time to meet and discuss details.

Knock on the Door

If you decide to show up unannounced, your reactions may not be as favorable. Some homeowners may not like the surprise visit.

If you decide to show up in person, bring a letter with you. Expecting someone to discuss their financial distress with you on the spot isn’t a tactful approach.

Use this opportunity to introduce yourself, deliver a letter, and let them get along with their day. This lets the homeowner put a face to your letter and allows them to process the request on their own.

4. Go Back to Your Lender

Once you’ve reached an agreement with a seller, your financial institution needs specifics.

A lending bank or credit union will ask for the following documents. Remember to budget for fees related to this documentation process.

  • Purchase agreement contract signed by both parties
  • Property details
  • An appraisal of the property
  • Mortgage application and fee
  • Proof of a source for your down payment
  • A list of your current assets and liabilities. Other loans or debt you may have.

Getting your financial ducks in a row is essential to buying preforeclosure homes. You won’t be able to secure a loan without doing these things first.

Once the process is approved by all parties, you’ll receive a commitment letter. This is your physical proof of confirmation that you are qualified to buy this preforeclosure home.

Enlist a Pro

Purchasing your first home involves a lot of details. Hiring a professional to make sure you’ve completed all the necessary documents is a great idea.

Many real estate agents specialize in preforeclosure homes and would be happy to work with you.

If you don’t hire a realtor, find an attorney who knows how to buy a preforeclosure home. A legal expert will make sure you’re not missing important steps to the sale process.

5. Close It UP

This is the day your ownership becomes final! Once you have a commitment letter, your hired professional will work with a title company to determine a closing date. For conventional home sales, this can take up to 90 days.

For cash home sales, the timeline is usually shorter.

It’s important to have your professional look over all documents before you sign them. Once you’ve signed documents at closing, you are the official owner of your preforeclosure home!

6. Before Moving In

Congratulations! You’ve bought a preforeclosure home! Before you start uploading and unpacking, you’ll want to take care of a few things.

1. Change the Locks

The house is now yours. To reduce the risk of unwanted foot traffic through your home, it’s best to start fresh with new locks.

2. Replace the Flooring

If you’re planning to update or replace the flooring, do so prior to moving in. Most flooring installers charge extra for moving furniture.

If you plan to do some remodeling yourself, it’s a great idea to get the dust flying before your stuff is in there!

3. Clean It Out

An empty home is much easier to clean. Consider hiring a professional cleaning company if you don’t want to do the job yourself.

Can I Buy a Preforeclosure Home?

The process of buying a preforeclosure home is more complicated than traditional sales. However, your savings can make it worth your while. Many preforeclosure homes sell for much less than their market price.

If you think buying a preforeclosure home is right for you, let us help. We can partner with you to find your best mortgage fit.

Questions? Check out our FAQ page, send us an email at [email protected], or call us directly at (855) 841-4663.

Source: thelendersnetwork.com

Home Equity Loan vs Line of Credit

If you need a quick cash injection and own sizeable equity in your home, equity loans can help. Home equity loans and home equity lines of credit are low-interest rate loans taken out against your home. Also known as second mortgages, they allow homeowners to tap into their equity, and offer a plethora of benefits, as well as a few downsides.

But which option is best for you and your needs, how do they differ, and what can they be used for?

Home Equity Loan vs Home Equity Line of Credit

Home equity loans and lines of credit are types of second mortgages, which means they often exist in addition to your primary mortgage. They are secured against the equity that you own, and the size of that equity will dictate how much you’re offered and what sort of rate you’re provided with.

A home equity loan gives you a lump-sum payment in exchange for securing your equity. A home equity line of equity, also known simply as a HELOC, is a line of credit that works a lot like a credit card.

In both cases, you are not selling your home or any part of it. You’ll still technically own all the equity that you secure against the loan, but if you ever default on it then the lender may seek to initiate foreclosure.

Of course, because they are second mortgages, the primary lender will take priority in the event of a complete mortgage default, but once they have secured their share then the second mortgage lender will take theirs.

Home Equity Loan Details

  • Payment Type: Cash paid upfront 
  • Interest Rate: Fixed-rate of interest 
  • Interest Charges: Pay interest on the entire balance
  • Closing Costs and Fees: Closing costs and fees charged
  • Repayment: Fixed monthly payments that never change

Home Equity Line of Credit Details (HELOC)

  • Payment Type: Money paid as a line of credit during a draw period
  • Interest Rate: Variable interest rate.
  • Interest Charges: Only pay on what you withdraw from the credit line
  • Closing Costs and Fees: Closing costs and fees tend to be lower
  • Repayment: Interest-only payments possible

When to Consider a Home Equity Loan

Towards the end of this article, we’ll discuss some of the ways you can use a home equity loan or HELOC, covering both the positive and the negative. But for now, it’s important to understand which of these options is best for you based on your current situation.

A home equity loan may be the better option if:

You Need A Lot of Money Now

The main reason to opt for a home equity loan is if you need a lot of money and you need it sooner rather than later. This is generally the better option is you have a specific amount in mind, such as if you have a vacation planned or medical bills to pay and have been given a specific quote.

That way, you know how much to borrow and can use the money straightaway, before focusing on making repayments.

It gives you some clarity and certainty, as you’ll be told how big your monthly payments will be, how long they will last, and how much money you’ll get in return for your home’s equity.

It’s important to take a little as possible, but to make sure you have more than you need. That seems like a contradictory statement, but for example, if you are planning a cruise around the Mediterranean and have been quoted $15,000 for you and your family, you should consider taking $20,000 instead. 

That way, you’ll be covered for spending money and unforeseen expenses and won’t need to resort to taking out personal loans, cashing savings or putting everything on your credit card when you realize you’re short.

You Want a Fixed Interest Rate

A home equity loan will typically cost you much less than a HELOC over the life of the loan. It also charges a fixed monthly amount, one that doesn’t change regardless of the prime rate and your accumulated equity.

Understanding how much you will be expected to pay over the loan term can help you to prepare and keep nasty surprises at bay.

You Have Debt to Repay

One of the best uses of a home equity loan is debt consolidation, whereby you use the loan to pay off your current debt. If you have a lot of debt tied up in credit card balances and personal loans, chances are you’re paying a much higher rate of interest than with a home equity loan.

Therefore, by swapping one big secured, low-interest debt for lots of small, unsecured, high-interest debts, you could pay much less interest over the loan term. 

Calculate how much debt you have; how much it is costing you every month (and over the term) and make sure you consider prepayment penalties as well. You can then calculate the same projected costs for a home equity loan and will likely discover that the latter will save you thousands when used to clear your debt.

Of course, for this to work, the home equity loan needs to provide you with a sufficient amount of money to cover all of your existing debts, which is reliant on your home’s value and your loan-to-value ratio.

When to Consider a HELOC

On the surface, a HELOC can seem like a better option. The loan amount isn’t as high and the money is released over a period of time, as opposed to a single lump-sum. But that could provide some huge benefits for certain types of homeowners.

You Don’t Know How Much You Will Need

If you have a couple of big events coming up, such as a wedding and honeymoon, and you don’t know how much money will be needed, a HELOC may be the better option. With a HELOC, you can draw money as you need it, paying interest only on the amount that you draw.

You will typically be charged a higher interest rate for this type of loan, but it means you can use the money to make staggered payments, such as a debt clearance this month, a wedding in a few months, and a vacation at the end of the year.

Your Income Rises and Falls

If you’re self-employed and don’t have a consistent or reliable income, a HELOC may be better than a home equity loan. With a lump-sum loan, the money typically goes quickly and then, if you encounter a slow period at work or you’re hit with a major bill, you don’t have many options for repayment.

But if you have a HELOC, you also have a line of credit waiting for you, one that can get you out of trouble when you need it.

Pros and Cons of a Home Equity Loan

  • Pro = Large cash lump-sum (based on home value) to spend as you please.
  • Pro = A fixed interest rate is charged.
  • Pro = The repayment period and the monthly payment is fixed and remain the same.
  • Cons = Interest payments may be higher than your first mortgage.
  • Cons = Your home equity is at risk.

Pros and Cons of a Home Equity Line of Credit

  • Pro = Interest is only charged on the amount you withdraw.
  • Pro = Borrow money as and when you need it during the draw period.
  • Pro = Can be used to make multiple small payments.
  • Pro = Large credit limit, depending on the value of your home and the size of your equity.
  • Cons = Only offered by credit unions and traditional banks.
  • Cons = Your home equity is at risk.
  • Cons = Interest rate is variable, and the loan is open ended, making it difficult to judge how much you will pay over the life of the loan.

How to Use Home Equity Home Loans 

There are many reasons you may want to consider a home equity loan or a HELOC, some more preferable to others, but all viable and all allowed. In fact, as long as you have the equity and meet your payments on time, the lender won’t care how you spend the money.

Education

College tuition is expensive and student loans don’t always cover everything that you need, especially if you’re studying for an advanced degree or you’re a mature student.

You need to think about living expenses as well as college tuition fees and equipment, and a HELOC or revolving line of credit can provide you with more options, more variety, and potentially a lower rate.

Major Expense

Major expenses like funerals and medical bills can arise unexpectedly and hit you hard, taking savings or leaving you with few options. If you have a significant share in your own home, however, then a home equity loan could help.

These loans can give you a cash sum to be used on everything from weddings to funerals and medical bills, helping you to dig yourself out of trouble.

Vacations

Spending your home equity loans or credit on a vacation is risky, as you’re using a secured expense tied to your most important asset to purchase something that is fleeting and won’t give you any tangible assets. 

However, we all need to live a little and while vacations can’t pay you interest or dividends and won’t appreciate in time, they will give you memories that last for a lifetime and allow you to place one extra tick on your bucket list.

Home Improvements

One of the most common uses for equity loans is to remodel, renovate or complete a major home improvement project. The costs of this project may be tax-deductible and could help to significantly boost the market value of your home.

Debt Consolidation

As discussed already, this is probably the best way that you can use a home equity loan as it’s one of the few options (along with home renovation) that may actually result in you saving/gaining money over the long term due to the lower interest rate offered by these loans when compared to unsecured debts.

Bottom Line

Home equity loans are ideal if you have some equity in your home and need some fast and easy cash. However, simply having a house isn’t enough to get these types of loans.

Your debt-to-income ratio and credit score will both be considered to make sure you can afford to meet the repayment schedule. And even if you do qualify, they may not be the best options available to you.

You can also look into a cash-out refinance, which gives you a larger mortgage than you need and lets you collect the remaining cash, or a reverse mortgage, which is only available to older homeowners who control a large equity stake.

In any case, the more of your house that you own, the more loan options you have and the better the rates and fees will become. So, if you get rejected, keep building that equity and try again in a few years.

Source: pocketyourdollars.com

Money Etiquette: How to Politely Ask for a Honeymoon Fund

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Have you been to a wedding that used Honeyfund or similar registry in place of traditional gifts? These new-age registries are becoming more and more popular and a variety of reasons has lead to the sudden increase. Couples are more likely to live together before marriage and are moving to smaller apartments in big cities.

Either way, a honeymoon fund – commonly referred to as a honeyfund – is a great option for those who want to take a grand vacation after their wedding but need a little help. But, what is the polite way to ask for this kind of gift?

How to Spread the Word

The best place to spread the word is your wedding website. Most templates come preloaded with a page specifically for registries, making it easy to add the link to your honeymoon fund there. You can also add a small story, or give some context, to why you are choosing a honeymoon fund over traditional registries. When my husband and I were engaged we did just this. We explained we were about to move to NYC, a city notorious for tiny apartments and were only moving with the bare minimum. We told our guests that coming to our destination wedding was a gift itself! But, if they still wanted to gift us something we had a honeymoon fund set up.

You can also choose to add a small registry card to your main wedding invitation. This is very popular as well and an easy way to reference your honeymoon fund and your wedding website.

Setting up Your Honeyfund Account

Setting up an account with Honeyfund, the most popular of the honeymoon fund websites, is extremely easy. Once you register, you create a profile adding your wedding details and honeymoon dreams. You can then design custom gifts for your guests to choose from. Money for airline tickets, hotel upgrades, spa visits, excursions. All of these are created by you, so the sky’s the limit! Do be aware if a guest gifts you $100 towards airline tickets you don’t have to use the money on airline tickets. The gifts are in name only.

Fees on Honeymoon Funds

There are actually very few fees that are associated with most online honeymoon funds. If guests gift you via gift cards bought through the web services or offline they pay zero fees. Any credit or debit gift is charged a small fee between 1-3%.

Other Registries Besides Honeyfund

While Honeyfund was the first and most well known of the new-age registries, there are a couple other choices that all offer different advantages. Check out Zola, Blueprint Registry, or Travelers Joy for other options.

Bottom Line

At the end of the day if you still feel weird, remember that all wedding registries used to be considered tacky and these new registries are becoming much more common. Just don’t forget to send out thank you cards!

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Source: mint.intuit.com