I am Behind in Payments and Need Mortgage Help

The U.S. housing market is in a sad state of affairs right now. Millions of homeowners in the U.S. fell behind on their mortgage payments in 2008, and many more will join those ranks in 2009 and beyond. So it's no mystery why so many people are seeking mortgage help right now.

But where do you go? What can you do? How can you get help when you've fallen behind on your mortgage payments, and what options do you have? That's what I'll address in this article.

Generally speaking, people who need help with their mortgage payments fall into one of two categories. If you're seeking help in this area, you can probably identify with one of the following scenarios:

• Scenario 'A' - The homeowner has experienced a temporary financial setback, such as unexpected medical expenses or job loss. As a result, the homeowner falls behind on the monthly mortgage payments and needs help getting caught up. This is a short-term
• Scenario 'B' - The homeowner simply cannot afford the home anymore. This may be because of an ARM loan adjusts to a higher rate, a recent job loss, the accumulation of other debts, or a combination of these things. This is a long-term predicament.

The question is, which of these categories do you fall into? If you are behind on your mortgage payments and looking for help, you must first determine whether you're in a short-term or long-term predicament. You can't find the best path forward until you start with this important distinction. So let's talk about the options people have when they fall into one of these scenarios.

If you are having short-term financial problems, and you feel you can get back on track with your payments, you should start talking to your mortgage lender (or whoever is servicing your loan at present). Most lenders will offer some kind of repayment plan to help you get caught up when you've fallen behind on payments. Specifically, you should ask them about reinstatement, repayment plans and forbearance. These are ways to get caught up on payments in lump sum or through future installments.

If you are having long-term financial problems, and you simply cannot afford the home anymore, then you will probably have to sell. Once again, you should talk to your lender about your options. In particular, you should ask if they would be willing to allow a short sale (where the home is sold for less than what you currently owe on it).

A home loan modification might be another option if you are behind in payments and need mortgage help. This topic has been in the news a lot lately, mainly because it's part of President Obama's economic recovery plan. The government is actually providing incentives to lenders and loan servicers who modify mortgages (to make them more affordable for struggling homeowners).

Conclusion and Going Forward

So, if you have fallen behind on your mortgage payments and need help of some kind, you should take the following steps. First, determine whether your payment problems are short- or long-term in nature. Next, talk to your lender and let them know where you stand. Research the options that are available to you, depending on your scenario. Learn everything you can about the most relevant solutions, and start talking to your lender early on. The worst thing you can do is nothing -- so get started today!

Advice on Getting a Mortgage in 2009

There are only three more days until the new year, so I thought it was a good time to make a list of mortgage tips for 2009 home buyers. If you've been following the news over the last year, you'll realize that much has changed in the world of real estate, credit and mortgage.

The home buyers of 2009 need to understand what all has happened to our economy, and how it affects their chances of getting qualified for a mortgage loan. And that brings us to the purpose of this article. Here is my advice on getting qualified for a home loan in 2009.

Tips for Getting a Mortgage

If you ask me, getting a home mortgage loan in the so-called "new economy" is the same as it always has been. The only real difference is that lenders aren't giving loans out to borrowers with bad credit, like they did over the last few years. Subprime loans are going to be hard to come by in 2009, if not completely extinct.

1. Start Saving Money

Before the housing crisis of 2008 - 2009, home buyers with decent credit could get qualified for a "no-money-down" home loan. But this has changed. Today, getting a mortgage without a down payment is nearly impossible. Many lenders are requiring a 20% down payment -- in fact, that seems to be the norm lately.

You'll also need some extra cash for closing costs and other expenses associated with the home buying process. So if you plan to buy a house in the near future, start saving your money now. It help you in getting a mortgage loan, among other things.

2. Fix Your Credit if Necessary

I've never thought it was a good idea to buy a home with a bad credit score. For one thing, it makes a lot harder to get qualified for a loan. And even if you do get qualified, you'll end up paying a much higher interest rate than a person with good credit. This can lead to all sorts of financial problems, including foreclosure.

Here's another reason to review your credit score before getting a mortgage loan. Improving a score takes time, so you need to find out where you stand as early as possible. That way, if your score needs improvement, you can take the necessary steps before applying for a mortgage. This will help you qualify for a loan, and it will also help you get a good interest rate on the loan.

3. Choose the Right Type of Mortgage

Do you know the pros and cons of a fixed-rate mortgage loan versus the adjustable-rate mortgage? If not, you've got some homework today. There are many variations of the home loan, but most of them fall into one of these two categories -- fixed or adjustable. So your first homework assignment is to learn about these differences.

Next, you should consider your home buying situation and your long-term plans, and then choose the best type of mortgage for those plans. For example, if you plan to live in a home for only a few years, then you can probably save some money by getting an ARM loan with a lower rate. On the contrary, if you on plan on staying in the home for many years -- or even permanently -- then you're better off with a fixed-rate mortgage.

And don't count on being able to refinance from one type of loan to the other, down the road. There's no guarantee you can do this. Take the current economy for example. Right now, a lot of people are trying to refinance their ARM loans into fixed rate loans. But property values have dropped significantly in many parts of the country, leaving homeowners upside down in their mortgage loans. This means that many homeowners are stuck with their ARM loans -- unable to refinance because they owe more than their homes are worth in the current market.

This is just one scenario that illustrates the importance of choosing the right type of mortgage for your particular scenario.

4. Use the Internet to Save Time

This is one of the most common pieces of advice I give to first-time home buyers. The Internet can save you a lot of time and energy when getting a mortgage loan. But a lot of people are afraid to get online quotes because of all the identity theft stories in the news. Let me offer this advice on the matter. If you follow the Internet security tips we offer here on this blog, your personal information will be safely guarded. On top of this, you'll save yourself some time by getting mortgage offers from several lenders at once. It's a great way to get the ball rolling.

The Best Online Lenders for Home Loans

Reader Question: We are buying a home early next year, and we want to get mortgage quotes online to save time. Who are the best online lenders for home loans these days?

As you can tell by the yellow box on the side of this blog, I am partial to LendingTree as an online lender. I just like everything about their business model, and that's why I recommend them so strongly.

But let's go beyond that one company. Here are some things you need to consider when choosing a web-based lender in 2009.

1. Which ones are still around?

You ended your question with "these days," and that pretty much says it all. Two years ago, there were a lot more web-based lenders than there are today. Many of them collapsed during the mortgage / housing crisis that came to a head in 2008. In 2009, you will have fewer options when choosing the best online lender for your home loan. But this is good news as well as bad news. While you have fewer companies to choose from in 2009, you can rest assured that the ones still around are well-run and well-financed. They have, after all, survived the worst economic crisis of our lifetime.

2. Which lenders are on stable ground?

We just talked about the economic turmoil our country is going through. So when choosing an online lender for your mortgage loan, it's important to research the company behind the website. Start by running their name through Google's news search engine to see what comes up. Is it good news or bad? Are people predicting their collapse? The best lenders will not only survive in 2009, but rise to the top as well. So with a little homework, you can easily find out which lenders to avoid and which ones to consider for online quotes.

3. Which lenders have the best reputation?

Also during the course of your online research, keep an eye out for any "bad press." If you see a consistent pattern of complaints and other negative information about a particular online lender (or their parent company), it's probably best to steer clear of them. Of course, you always have to consider the source when doing this. Sometimes, even the best lenders have unhappy clients. So don't rule them out based on a single piece of bad news. Remember, you are looking for reputation patterns -- for better or for worse.

4. Which ones have the biggest network to leverage?

Some online lending sites only give you access to a single company. For example, if you visit the website of a company like Bank of America to get online mortgage quotes, you'll probably only get offers from BOA itself.

Other lending websites, however, give you access to a wider range of brokers or lenders. In other words, you submit a request for a mortgage quote through the website, and then you receive offers from multiple lenders. Without question, this is the best way to find a home loan online. So, by extension, the best online lenders in the U.S. are those that have access to the biggest networks.

The Truth About Instant Mortgage Quotes

What is an instant mortgage quote and how do I get one? Is it really an instant offer from lenders? How can they give me a quote so fast without even reviewing my finances?

These are common questions about mortgage shoppers, and I can certainly understand the confusion. You see advertisements for instant loan quotes all the time. But it makes you wonder ... how can a mortgage broker or lender offer a quote so fast, when they need to review your financial situation first?

The answer is two-fold:

1. There is no such thing as a truly instant mortgage quote.

Even a basic, cursory review of an applicant's finances will take some time. So the only way to make the process instantaneous is by offering "blanket" quotes to everyone, regardless of their qualifications -- and that would be a waste of everyone's time. Sure, this initial process can be pretty quick, thanks to the Internet. But it's just not instant.

2. The initial quote is far from approval.

It's also important to realize that this kind of up-front mortgage quote is based on limited data. So it's not the same as a pre-qualification or pre-approval. In other words, just because you get an instant quote for a certain loan amount and interest rate, it doesn't mean you'll receive final approval for that amount. This will make more sense when you read the series of events described below.

The Online Mortgage Quote Process

When you hear the word instant used to describe this process, it usually refers to online quotes and the companies that provide them. This truly is one of the fastest and easiest ways to get the ball rolling. Here's an overview of how the process works:

• Step 1 - Choose an online lending website. Here are some security considerations to keep in mind.
• Step 2 - After reviewing the security recommendations provided above, provide the requested information on the mortgage website. Typically, this will be a short web form asking for your name and contact info, your desired loan amount, size of down payment, desired mortgage terms, etc.
• Step 3 - Once you have submitted the information needed for the online mortgage quotes, you will eventually receive some offers from brokers and/or lenders. This may come in the form of emails, online messaging through the lending website, or a combination of the two.
• Step 4 - You would then review the quotes presented and see which one offers the best interest rate and terms. Just keep in mind you may not actually qualify for those terms -- it's just an initial offer based on the information you provided.
• Step 5 - Based on the mortgage quotes provided, you would choose a broker or lender and follow up with them by email or phone.
• Step 6 - Eventually, you would go through a more detailed review. The lender will request financial documents such as your W-2 forms for the last two years, pay stubs, etc. They will also pull your credit score to see where you stand. You'll eventually be pre-qualified for a certain loan amount, and you can use that pre-qualification letter when house hunting (it shows the seller that you are capable of buying their home).
• Here are some of the things you should do before you apply online for a loan.
  

This is the basic process that takes place when you request the so-called instant mortgage quote. Your actual experience may differ from what I've outlined above, based on any number of variables. But at least now you have a general idea of what takes place.

Not Instant - But Still Convenient!

When people email me asking about home loans, I usually refer them to one of the big online lender websites. I do this because it's a convenient way to initiate the mortgage application process. As you can see from the outlined steps above, it doesn't take much to get started.

It's also a convenient way to compare mortgage quotes / offers from more than one lender. In some cases, you can receive information from up to four lenders at once -- and you can get it by the end of the day, straight to your email inbox.

Before You Apply for a Home Loan Online

Summary: In this lesson, I'll explain the steps you should take before you apply for a home online through a mortgage lender's website.

Applying for a home mortgage loan via the Web is really quite simple. In fact, that's one of the reasons I publish this blog -- to teach people who easy the process can be. But in reality the process starts long before you apply online for a home loan quote. At least, it should.

Before You Get Home Loan Quotes

Before you start visiting lender websites and requesting quotes, you should spend some time reviewing your finances and coming up with a realistic budget for yourself. Here are five things you can start with:

1. Start Saving Money

In the current economy, most lenders will require you to make a down payment on the home you intend to buy. You used to hear about "no money down" home loans all the time, but they are hard to come by these days. This is true with online mortgage lending as well. In fact, you'll probably be required to make a down payment in the neighborhood of 20% -- especially if you want to get a decent interest rate on the loan.

That's just one of the reasons you should start saving money. You'll also need enough cash to cover your closing costs, and these can add up to several thousand dollars. Most lenders will review the amount of money you have in checking / savings for this very reason. If you apply for a home loan online you could very well save some money on these closing costs, but you should prepare for the worst and hope for the best.

2. Review Your Credit Reports

When you request a quote for a home loan online, what you get back is just an initial offer. After you follow up with the mortgage lender or broker, they will review your finances much more closely. Your credit score is a big part of this review process, and your score is based on the information contained within your credit reports. So early on in the home loan process, you should get copies of all three of your credit reports and review them for errors / inaccuracies.

If you do find an error, dispute it through the company that produced the report until the item gets removed. Inaccurate information on your credit report can drag down your score, which makes it harder to get qualified for a mortgage loan.

3. Check Your Credit Score

We just talked about the importance of having a good credit score in this economy. So this is another item you should obtain before you apply online for a home loan. Remember, your credit reports and scores are two different things entirely. The former is a record of your financial history, and the latter is a number. The higher the number the better. A high credit score will make it much easier to qualify for a mortgage, and (more importantly) it will allow you to get the best interest rate on that loan.

You can learn more about obtaining your scores on the credit page of our main website.

4. Determine Your Budget

I was recently watching a news program with yet another sad story of mortgage foreclosure. They were interviewing the person who lost a house to foreclosure, and she said: "When we got the home loan we just figured we could afford it, because the mortgage lender approved us for the loan."

This completely backward, and I've been telling people this for years. Don't ever let a lender tell you how much you can afford to pay each month. You must determine this for yourself. So before you apply for a home loan online, you need to have a budget in mind -- including the maximum amount you can afford to pay every month.

Online Mortgage Advice - How to Get Mortgage Quotes From the Web

Summary: In this blog post, I'll offer some online mortgage advice to help you get quotes from mortgage lenders via the Internet.

Imagine this. You're shopping for a home loan, and as a smart shopper you want to compare multiple offers. So you go online to a certain website, and you fill out a short form with information about yourself. By the end of the day, you receive information from several different lenders or brokers -- straight to your email inbox.

Sound too good to be true? It's not. These days, there are many reputable companies that offers this kind of online service to consumers. You've probably even seen their ads on TV. It's a great way to save time and energy while achieving your ultimate goal of finding a home loan. So in this article, I'd like to give you some online mortgage advice based on my own experience with this industry.

Here are the steps I recommend when getting mortgage quotes online.

Step 1 - Determine Your Home Buying Budget

Some people think a lender will only approve them for a loan they can afford. In truth, this is a flawed way to look at things. And as we have seen from the housing crisis of 2008, this is simply not the case. You cannot rely on a mortgage lender to determine your housing budget. You have to do that for yourself. This is one of the most important pieces of advice I can give you, related to online quotes.

Use a mortgage calculator to get a rough idea of the monthly payment you can afford. Be sure to consider all of your other monthly expenses, such as your car payment, credit card bills, groceries, insurance, entertainment and savings. This will help you determine how much of a loan you can afford, and you can use that number as a cap when requesting quotes.

Step 2 - Choose a Lending Website

The best online mortgage advice I can give you here is to choose a well-known company, such as the big-name brands you've seen advertising on TV. These companies spend a lot of time and money developing their reputations, which means they also want to protect their reputations. They do this by offering a good service with built-in security, and by treating their customers right.

Step 3 - Complete the Online Request

There's actually not much to say about this step, because it's very straightforward. But it needs to be included in the list. Once you've chosen a lending website, just follow the instructions they provide to request a quote. In most cases, you will be asked to provide your name and contact information, the amount of loan you wish to apply for, the amount you have to put down, and similar information.

After you submit the form, you will get some preliminary offers from mortgage brokers or lenders. Keep in mind these offers will likely differ from the loan amount and interest rate that you ultimately qualify for. The online process is just to get the ball rolling. You'll go through a more thorough approval process after this initial request.

So there you have it -- online loan quotes in three easy steps. I told you it was simple. If you'd like more advice on this process, of if you'd like to get started requesting an offer, check out out our mortgage quotes page.

Getting Home Loan Quotes Online

The Internet has made all aspects of the real estate process easier. You can locate properties faster, find home values easier, and get home loan quotes from lenders with a lot less effort.

Of course, you also need to exercise some caution when applying for a home loan online. You must guard your personal information from identity theft, as much as possible. This is why a lot of folks are afraid to get loan quotes via the Web. They think that everyone is out to get them, and that all websites lead to identity theft. But this is simply not the case.

Home Loan Quotes & Internet Security

Let me offer you some reassurance, based on my own experiences with this industry. With a basic understanding of Internet security -- and a healthy dose of common sense -- you can enjoy the speed and convenience of online home loan quotes while also protecting your personal information. Here are five tips on doing just that.

1. Stick With the Names You Know

I recommend using companies and websites you've heard of before. For example, if you were to use the website of a big-name brand (like Ditech, eLoan or LendingTree), you could be fairly certain there would be no "monkey business" behind the scenes. These companies, and others like them, have a lot invested in their reputations. So they would be foolish to act unethically. Personally, I would never provide my personal information to a company I've never heard of before. I recommend you exercise the same caution when getting home loan quotes via the Internet.

2. Look for the 'S' in the Web Address

A secure website has special encryption to prevent hackers and identity thieves from accessing certain areas. You can tell if you're on such a website by looking at the web address / URL up in your Internet browser's address bar. Before the "www" part, there should be an "https://" prefix. Note the letter 's' in that prefix -- this must be present to indicate a secure web page. If it starts with "http://www" (without the letter 's'), then it's not a secure site and you should not transmit personal information through it. Find a more secure place to request a home loan quote.

3. Look for Third-Party Verification Seals

Today, there are companies whose sole mission is to verify the Internet security of other companies. You've probably seen their logos at the side or bottom of financial websites. For example, you might see a graphical seal of approval that says something like "verified by TRUSTe."

In most cases, these graphics are hyperlinks as well, and you can click on them to check the security verification status of the website you are currently using. All of the big-name online mortgage companies have these verification seals on their websites. Combine this with the first two recommendations above, and you can be 99% sure you're on a safe and legitimate website.

4. Trust Your Instincts

If something doesn't seem right to you, there's a good chance it's not. For example, if a website asked you for bank account numbers and passwords as part of the home loan quote process, you would know something wasn't right. Why would a mortgage broker need this information? They wouldn't, of course. Yet you would be surprised by the number of scams online that operate in this way. Trust your instincts when using financial websites. And when in doubt, back on out.

Of course, if you follow the previous tips I offered above, you can avoid this kind of thing altogether.

5. Research a Company / Website Before Using It

Just by using Google, you can become an amateur detective and research everything about a particular company -- aside from their private financial data, of course. I recommend you do this before dealing with any kind of financial company, but especially when dealing with a website that offers online loan quotes.

Conclusion and Going Forward

With a little bit of research, and a lot of common sense, you can capitalize on everything that's good about the Internet while protecting yourself from the bad. Follow these five pieces of advice when requesting mortgage offers via the Web, and you'll be more likely to enjoy a smooth and safe process. And remember … when in doubt, back on out!

Related article: How to Apply Online for a Mortgage Loan

What is a Mortgage Amortization Schedule?

Article Summary: What is mortgage amortization and what does it mean to a home buyer / homeowner? This is actually an important topic that confuses a lot of people (including myself). So I asked Melissa, our resident mortgage guru, to explain what amortization is and why home buyers should understand it.

Let's start with a quick definition. Amortization is defined as the paydown of a liability, such as a mortgage loan, in regular monthly payments over a specified period of time. The monthly payments are divided between the principal and interest of the loan.

As a part of the mortgage loan process, your lender will provide you with an amortization schedule that shows you the breakdown of your monthly payments -- how much goes to pay the interest, and how much will pay down the principal and the remaining balance until the loan is paid off. This schedule can be provided in a monthly or annual format.

As a home buyer, there are some things you need to understand about the amortization calculation or schedule you are given:

What to Know About Your Amortization Schedule

First, you want to make sure the lender has not sold you a negative amortization loan. This means that your monthly payment does not cover both principal and interest, so there would be a remaining balance at the end of your mortgage loan term. If the payment is not enough to cover the full amount of interest due as well as the principal for each month, the remaining unpaid interest amount would be added on to the balance of the loan, again resulting in a balance at the end of your loan term.

This was a common practice during the recent real estate boom of the 1990s, because many borrowers were initially unable to qualify for or afford the full payment amount on the size of loan they wanted. So the mortgage loans were structured to adjust that payment amount at a later date. This could present a real problem to a borrower if the negative amortization schedule was not fully disclosed, because at some point the loan payment is going to adjust in order to "correct" itself -- and this could mean a significant increase in the size of the payment.

You also want to make sure the term (or length) of the mortgage loan coincides with the amortization schedule you are given. For example, your loan payment is calculated or amortized over a 30 year term, but your lender has put you into a 7-year mortgage product. What this means to you is that, at the end of the 7-year loan term, the full remaining balance would be due! This is commonly referred to as a balloon loan. The previous scenario comes into play again in this situation. It spreads the payments out over a longer term, thereby making them more affordable, with the hopes that the homeowner will sell or refinance before those seven years are up.

No doubt, this can be a confusing subject. That's why it helps to have a visual aid (the mortgage amortization schedule / table) as well as someone who can explain it to you. At the same time, it's critical that you do understand this concept, so that you don't face any unpleasant surprises several years into the life of your loan.

Related blog posts:

• How much can I afford to borrow?
  
• How to apply for a home loan
  

How Much Mortgage Can I Afford to Borrow?

How much of a mortgage can I afford by borrow when buying a home? It's a common question among first-time home buyers, and for good reason. Take out more of a mortgage loan than you can afford to pay, and you could become another foreclosure statistic. And that's bad for all parties involved -- for you, the bank, and even the economy.

So in this article I'd like to talk about the key concepts of mortgage affordability and the process of determining how much you afford to pay.

Lenders Cannot Tell You What You Can Afford

Many home buyers wrongfully assume that a mortgage lender will only approve you for a loan amount that you can afford to pay. But this is not always the case. The lending industry is driven by profits -- they are not in the business of looking out for consumers. You are the only one who can determine the affordability of a certain size mortgage payment.

"But a lender wouldn't let me borrow more than I can afford ... they would lose out too, right?" This is a common argument, but it's also a flawed way of looking at this subject. In this country, there is a secondary mortgage market. I won't go into the financial weeds on this, but it basically gives lenders a way to sell off their mortgage loans soon after they grant them. And to a certain extent, it makes them less concerned about what you can truly afford to borrow (because they can sell of the risk associated with the loan).

We are seeing this happen right now, in staggering numbers all across the United States. Lenders gave people mortgage loans that they could not possibly afford, but they "eased" them into the loan with a low initial interest rate and (often) downplayed the risk of a future rate increase. You know the rest. The mortgages reset to higher interest rates, and millions of Americans found themselves unable to afford their mortgage payments. Then came the foreclosure crisis ... the housing crisis ... and, now, a full-scale economic crisis.

I believe I've made my first point. You are the only person who can determine what kind of mortgage you can afford to borrow and pay back. The only thing a lender can tell you is the amount they'll qualify and approve you for -- not the amount you can realistically afford.

So, How Much of a Mortgage Can You Handle?

Assuming I've convinced you that this is entirely your decision, we can move on to the next logical question. How do you determine how much of a mortgage you can afford to borrow?

The first step is to determine your home buying budget. By this, I mean the amount of money you could afford to put toward a mortgage payment every month, after all of your other monthly expenses have been covered. So start by adding up your monthly expenses -- car payment, credit card payments, food, gas, savings, etc. You can leave your rent off, because that payment will disappear when you buy a house (hooray!).

Next, you can take a hypothetical sale price for a home (or better yet, the actual sale price for a home you're interested in) and put it into a mortgage calculator. You can find these calculators online, and most of them are free to use. These tools will ask you for several pieces of data -- (A) the principal amount you need to borrow, (B) the interest rate, (C) the length or term of the loan, and (D) the property taxes. Some of these items are optional, such as the tax and interest amounts. But you'll get more accurate results by entering as much information as possible.

The more advanced calculators will let you enter your income as well, which is even more useful in determining how much you can afford to borrow. You can find these kinds of tools at Interest.com and a few other places.

When you run the numbers, you'll have a better idea of how much mortgage you can afford to borrow, because you'll have an estimate of your monthly payment based on the principal amount you're going to borrow. Compare that number to the amount of money you can afford to pay each month (after your other expenses), and you'll be honing in on your mortgage affordability level.

Keep in mind that the interest rate the lender gives you will have a lot to do with your monthly mortgage payments. So until you know what kind of rate you qualify for, you'll have to use the default setting for interest rate on the mortgage calculator. If you do have all the pieces of the puzzle (the principal, the property tax amount, the interest rate, etc.), you'll get a fairly accurate idea of what you can expect to pay each month for a certain mortgage amount.

Related blog posts:

• Which mortgage type is right for me?
• How to apply for a home loan
• What is a mortgage amortization schedule?
  

What Is a Second Mortgage and When Is It a Good Idea?

Article Summary: What is a second mortgage and why do people use them? When is it a good idea to get a second mortgage, and when is it a bad idea? These are the questions we will address in this article.

A second mortgage is an installment loan or line of credit that uses your home as collateral. The amount you are able to borrow against your home is determined by the amount of equity (ownership) you have in your home. For example, your home is currently valued at $300,000 but your mortgage balance is only $200,000. This means you have $100,000 worth of equity, or ownership in the home.

Most lenders will loan you up to 80% of your available equity. They will secure their "interest" in your home by filing a lien behind the lender who loaned you the money for the actual purchase (first mortgage) of the home. This means that later on, when you sell the home, both the first and second mortgage will be paid off. Of course, you can also pay off the second mortgage anytime you are financially able to do so. You could also refinance down the road to roll the second and first mortgages together.

An installment version of the second mortgage is just like your first mortgage -- it is a set amount with a monthly payment until the balance is paid in full. This type of loan is typically used for a specific project, such as a swimming pool or a renovation project. The whole amount of the loan is advanced in chunks as the pool (or other project) is being built. Then, when the project is complete, you will start making payments on the second mortgage loan.

Reasons to Use a Second Mortgage

There are many reasons people take out a second mortgage on their home. They may use it to remodel their kitchen, pay for a new addition, or to put in a pool. Or perhaps they need to pay for college tuition for a child, or for the adoption of a child. They may use the second mortgage to pay for a wedding or a dream vacation.

Many people use the loan or line-of-credit to payoff bills and consolidate their debt. Regardless of the reasons, there are several advantages to using a second mortgage. For one thing, the interest paid on the loan or line-of-credit can be used as a deduction on most people's taxes. In addition, the interest rates on a second mortgage are usually lower than the rates for credit cards, student loans and other types of credit accounts.

In particular, homeowners who live in a strong real estate market with good appreciation can take advantage of their equity through the second mortgage option. This can be a good way to consolidate debt. Also, if you have lived in your home for many years and the value of your home will go up considerably with a kitchen or bathroom remodel, then a second mortgage might be a smart financing idea.

Reasons to Avoid It

With all of this being said, there are certain scenarios where it doesn't make sense to take out a second mortgage on your home.

The recent economic downturn we've seen is a prime example of this. Just before the housing bubble burst, homeowners were taking out second mortgages right and left. The value of their homes increased quickly and dramatically, so they were using their newfound equity to make all sorts of improvements -- additions, pools, remodels, etc. Many were even buying cars and second homes. Then, when the real estate bubble burst, they found themselves with over-improved homes and mortgage balances that were much higher than their home was now worth.

Here's what you should take away from this article. A second mortgage can be a useful financing tool in certain scenarios, because it allows you to leverage your home equity at a favorable interest rate. In other scenarios, however, this type of loan doesn't make sense. The key is to know what type of situation you are in, and decide for or against the second mortgage accordingly.

Mortgage Applications 101 - How to Apply for a Mortgage Loan

Article Summary: This lesson explains how to apply for a mortgage loan and the things you'll need to do when you submit a mortgage application to a lender.

So you've finally decided to make the big leap and buy a house. Perhaps there is already one you have your eye on. Being that the current real estate is favorable to buyers, you probably have plenty of time to apply for a mortgage loan. But why wait? Most real estate agents won't even talk to you unless you've been pre-qualified or pre-approved by a lender. So why risk losing that special house you've had your eye on to another, better prepared buyer?

Before you can even start shopping for a mortgage loan, or filling out an application for one, you need to know what your credit looks like. You can request all of your credit reports and scores from this page. The best mortgage loan rates go to those borrowers with the best credit and highest scores, so it's a good idea to know what you have to deal with. It will also help you find a good lender with a rate that you actually qualify for.

Application Essentials

Now that you've decided on a lender, they will help you choose the loan program that will best suit your budget (i.e., 30-year fixed, 7/1 ARM, etc.), but they are going to need additional information from you. So when you apply for a mortgage loan, it's always best to come to that first appointment armed with the following:

• Paystubs -- 2 most recent for all borrowers
• Tax returns -- past two years
• Bank statements -- most recent
• Statements for retirement accounts, stocks, bonds, investments -- most recent

During the mortgage application process, the lender will also pull credit reports from all three credit reporting agencies (TransUnion, Equifax, Experian) and review the information with you to make sure it is correct. They will also discuss any negative items on your credit.

At this point in the application process, many mortgage loan officers will make a preliminary judgment as to whether or not you will qualify for a loan and be able to afford the payments. They will come up with a set amount they think you will be approved for. This is commonly referred to as "Pre-qualification". Your lender should be able to provide you with this information in the form of a pre-qualification letter.

But we are not done yet. When you apply for a mortgage loan, you will go through a series of evaluation stages, with plenty of paperwork along the way. So let's talk about what happens next.

The next step will be one of two options:

• You can request your lender to "Pre-approve" you for a set amount, which means your application and financial documents will be submitted for underwriting and approval, and you will be provided with a pre-approval letter.
• Or, you can wait to officially submit your mortgage application when you know how much you need to borrow -- i.e., until you find a home you'd like to buy and your offer is accepted by the seller. You may find the pre-approval letter has a little more weight when dealing with sellers and their agents, so if you are certain you'll be purchasing a home in the near future, and you can stick to your budget, you may want to choose this option.

The next steps in the mortgage application and qualification process will be handled by the lender. They will order an appraisal of the home and, in some cases, request you to schedule a termite inspection. They will also perform title searches to make sure there are no liens on the property and that the seller does truly own the home. They will also obtain a flood certification to insure the home in not in a flood zone.

During this time, you must be diligent to make sure your credit remains good, mainly by paying all of your bills on time. You also want to refrain from making any big credit purchases and opening any new credit accounts. This will lower your debt-to-income ratio and affect your credit score, which could raise some red flags since your lender will pull your credit reports again before closing.

It's also a good time to spend as little money as possible to make sure your bank account balances don't fluctuate too much. You will need to submit another set of pay stubs and statements for all of your accounts before closing on the house.

If all goes well with the above, you should be ready to close on your new home within the time stated in your offer contract to the seller. The lender and title company will schedule the closing so all you'll need to do is show up with a cashiers check for your down payment and closing costs.

You will receive a statement (HUD-1) of all the fees and amounts you will be required to pay at closing at least 24 hours prior. It is important to review this statement for accuracy so there is time to make any necessary changes before the scheduled closing. The final piece of the mortgage process puzzle is the most exciting -- when you are handed the keys to your new home!

Remember that when you apply for a mortgage loan, you are taking the first of many steps in the path to qualification and approval. You need to understand how the process works before you even submit your mortgage application to a lender. By understanding the process, you can better prepare for it. This will make it easier to apply for the loan to begin with, and will also expedite the process.

How to Apply Online

These days, you can use the Internet to save yourself a lot of time and energy. By using certain websites, you apply for a mortgage loan online and get offers from multiple lenders just by filling out a single form. This is a fast and easy way to get the ball rolling.

Of course, you have to use caution when you fill out a mortgage application online, because it will ask for sensitive information such as your Social Security Number. That's why we recommend using trusted names and websites. Get an online quote here.

Which Mortgage Type is Right for Me?

Which mortgage should I choose, based on my home buying situation? This is a common question among home buyers, and with good reason. The type of mortgage you choose will have a long-lasting financial impact on you. After all, you will be making payments on the loan for many years to come (unless you sell the home or refinance the mortgage).

Before we go any further with this lesson, let me say that only you can decide which mortgage is right for you. I'm happy to offer you my input on the subject, but I don't want you to make any financial decision based on this article alone. These are just my own personal and professional views on this topic.

Which Type of Mortgage - Fixed vs. Adjustable

There are many different types of home mortgage loans available today. But nearly all of them all into one of two main categories -- they are either fixed-rate or adjustable-rate mortgage. Which one you choose has a lot to do with your future plans. We will talk about which mortgage is best for different situation in a moment. But first, let me explain how these two types of home loans work:

• With an adjustable-rate mortgage, or ARM, the interest on the loan will change at predetermined intervals (such as every three years, every five years, etc.). In most cases, this means an increase in the rate -- and a larger mortgage payment as a result. These loans get their name because of the period in which they adjust or "reset" to a different rate.
• With a fixed-rate mortgage, the interest rate stays the same for the entire life of the loan. For example, if you got a 30-year fixed-rate loan at 7% interest, it would have that same 7% interest rate after the first year, after the tenth year, at year 20, etc.

There's another popular mortgage option that's actually a combination of these two variations. It is appropriately referred to as a "hybrid" mortgage -- or, to be more specific, a hybrid ARM loan. This loan starts out with a fixed rate for an initial period, and then it adjusts at predetermined intervals after that introductory period. In other words, it combines certain aspects of both the fixed and adjustable mortgages (hence the term hybrid).

A common example of the hybrid ARM loan is the 5/1 option. It's common to see hybrid loans expressed in this way. The first number pertains to the number of years during the initial fixed-rate period. The second number tells you how often the mortgage rate will adjust after that period. So for a 5/1 ARM, you will have a fixed-rate for the first five years, but after that the rate will adjust every year. There are also 3/1 ARM loans, 7/1 and 10/1 options. Those are the most common.

Choosing the Right Mortgage

Now we get back to the question we started this article with -- which mortgage option is right for me, given my home buying scenario? Keeping in mind the disclaimer I made earlier, let me say this...

• If you plan to stay in the home (and therefore keep the mortgage loan) for many years, you should strongly consider the fixed-rate mortgage. It offers predictability in terms of the interest rate, and that can be a good thing to have over the long haul.
• If you only plan to be in the home for a few years, then a hybrid ARM loan might be a good way to save money during those years. You see, during the initial fixed-rate period of a hybrid ARM, you can usually get a lower interest rate than you could get on a traditional fixed-rate loan. Of course, after the ARM adjusts the rate will go up. But if you sell the house before then, it won't matter.

Let me give you a good example from my own past. When I was near the end of my military career, the wife and I moved to Maryland for my last two-year tour of duty. We were pretty sure we weren't going to live there permanently, and would likely move after the two years were up. This knowledge helped us decide which mortgage option to choose.

Long story short, we got a hybrid ARM loan that had a low fixed rate for the first five years. Had we chosen a traditional fixed-rate mortgage instead, we would have paid more in interest. We sold the home after two and a half years ... long before the adjustment period. So we saved money without exposing ourselves to any extra risk.

So when trying to figure out which type of mortgage is right for you, you'll benefit from this kind of long-term thinking. Ask yourself how long you plan to stay in the home. If you plan to stay there for a long time, you have to consider the risks of an ARM loan. You don't fully know how the interest rate will adjust. If it goes up a lot, you might even find that you can no longer afford your monthly mortgage payment. This was a big contributing factor to the housing crisis we are now facing. So choose wisely!