 Does it make sense to pay off my mortgage?
There are varied opinions on whether it makes sense to pay off a mortgage, especially on an investment property. Although owning real estate free and clear would appear to be the most obvious goal, many experts disagree with this strategy. Here are the reasons:
- The average person is limited as to how much real estate they can own free and clear. Successful real estate investors use the other people's money (the bank) to acquire many properties vs. their own money to acquire just one or two.
- Equity has no rate of return. A property owned with free and clear will not appreciate any faster than one with a mortgage. Equity has no rate of return until it's leveraged and invested.
- Having a lot of equity may not provide the same tax advantages as carrying a mortgage.
- Equity is not liquid. Many people work there entire lives to pay off their mortgage only to reach a point when the need arises to borrow against the equity for retirement, medical emergencies or children's education. All this time they have been using their hard earned money to pay off the mortgage just to turn around and borrow it back from the bank, with interest of course.
- Equity is not safe. Not only will the bank charge you interest to borrow against the equity, but in the event of a financial hardship you may not qualify for a new loan.
Again, there are different opinions and strategies, but many savvy investors believe it makes more sense to leverage the equity in your real estate to invest in more real estate or some other investment that would be more liquid, safe and provide a better rate of return.
 Should I avoid loans with pre payment penalties?
This really depends on your investment strategy. One of the biggest misconceptions is that pre payment penalties only benefit the lender. Since lenders make their money by collecting interest, the longer they collect interest the more money they make. Therefore, they are willing to offer lower interest rates in return for a guaranty that you will hold the loan for a specified period of time.
Pre payment penalties come in many different sizes and shapes. The most common length is 1, 2 or 3 years. There are hard or soft pre payment penalties. Hard meaning if you either sell or refinance the loan and soft meaning only if you refinance, leaving open the option to sell without penalty.
If you have intention of selling or refinancing immediately you are better off without any pre payment penalties even though the interest rate may be a little higher. However, if you intend on holding the property for a longer period of time, and do not intend on refinancing, it makes sense to choose a loan with the appropriate pre payment penalty and the lowest possible interest rate.
 Should I use 100% financing on investment properties?
While there are lenders offering 100% financing on investment properties, this is considered a higher risk loan and the interest rates are typically quite high. Higher rates combined with higher loan amounts make it difficult to generate cash flow.
The most common use of 100% financing would be when purchasing an investment property at well below market value with the intention of refinancing within a short time to pull cash out. In this case you normally have to wait between 4 and 6 months to allow for the seasoning of the loan before refinancing.
 How does an impond/escrow account work?
An impound (also known as an escrow account) is an account that's set up for you by your lender to collect funds from you that are used to pay future tax bills and insurance premiums. After closing, you'll pay one-twelfth of your insurance premium and property tax bill to the lender each month along with your mortgage payment. The lender is responsible for paying your property tax bill and hazard insurance premium when they come
due. An impound account is usually required if the borrower makes a down payment of less than 20% of the purchase price. This requirement will vary from lender to lender.
Money is collected from the borrower at closing to set up the impound account. This amount will vary depending on what month of the year you close. If the property tax bill was recently paid and the next installment isn't due for some time, the amount required to start the impound account will be less it will be if the property taxes need to be paid in the near future. The amount collected at closing will usually be enough to cover several months' worth of taxes and insurance.
Although many people prefer not to have an impound account unless it's required, some people prefer having one because it relieves them of the obligation to pay taxes and hazard insurance bills as they come due. Even if an impound account is not required, the lender will usually give you the option at closing of having one if you want.
Your impound account will be reviewed on an annual basis to determine if the correct amount of money is being collected to pay your taxes and insurance. In the event of an increase sometime during the year in your taxes or insurance you may end up with what is known as a shortage, and the amount collected will be increased to cover next year's bills. In addition, if the amount in escrow was not sufficient to pay those bills, you will be required to make up that shortage. The lender will usually give you the option of paying the shortage in one lump some or dividing it by 12, and adding that to your monthly payment over the next 12 months. In the event of a decrease during the year in your taxes or insurance you may end up with an overage. In this case the lender will usually give you the option of receiving a refund, leaving the extra money in the impound account for possible future increases, or applying it to the principal balance of your loan.
If you do end up with an impound account, be sure to carefully monitor the payment of your property taxes and insurance premium, as lenders do occasionally make mistakes.
 Why some loans require PMI
PMI or Private Mortgage Insurance is required by some lenders when you purchase a property with less than 20% down or refinance an existing mortgage resulting in more than 80% LTV. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. It enables lenders to accept lower down payments than they would normally accept. In effect, mortgage insurance provides what the equity of a higher down payment would provide to cover a lender's losses in the unfortunate event of foreclosure.
On a purchase, the cost of PMI increases as your down payment decreases. On a refinance, the higher the LTV, the higher the PMI. You're PMI is normally added to your monthly mortgage payment.
Statistics show that half of all home mortgage loans have PMI policies associated with them. One alternative from paying PMI is using subordinate financing. In The first mortgage is taken out for 80% LTV and a second mortgage is for the remaining 5-20% LTV, depending on the amount of down payment.
A common question from homeowners is how can I get rid of PMI? The decision on when to cancel the private mortgage insurance coverage does not depend solely on the amount of equity in your home. The final say on terminating a private mortgage insurance policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, in most cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. Some lenders may require that you pay PMI for one or two years before you may apply to remove it. In most cases, a new appraisal will be required to determine the value of your property.
 Documentation types
One of the major factors influencing the types of loan products, rates and terms offered by a lender will be the documentation type used for qualifying. The general rule is the more you can prove, the lower the risk, therefore the lower the rate. The following are the most commonly used by Real Estate investors.
Full Documentation
Full documentation or “Full Doc” means you will provide the lender with proof of income through pay stubs, W-2's, and/or tax returns, as well as proof of required assets through bank statements or investment account statements. To qualify as a “Full Doc” borrower you must prove enough income and assets to meet the minimum debt to income requirements from the lender. Most lenders offer the best rates and terms to “Full Doc” borrowers.
Stated income/verified assets
Stated income/verified assets mean your income is stated and the source of the income is verified but the amount is not verified. Assets are verified and must meet the lenders requirements. The amount of stated income must be reasonable in relation to the type employment. Lenders are looking for length of time in the job, strong assets and good credit to support the stated income.
Stated income/verified asset borrowers will usually pay a slightly higher interest rate and be limited to a lower loan to value than “Full Doc” borrowers. However, this is a very popular loan for Real Estate investors, especially those who are self employed or own multiple investment properties and have a difficult time qualifying otherwise.
Stated income/stated assets
Stated income/stated assets mean both income and assets are disclosed and the source is verified but the amount is not verified. Once again, lenders are looking for length of time in the job, strong assets and good credit to support the income and assets you are stating. Stated income/stated asset borrowers will pay a higher interest rate and be limited to a lower loan to value than stated income/verified asset borrowers but can take advantage of the same loan products.
No ratio
No ratio means your income is stated in the loan application but not used directly in qualifying for the loan. Assets are also disclosed, but are typically not verified. The term no ratio comes into play because the lender disregards the debt to income ratio and does not consider it for qualifying purposes. No Ratio borrowers will pay a higher interest rate and be limited to a lower loan to value than stated income/stated asset borrowers.
No Doc
No Doc (No Documentation) means exactly that. The lender does no require you disclose the source or amount of your income or assets. They don't want to know where or even if you work, how much you make, or anything regarding assets. You are qualifying strictly on credit. Obviously since this would be considered a much higher risk loan you will be charged a higher interest rate and limited to a lower loan to value.
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