When you have excess income beyond the normal monthly expenses, there are two options which might be preferable to just leaving it in the bank. You can pay down your mortgage, reducing the overall cost in interest and increasing your equity, or you could invest in any number of opportunities and hope to increase your gains. Here are some tips on whether you should pay down your mortgage or invest the money.

Let’s say you have $5000 extra, and the mortgage has five years left at 6.25% interest, with $25,000 remaining principal. If you pay down $5000 now, the monthly payments will reduce by almost $100/month, and the overall cost of the remaining loan would decrease by $5835 - a savings of $835 interest.

The easiest options to compare with paying down your mortgage are low-risk investments with a specific rate of return, like money market accounts and certificates of deposit (CDs). For example, investing the $5000 in a 2.5% money market account should produce $125 in earnings over the next year, or $657 in five years.

Some banks offer five-year CDs with 5% interest; this should generate total earnings of $1,381. This is $546 more than the mortgage savings produced by the same amount of money; however, it is considered taxable income. Another option is to purchase a $5,000 Treasury I Bond. This could be withdrawn after five years without penalty, and would produce $1,333 interest (4.84%).

There are many other ways to invest money, such as buying stocks, commodities, precious metals, or starting a business. These opportunities offer a less certain level of return and involve higher risks, but do have the potential to produce much greater gains than paying down the mortgage or using the above-mentioned low risk investments.

Aside from the monetary advantages of either option, there are other factors which should be considered. Choosing to pay down the mortgage is easier, less time-consuming, and less complicated. To invest, you will have to spend a lot of time researching the wide range of choices available to investors. Even after you invest, monitoring the investment’s progress will be necessary.

There are also some factors which affect the level of savings when you pay down your mortgage. If your income is high enough to deduct part of your mortgage interest from taxes, this decreases the importance of paying down the mortgage early; however, limits apply and the deduction varies depending upon your income level. If your mortgage has a prepayment penalty, you may want to invest instead; a large fee must be paid if you pay it down early.

As part of the government’s efforts to tackle the subprime loan crisis federal prosecutors have charged over 400 people in the U.S. with mortgage fraud.

The effort, known as Operation Malicious Mortgage, was created to send the message that housing crime is a national program according to FBI Director Robert Mueller and Deputy Attorney General Mark Filip. Filip said, “The Department of Justice is determined to detect and to punish mortgage fraud and to help restore the stability and confidence in our housing and credit markets,” in a recent press conference in Washington.

Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University said the increase in subprime lending has created a “fertile environment for all kinds of things, including outright fraud.” Retsinas believes this criminal activity is one more reason for investors and lenders to be concerned about the valuations of investments and loans.

Authorities estimate that more than $1 billion has been lost due to the mortgage frauds. The different schemes include cheating lenders, swindling those facing foreclosure and filing fraudulent bankruptcy claims according to officials. There are real estate agents, lawyers, appraisers and borrowers among the indicted.

This operation focused mainly on individual cases and small crime rings, but officials have reported that they are also looking into 19 companies, including investment banks and hedge funds that are believed to have participated in accounting fraud among other white-collar crimes dealing with mortgage securities.

As a co-signer on someone else’s mortgage, you face a number of potential financial and legal risks. Such a decision should not be taken lightly. Before agreeing to cosign a loan, it is important to carefully consider the following risks which you will become vulnerable to as a mortgage co-signer.

1. If the person applying for the mortgage becomes unable to pay, the lender will expect you to make the payments. If the bank has added a late payment fee which the borrower cannot afford, this will also become your responsibility as the co-signer.

2. Your ability to obtain loans or other credit may be decreased. According to the Federal Trade Commission, lenders see the mortgage as a debt you are responsible for. The potential obligation to pay the co-signed mortgage increases the risks involved in lending to a co-signer.

3. You could be targeted with a lawsuit by the lending institution if you and the borrower both fail to make the mortgage payments. This could result in additional legal costs which would also be your responsibility.

Individuals are more likely to ask you to act as a co-signer if they have a poor credit record or minimal experience with credit, and your credit record is (or is perceived to be) better. This doesn’t necessarily increase the risks a co-signer is exposed to. For example, someone who has never used a credit card and previously always paid for items in full may be less likely to default on a mortgage than someone who has many debts but hasn’t made any late payments yet. On the other hand, the bank could have a very good reason for not giving the borrower a loan without a co-signer.

Before becoming a mortgage co-signer, it is best to carefully consider the borrower’s ability and intention to continue repaying the loan. Also look at the type of loan being applied for; a mortgage with high interest or a small down payment increases the risks. Unless it is a fixed rate loan, the borrower should be fully prepared to pay more if the interest rate goes up. You also ought to be sure that your positive relationship with the borrower isn’t easily subject to change.

Basically, the risks involved in cosigning a loan make it a problematic decision, especially if you lack a substantial amount of excess income. Keep in mind that even a reliable borrower with consistent earnings can unexpectedly lose employment or experience other financial difficulties.

Depending upon your specific mortgage and financial situation, there are a number of potential reasons why you should refinance. Refinancing can decrease your monthly payments, allow you to pay off the loan more quickly, and/or provide other financial benefits. Read on for more specifics about each of five different possible reasons why you should refinance your mortgage, along with details on the costs of refinancing.

1. Lower Rate: It may be possible to gain a lower interest rate if you refinance from a fixed to adjustable rate mortgage, or if your credit score has improved since the loan was originated. A lower rate might also be available if interest rates in general have reduced.

2. Balloon Payment: Some mortgages have a large “balloon payment” which becomes due at the end of the mortgage term. If this payment is too costly to afford, it may be possible to refinance it instead. In some cases, the original lender is required to offer refinancing if certain conditions have been met.

3. Length: Another possible reason why you should refinance is to obtain a different mortgage term. Changing to a shorter term (like 15 years) will make it possible to pay off the loan sooner, whereas a longer term (30, 40 years) reduces the monthly payment. A home owner might want to refinance in this manner if his/her income has significantly increased or decreased.

4. Fixed Rate: If your mortgage has an adjustable rate, it could be possible to refinance it to a fixed rate. This way, your monthly expenses should be more predictable, and there will be no need to worry about the mortgage payment increasing if rates go up.

5. Better Terms: If your mortgage requires Private Mortgage Insurance (PMI) or includes other undesirable terms, refinancing may allow you to obtain a loan without these negative aspects - especially if you have finished paying off a substantial amount of the principal.

Regardless of the reason why you should refinance, it is important that the closing costs for refinancing do not outweigh its benefits. For example, you should consider whether Private Mortgage Insurance will be more expensive than the closing costs, before refinancing so that it no longer has to be paid. Also, be aware that some lenders charge a significant prepayment penalty if a borrower refinances; this most commonly applies to subprime loans, but affects some other mortgages as well.

The basic concept of a payback period is that it equals the amount of years it takes to earn back an upfront payment used to gain income or reduce expenses. Regarding mortgages, a payback period refers to how long it takes to repay the closing costs required to obtain refinancing or purchase points.

To buy points when purchasing a home or to refinance a mortgage, closing costs must be paid. The cost of points is considered part of the closing costs. In both cases, the upfront expense is regained at the end of the payback period, and the home owner begins saving money on mortgage payments. Because of this, it is generally not financially helpful for the owner to refinance or pay points when he or she expects to sell the property soon. However, owners cannot always realistically predict how long it will take to sell their homes, especially when factors outside their control impact the local or national real estate market.

For example, a home buyer takes out a thirty-year $110,000 mortgage and pays $3,300 for three points. This amount is added to the closing costs, and reduces the interest rate by 0.75 percent. He would save about $55 per month, so the payback period would last for 61 months (just over five years). To make paying points worth the expense, he would have to stay in the home for a period of time at least one month longer than this. During an entire thirty year term, the total savings would amount to just under twenty thousand dollars, making the initial cost an effective investment.

Finding the length of the payback period for refinancing is more complex; someone who refinances an adjustable rate mortgage to a fixed rate (or vice versa) will have to use estimation, as there is no certainty of how much the rate might change. The maximum rate and the time period in between adjustments can be used to help predict the cost of an adjustable mortgage to some extent. It is easier to determine the payback period if refinancing immediately produces monthly savings, such as when a lower rate is obtained.

The concept of a payback period can also apply to other housing related expenditures, such as installing a more efficient heating system or insulating the walls. There is a significant initial cost, but these purchases provide additional savings as someone stays in the home for a longer length of time.

A good credit score often translates to getting better mortgage rates and more favorable terms on your mortgage. This can result in many thousands of dollars in savings. There are some steps you can take to help repair your credit and gain a better chance at receiving these rates. Here are five tips on how to do this.

1. Getting your credit report and reviewing it for errors can help repair your score. After doing this, you can notify the appropriate credit reporting agency if there are any mistakes, thus gaining a better score. These reports are offered free of charge at annualcreditreport.com and can be requested yearly.

2. Another way to repair your credit is to consolidate two or more debts into a single balance. Your score reduces when a greater number of accounts exist. For example, you might be able to consolidate the debt from separate credit cards or multiple student loans. This will also reduce the chance of accidental late payments, while saving money on checks.

3. If you have taken out few or no loans (cards, mortgages, auto, etc) in the past, consider borrowing a reasonable amount of money at a relatively low interest rate and paying it back on time. However, you should first check your report to see if many utility or other payments have been recorded; this may not be necessary, esp. if you have high income.

4. Pay off some of your current debt balances if possible. Even when monthly payments are received on time, greater amounts of existing debt have a detrimental effect upon your credit score. This includes any money you might owe on car loans, credit cards, or student loans. Prioritize getting rid of debt with high interest rates first.

5. If there is significantly negative data on your credit report, such as a past foreclosure or bankruptcy, it may be best to wait until later before applying for a mortgage. The score will slowly repair itself, and getting better rates on a mortgage or other loan will eventually become possible.

Following these credit repair tips can be quite worthwhile. For example, even a half percent difference in interest rates on a $150,000 thirty-year mortgage will generate about $50 in savings each month, or eighteen-thousand dollars overall. Other ways of getting better mortgage rates include choosing a shorter mortgage term, paying points, and comparing the rates offered by different banks.

A home loan known as a mortgage accelerator common in Australia and the U.K. has made it’s way to the U.S. recently. This loan uses a borrower’s paycheck in combination with home-equity borrowing to help lessen the amount of time a mortgage is paid. This can potentially help borrowers save tens of thousands of dollars in interest.

In a traditional 30-year mortgage the principal payment doesn’t equal the interest payments until just after 20 years of paying on the loan. Because many of us only stay in our homes an average of 5 to 7 years we spend most of that time strictly paying the interest on our mortgages. The introduction of the mortgage accelerator helps make a borrower’s money work for him or her instead of the bank or mortgage holder.

The way it works is that a borrower deposits their paychecks into accounts that use all the unspent money against balances on mortgage loans each month. At the beginning of a month you pay an amount toward your mortgage that includes as little interest as possible. Actually an advance line of credit, or HELOC, pays this amount. You’ll also use a credit card for daily expenses and then pay off that balance monthly with the HELOC. Then you deposit your paychecks into the HELOC, paying down the debt in this account. While it may take some financial responsibility to use this method, as many as 25% of Australians use it for paying down their mortgages.

In the United States, the two firms now offering these mortgages are Macquarie Mortgages USA, which calls the program the Macquarie Asset Manager, and CMG Financial Services, whose offering is called the Home Ownership Accelerator.

The Federal Housing Administration held almost 70% of home loans in the 1980s. Due to home prices appreciating faster than the loan limits of the FHA that percentage has drastically decreased over the past decades. To combat this, the 2008 government fiscal stimulus plan provided increases in FHA loans, from $417,00 to $729,750 in geographical areas with larger home prices.
This increase in the FHA loan limit has led to a surge in applications for FHA loans. As a matter of fact, the Mortgage Bankers Association showed a 15% increase in applications in a recent report.

Taking out an FHA loan has a lot of advantages compared to other, more traditional loans. For instance they have lower interest rates, usually around 1% less. The reason for this is that they can be resold to Freddie Mac or Fannie Mae, which implies a financial backing by the government.

You can also have a lot less equity with an FHA loan. Thanks to the recent credit crisis and declining value of houses lenders are lending much lower percentages of a home value to borrowers. This means many borrowers have to pay at least 20% down for home loans these days. FHA loans allow buyers to purchase a home with only 3% down.

This increase in FHA loans is great for people that want to purchase homes, but haven’t been able to put away enough money for a down payment. You don’t have to meet minimum requirements to qualify for an FHA home loan, but you will face debt-to-income ratios to prevent you from getting a home that you cannot afford.

As real estate values fall, some home owners are finding that they have negative equity. This means that the owner owes more money to the bank in mortgage(s) than the property is actually worth. Even if the home is sold, the owner still owes the amount of the negative equity on his or her mortgage.

For example, someone buys a house for $300 thousand dollars, with a down payment of $50,000. He eventually pays off $10,000 of the mortgage principal, but the home’s value falls to $230 thousand, thus he has negative equity. Here are some possible options for what to do if you have negative equity…

A. If you can still afford to make the monthly mortgage payments, consider waiting to see if property values (and your equity level) eventually rise. However, values may additionally decrease before they go up again.

B. Making improvements or repairs to the home will improve your equity and increase the property’s chance of selling. In some cases, this only produces a net gain if you carry out the work, rather than hiring a contractor.

C. If possible, selling the home and using other assets to pay off the remaining mortgage balance will prevent damage to your credit record. However, it will probably not be possible to afford buying another residence.

D. Allowing foreclosure to occur will result in a poor credit score and loss of the home. On the other hand, you will not have to pay for the negative equity portion of the mortgage if this happens.

E. Banks will sometimes approve a “short sale”; according to wikipedia.org, this means that the bank lets an owner sell his/her home for less than the total owed on the mortgage, and accepts that amount as repayment for the full balance.

F. Filing for chapter 13 bankruptcy can enable you to gain more favorable mortgage payment terms without losing the home, or at least delay foreclosure. However, it will have a negative effect on your credit record.

An appraisal should be used when determining what level of equity you have. City tax assessments do not always reflect the market value, and some realtors may intentionally underestimate the home’s worth so that they can sell it more quickly and gain a commission. Monitoring the general trends in regional home values should give you an idea of whether your equity is going up or down, and if it is still negative.

Also referred to as a “tandem” loan, an 80-20 mortgage involves taking out two loans to pay for the entire cost of a home. The first mortgage consists of eighty percent of the purchase price, while the 2nd loan pays for the twenty percent which would more typically be paid for with a down payment. The only up-front expenses are the closing costs.

An 80-20 mortgage is most attractive for someone who doesn’t have the money for a down payment, or desires to use these funds for a different purpose. It can provide a more realistic option for first-time buyers, as they do not have funds from the sale of a previous home. Another advantage of an 80/20 mortgage is that private mortgage insurance (PMI) usually isn’t needed.

A major downside of using this type of loan is the higher cost in total interest. With a thirty year term and six percent interest, it would cost a total of $664,714 to purchase a $345,000 home with a twenty-percent down payment. On the other hand, the total expense would be $744,642 with an 80-20 mortgage, almost eighty thousand dollars more. The actual cost may be greater; as bankrate.com points out, an increased interest rate often applies to the 20% loan.

Another disadvantage of an 80-20 loan is the lack of home equity it produces. Until a significant amount of the principal has been paid off, the owner will not be able to take advantage of home equity loans, equity credit lines, or reverse mortgages. If the home is sold, both loans will have to be paid back and it will be difficult to purchase a different property without using another 80-20 mortgage.

There is a greater possibility for negative equity with 80-20 mortgages, as the home’s value only has to fall slightly for this to happen during the first years of ownership. It should be verified that the home is worth at least as much as the purchase price; otherwise, a mortgage of this type could begin with negative equity.

Overall, an 80-20 mortgage offers a more convenient alternative for home buyers who cannot afford to make a down payment and don’t want to delay purchasing a property. However, in the long run, it is often less financially advantageous than making a down payment on a traditional loan. Lending institutions which offer 80-20 mortgages include Citizens Bank, National Penn Bank, and various local banks.