Having a place to call home is an aspiration many people strive to achieve. However, accessing the finances to make this dream a reality remains the most significant challenge. Traditional loans have been the go-to option for most of us when it comes to seeking finances to buy a home or to invest in the real estate sector. The trouble is, they are not easily accessible, which may delay your plans.
Owning a home should not be an uphill task. That is why at Money Lender Loans, we provide alternative financing options to help you invest in the real estate sector. We offer non-traditional loans that are easily accessible and ensure you get the financing you need. Non-traditional loans are tailored to address the challenges that most of us face while seeking traditional funding, an experience not new in Orange County, CA. The information provided will help you deepen your understanding of non-traditional loans.
What are Non-traditional Loans?
Non-traditional loans are financing options offered by non-banking institutions. In their nature, non-traditional loans lack the requirements needed for you to access traditional loans. Conventional loans insist on you providing details of your credit history, security for the loan, income level, and credit rating details. The information is used to determine your risk potential and the ability to repay the loan. While this approach by traditional loan providers may be a noble initiative to secure their funds, the risk assessment has locked out many potential homebuyers from accessing finances to buy homes.
Non-traditional loans are structured to be easily accessible. This means that the information required of you by the lender does not affect your eligibility of the amounts stated in your loan application. It is used to understand you better as the customer. The concern for non-traditional loan providers is the interest and principal repayment.
Non-Traditional Loans Compared to Traditional Loans
Both traditional and non-traditional loan options are readily available for all home buyers. The choice of which loan facility to go for is informed by comparing certain aspects and gauging what works best for you. The elements you should take note of include accessibility of the finances, interest charges, and loan repayment terms.
Accessibility of the Funds
In traditional loans, the information you provide when applying for the funds builds your credit risk profile. The banks have two rank groups, the high-risk customers and the low-risk customers. High-risk customers are those who are likely to default on their loan repayments. Low-risk customers are those who are less likely to default on their loan repayment. Therefore, low-risk customers have better chances of accessing the full loan they applied for, unlike the high-risk loan applicants.
Non-traditional applications ask for information to build your profile as a customer. Unlike traditional loans, the information does not decrease your odds of accessing a loan package. The loan is attached to the house or piece of real estate you are buying. Thus, in case of default, the home will be repossessed and sold off for the lender to recover the sums owed to them. This operating model opens doors to everyone looking to buy a home.
Interest Charges
The charges levied on the loan facility are an essential consideration to take into account when applying for credit. Interest rates in the market do vary depending on, but not limited to the economic environment, demand and supply of the loans, inflation, and lender’s charges for the loan. The variation affects both traditional and non-traditional loans. However, non-traditional real estate loans charge lower rates unlike conventional loans because accessibility is the driving force behind non-traditional loans.
Repayment Terms
Loan repayment periods are similar when non-traditional loans are compared to traditional home credit packages. The periods could range from five-year-long packages to thirty year-long credit facilities depending on the agreed terms. In most cases, the conditions for traditional credit packages are usually set, and a credit applicant needs only to agree to the loan repayment terms. There is little room for negotiations. Non-traditional real estate loans, on the other hand, use a different approach. Terms are set to ensure uniformity. However, they can be adjusted and tailored to suit your repayment capabilities.
Types of Non-Traditional Real Estate Loans Available in the Market
Every non-traditional loan in the real estate sector is tailored to suit the various financing needs in the market. Thus, there are several non-traditional loans to consider before zeroing in on one that will address your needs.
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Adjustable-Rate Mortgage (ARM)
These mortgage plans have interest rates that vary throughout the year. The fluctuation is based on an index that determines the interest rate. Indexes are interest rate charges set by the market forces. Having the index rate added to an ARM margin, which is an agreed fixed percentage, gives the final value of the ARM interest rate. ARM margins remain unchanged while the indexes vary depending on the economic dynamics.
Economic changes may be unsettling especially if they affect your mortgage payments. It is, for this reason, there are periodic caps on the ARMs. The caps set a ceiling price to which the rates cannot exceed. This system is in place to shield mortgage buyers from economic extremes. The caps also extend to monthly payments. Therefore, the caps, in this case, stipulate by how much monthly mortgage payments can increase by.
Similarly, these caps can also dictate terms on the life of a loan. Lifetime rate caps limit the increase of interest rates over the loan’s life. The interest caps are not only limited to the upper levels. They too affect the lower levels. This policy ensures that the lenders do not suffer when the economic dynamics are not in their favor. This means that you may end up with a lowered interest rate, but it does not affect your overall ARM rate.
Adjustable-Rate Mortgages (ARMs) are expressed as two figures. The first digit represents the time of the fixed rate on loan. The second digit, however, is a figure derived from a set formula. For example, consider an ARM rate of 3/25. The fixed rate will be in effect for three years after which a floating rate is charged for the remaining 25 years.
Benefits of Adjustable-Rate Mortgage (ARM)
In acquiring this loan, you enjoy certain benefits that include the following.
Lower Closing Costs
You enjoy cheaper loan rates when compared to the fixed interest rate loan packages. Fluctuations of the rates also add to the benefits you enjoy. An overall assessment of the costs of the ARMs compared to the fixed-rate loan packages shows cost savings enjoyed in ARM loan packages.
Fixed Interest Period that Allows You to Make Cost Savings
You have the option of using the mortgage funds to refinance or sell your home during the fixed-rate period. For example, in the case of an ARM rate of 3/25, you can use the three years to refinance or sell your home. You then get more funds to take up new projects all the while enjoying lower rates during the rest of your mortgage’s life.
Access to Better Home Deals
Most home buyers have an upward income trajectory in the foreseeable future. With this projection, most investors or home buyers can access more funds. They, therefore, can close on better real estate deals.
Challenges of Adjustable-Rate Mortgage (ARM)
The loan product has its set of challenges worth looking further into Adjustable-Rate Mortgages.
Planning may be Hampered
Due to the fluctuation of the rates during the life of the credit facility, planning may be a challenge. You will have to prepare for higher monthly payments when the interest rate goes up.
Detrimental if You Fail to Honor the Loan Terms
Familiarizing yourself with the fine print of the loan is essential. Before signing the loan document, be sure that you understand all the dictates of the contract. Failure to do so will work to your disadvantage should you violate the agreement.
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Interest-Only Mortgages
These loans are structured to allow for interest payments before principal repayments. Depending on the loan terms, the first years of the loan are meant for the repayment of the interest at a fixed interest rate. These years are the interest-only years. Most loans have an interest-only period ranging from ten to thirty years. Once the interest repayment is completed, you begin paying off the principal amount at an adjustable interest rate. Rates on this loan package differ from one lender to another. Be sure to look out for the best rates.
Advantages of Interest-Only Mortgages
Interest-only mortgages do have advantages that you can access if you take up the loan. They include the following.
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Interest charges that are lower than the traditional loans.
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Loans of up to $750,000 are tax-deductible during the interest-only period.
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You can buy a large house by merely qualifying for a higher loan. Further, you have more liquidity to channel towards other opportunities during the period the loan is in effect.
Disadvantages of Using Interest-Only Mortgages
There are certain drawbacks to the loan that should be taken into consideration.
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The adjustable interest rates may make payment of the principle strenuous. This is the case when you have cleared the interest repayment at a fixed rate.
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The value of your home may not appreciate as anticipated. The non appreciation of your home will indeed hamper any plans of reselling or refinancing your home during the period the loan is in effect.
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Negative Amortizing Loan
Borrowers of negatively amortizing loans get to schedule loan repayments to a time when the payment is less than the interest charged on loan. That means that the payment made is less than the interest charge at that particular time. This arrangement creates a deferred interest charge. The deferred interest is then added to the principal due; thus the principal owed increases over time.
Pros of Negative Amortizing Loans
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Deferring interest allows one to have certain funds at their disposal. Most investors channel the funds to other projects that can generate income during the period the interest is deferred. They will then use the funds to offset the credit due and still have some funds saved up.
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This loan can be utilized by those who cannot afford to buy homes with other loans because of high monthly payments. In these situations, you can buy a more expensive home, if you qualify for the negatively amortizing loan. Since the monthly payments are low, you are in a position to honor them. If the value of your home increases during the period the loan is in effect, you can sell the house at a markup. Whatever gains you make, you can channel them to paying for the loan. You should still have funds left after the loan is cleared.
Cons of Negative Amortizing Loans
Negatively amortizing loans are not immune to challenges. Failure to reduce the principal due during the negative amortization period will work to your disadvantage. Also, when you are repaying the loan, the final amount due will be higher than the sum owed. This discrepancy may affect your monthly payment plans.
Where to Access Non-traditional Loans
While it is exciting to know that there are alternatives to accessing credit to invest in the real estate sector, it is good to identify an ideal lender. The market is flooded with numerous credit providers. They are three categories that you can utilize when searching for non-traditional loan providers.
Online Mortgage Lenders
The online space is made up of mortgage players who specialize in eradicating the hurdles experienced in applying for a traditional loan. The bureaucracies in the old system created inefficiencies. Customers had to wait for long periods to get approval for the funds. In other instances, customers offer information that affects their credit such as credit histories. These inefficiencies either reduce the loan ask by the applicant or denies them the funds altogether. The approval time of loans is in minutes. Online mortgage players utilize a loan-decision algorithm. Based on the information you provide, the system determines the sums you can access.
Marketplaces and Brokers
Various platforms create a market for lenders and loan seekers. These platforms offer comparison tools to the loan seeker. You get to compare the interest rates offered by the various lenders and choose who you are comfortable engaging. Once you have selected, any further engagement will be with the creditor directly.
Non-Bank Lenders
Past economic challenges coupled with slow economic growth has seen many banks exit or reduce their operations in the mortgage sector. This void is being filled by non-banking institutions such as the credit unions and the small lenders. Bank loans are restrictive owing to the regulations set by the federal government. However, non-banks enjoy a freer space to carry out their activities. This freedom translates to flexible loan options to the consumers.
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Where to Access Non-traditional Loans
While it is exciting to know that there are alternatives to accessing credit to invest in the real estate sector, it is good to identify an ideal lender. The market is flooded with numerous credit providers. They are three categories that you can utilize when searching for non-traditional loan providers.
Online Mortgage Lenders
The online space is made up of mortgage players who specialize in eradicating the hurdles experienced in applying for a traditional loan. The bureaucracies in the old system created inefficiencies. Customers had to wait for long periods to get approval for the funds. In other instances, customers offer information that affects their credit such as credit histories. These inefficiencies either reduce the loan ask by the applicant or denies them the funds altogether. The approval time of loans is in minutes. Online mortgage players utilize a loan-decision algorithm. Based on the information you provide, the system determines the sums you can access.
Marketplaces and Brokers
Various platforms create a market for lenders and loan seekers. These platforms offer comparison tools to the loan seeker. You get to compare the interest rates offered by the various lenders and choose who you are comfortable engaging. Once you have selected, any further engagement will be with the creditor directly.
Non-Bank Lenders
Past economic challenges coupled with slow economic growth has seen many banks exit or reduce their operations in the mortgage sector. This void is being filled by non-banking institutions such as the credit unions and the small lenders. Bank loans are restrictive owing to the regulations set by the federal government. However, non-banks enjoy a freer space to carry out their activities. This freedom translates to flexible loan options to the consumers.
How to Choose the Right Mortgage Plan
With all that information about non-traditional loans, it is best to also conduct a self-assessment before applying for a loan. There are four assessment avenues you can utilize to ensure that you get the perfect fit for a loan package.
Evaluating your Situation
This evaluation helps determine the amount of loan you should apply for during this process. Further, you will be in a position to know how much you are willing to part with at the end of every month in loan repayments. Therefore, be sure to know beforehand your life plans, financial health including your credit history and the potential home value if you are looking for a refinancing package. If you are buying a new home, look for a home that you are comfortable with its price.
Take into Account the Loan Options
Compare all the loan options available to you. Have all the details with regards to interest charges, the terms of the loan, and the loan type. All this information will help you determine what loan package that suits your needs. Most real estate loans are in effect for 15 years to 30 years. The length of the loan also has a bearing to the repayment terms and the interest charges levied on the loans. You are, therefore, better placed to decide on what loan option to consider.
Compare Lenders and their Loan Packages
Several online platforms have been set up to help loan applicants compare the various interest charges offered by several loan providers. The online platforms help inform your decision on who is best suited to provide you with a loan. It is best to take time and have all your questions about the loans addressed. Do also consider consulting various people who are better placed to offer the needed insight.
Familiarize Yourself with the Loan Costs and Fees
Various aspects affect interest rates. Save for the factors beyond the lender's control like the economic environment, and there are certain internet costs that they include to the overall interest charge. Look out for the service charges, and loan facilitation fees among others. Compare and be sure to go for the one you are comfortable paying for in the long term.
Finding a Non-Traditional Loan Provider Near Me
Real Estate investment and home ownership decisions in Orange County, CA, require a strategic financial partnership. Non-traditional loans offer the needed capital injection into your investment plans or your home purchase needs. We at Money Lender Loans understand the importance of financial help when it comes to these significant life decisions. We are ready to partner with you to see your dreams fulfilled. Give us a call at 949-409-4372 and let us have a conversation on what loans you need.
