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Understanding How to Finance Homes and Businesses

 Scott McKee, Kristine Murphy, Michael R. Bealer

                   English 312

                  March 4, 2009




                   Prepared for

               Karen C. Holt, Ph.D.

          Professor of Advanced Writing

         Brigham Young University-Idaho
                                                                                                                                                Finance               2


                                                                    TABLE OF CONTENTS

LIST OF ILLUSTRATIONS .......................................................................................................................... 3

ABSTRACT ................................................................................................................................................... 4

INTRODUCTION .......................................................................................................................................... 5

FIRST TIME HOMEBUYERS ...................................................................................................................... 5

             STEPS .............................................................................................................................................. 6

             CHALLENGES ................................................................................................................................ 7

             UNDERSTANDING……………………………………………………………………………….8

             RATE ............................................................................................................................................... 9

             PAYMENTS .................................................................................................................................... 9

HOME LOANS ............................................................................................................................................ 10

             FIXED RATE MORTGAGES ....................................................................................................... 10

             BI-WEEKLY FIXED RATES ....................................................................................................... 11

             CONVERTIBLE FIXED RATE MORTGAGES .......................................................................... 12

             ADJUSTABLE RATE MORTGAGES ......................................................................................... 12

             SAFEGUARDS .............................................................................................................................. 13

             REVERSE ANNUNITY MORTGAGES ...................................................................................... 14

BUSINESS LOANS ..................................................................................................................................... 15

             TYPES OF BUSINESS LOANS……………………………………………………………………………16

             LOAN REQUIREMENTS…………………………………………………………………………………..16

             RISKS WITH BUSINESS LOANS…………………………………………………………………………16

             MOTIVATIONS……………………………………………………………………………………………..17

             APPLYING FOR A BUSINESS LOAN……………………………….………………………………….18

             BUSINESS LOAN IN SUMMARY………………………………………………………………………..18

CONCLUSION…………………………………………………………………………………………………..........19

REFERENCES ............................................................................................................................................. 20

APPENDEX…………………………………………………………………………………………………21
                                                                                                                  Finance             3


                                                LIST OF ILLUSTRATIONS



Figure I: Home for sale ......................................................................................................... 7



Figure II: Home Loans………………………………………………………………….…10



Figure III: Loan Approved………………………………………………………………...15



Figure IV: Receiving Loans……………………………………………………………….18



Figure V: Calculated Risk……………………………………………………………....…21
                                                                                  Finance        4


                                           ABSTRACT

Understanding How to Finance Homes and Businesses are many questions young adults face in

beginning their lives. In this we identify what to look for, what steps to take and finding the best

loan for you. In conclusion we hope you feel educated enough to go out and find your first

home, your first home loan and your first business loan.
                                                                                  Finance          5


                                               Introduction

       First time homebuyers face many challenges because they do not know what to look for.

They wonder if they are taking a risk on getting a home. They do not understand the steps and

challenges, or are unfamiliar with rates, in this process. The purpose of this report is to help

these individuals learn and be aware of the steps that need to be taken, the challenges they could

face, and understand the cost of buying a home.

       In today’s world we are surrounded by many investing opportunities. These opportunities

lead to chances to finance and refinance so that we can make a buck or simply live our lives in

comfort. One of the biggest topics that seem to plague our ears when addressed with this issue is

that of loans. Loans have become a crutch for many and for others an opportunity. Loans can be

used for our benefit as long as they are understood and applied properly. There are a few

important loans that we feel are important to be familiar with.

       The methods used in finding the answers will be found throughout many websites listed

below. Live and personal interviews will be done as well with live loan officers helping us

understand what it takes to receive a particular loan.

                                     First Time Homebuyers

   First time homebuyers face many challenges. They wonder if them taking a chance will

become a reality in owning their own home. They do not know the steps, challenges or

understanding rates in which we hope to help these individuals learn. What steps to take, the

challenges they could face, and understanding the cost of buying a home.
                                                                                    Finance          6


Steps

        The steps in getting your first home are finding what you can afford, searching for the

perfect home and finding a real-estate person or finding yourselves an agent. There are many

steps in buying a new home but we would like to focus on five steps in particular.

        First, making sure your financial house will be secure in which means that you know

your job is not at risk. This contains that you have a solid credit score as stated before, also

having the down payment needed to purchase your home. This is normally 20% down of the

cost of the home. At this time of the economy we are facing, the market is low and can be the

best time to buy, but only as long as you are able to. If not then it will be best for you to wait

until after the market improves.

   Second, is the best advice anyone could give is, “Don’t buy a house because it’s cheap; buy a

house because you want to live in it” (Mullins, 2009, para. 3). The one thing you must always

remember is if you are not going to be in the home you are purchasing for more than five years,

it might not be your best option. Finding the right home is an important thing.

   Third, being conservative is the most important thing. If 2009 is not a great year for you to

try to stretch your finances, the economy is low, the dollar is not worth as much anymore, and it

is a time of depression. Rosen says’ a buyer’s monthly housing payment should not exceed 35%

of their gross monthly household income (Mullins, 2009, para. 4). Remember to look at your

income and all payments remembering to see what you as a family can afford and stick to that

amount as a payment.

   Fourth, getting and finding the right concessions for you is the right thing to do, especially

now in the market. Remember you can ask for a lower price than what the price is, by asking

them to pay the closing cost of the loan or even a part of it. People are determined to sell their
                                                                                  Finance          7


homes they will be willing to sell it to you at a lower price than that which they are asking for.

Do not settle for a high price on a home when you can try to counter offer them into a lower and

more reasonable price in which you can afford.

   Fifth, is looking for homes that banks may be selling after other homeowners have to

foreclose on them. There are many homes in which the banks have had to step in and begin the

process of foreclosures. I remember when so many banks were handing out loans to people who

really should not have qualified to get one. From this decision, many are now losing their homes

from banks handing out loans to those who really couldn’t afford one. If your family is looking

at getting a home in this type of way, you are going to want a professional to help you. This type

of way in buying a home is done differently and at times can be at a better rate than normal.

                         Figure I. Home in Rexburg Idaho




                         www.forsalebyownerbuyersguide.com/ForSaleByOw...

   Challenges

       What are some of the challenges one faces in first time home buying? For some it is

agreeing on a price, taking time to look around at the options that are available, and finding a

bank to loan them the money needed to get a home. Agreeing on a price is something that makes
                                                                                   Finance          8


you take a chance, someone may be asking for $400,000 on a home but you want to spend

$323,000, this is not the price in which they are asking, but for some they may take that offer.

There are different occasions in which where some will come back and want a counter offer of a

higher price then you offered, or they may say that is fine if you have the down payment ready.

       What is meant by taking the time to look? For us the idea of owning my own home one-

day gets us excited, but how many people think that this could be the house that they will live in

for the rest of their life. It’s a hard thing to think of, when you are looking at a home you are

going to want to find something that makes you happy, the location, size, able to fit your family

comfortably, do you want a fixer upper, or one that is already completed? There are so many

decisions to make and knowing that you are making the right choice is important. It is great to

compare what you want to what there is. There is also the decision to build your own home, is it

a better buy to take that route than buying one that is on the market? So many options to

compare and see what you can afford financially and stay within your means.

   One of the most important things is looking for a bank that is willing to give you the loan

needed to buy a home. Every bank is different, in helping first time buyers. You must learn what

to expect and the process in purchasing the home. When you apply, you will have to state your

debts, your monthly payments, the amount of time left to pay on those debts, and a credit report

is to verify your debt. They then look at your current job status, what you make in income and

from this information, your rate is figured on interest and on the amount of a loan, you may

receive.

Understanding

   Understanding the cost in buying a home at times can be difficult. Then understanding what

the closing costs are, what type of rate did you get in your loan, and then making sure, you have
                                                                                  Finance        9


the amount of money to make your monthly payments and insuring your home. Closing cost is a

fee that is required on closing the home in which you are purchasing. Sometimes as a buyer, you

can ask the seller to cover the closing cost, or even lowering the amount that they are wanting.

Rates

   Rates are figured by your credit scoring which is looking at your current debts and the

amount of time you have to pay those loans off. Many of us do not even think that our current

debt could make buying a home impossible or even making us have a high interest rate. Most

people make counter offers if the buyer feels the rate is too high. In addition, if the seller comes

down on their rate, but it is not low enough for you and your families, you can put in another

counter offer to try to get the rate you want. In purchasing your home, you must have at least

twenty percent down to get the home.

Payments

        Payments for homeowner’s are done in many ways; you can pay it monthly, yearly

through a bank, which is called escrow. “Escrow is best known in the United States in the

context of real estate (specifically in mortgages where the mortgage company establishes an

escrow account to pay property tax and insurance during the term of the mortgage)” (Wikipedia,

2009, para. 1). They contact you when the amount is due for these things. From this, we are all

able to see new and improved ways in trying to buy your first home.
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                                          Home Loans

                                            Figure II

                                Represents money for home loan




                                     www.psycholoans.com



       Mortgages are often spoken of in different varieties and types. What exactly is a

mortgage? The Federal Trade Commission states that a mortgage is, “A contract, signed by a

borrower when a home loan is made, that gives the lender the right to take possession of the

property if the borrower fails to pay off, or defaults on, the loan (The Federal Trade Commission,

2008, Glossary, Mortgage).” Mortgages can be divided into a few basic forms. These forms are

known as fixed rate mortgages, and adjustable rate mortgages. These different types of

mortgages are easier to understand than people actually realize.

Fixed Rate Mortgages

       Fixed rate mortgages are the most commonly thought of when referring to mortgages.

These types of mortgages have been the staple for the American people for the last couple

decades. People get a sense of comfort knowing that their payment per month for their mortgage

will be the same for many years to come. This is one of the main benefits to having a fixed rate
                                                                                 Finance          11


mortgage. As stated by Mortgage-X.com, “the major advantage of fixed rate mortgages is that

they present predictable housing costs for the life of the loan (Mortgage-X.com, 2009, Fixed

Rate, Para 1).” This is very beneficial because there is no wondering what your payment might

be on a month-to-month basis. The customer is able to live in comfort with the knowledge of a

more exact and definite budget for themselves.

       The time of the loan is another feature that plays a role in the appeal to the customer.

There are many different time frames that these fixed rate loans work within. As time goes on

there are many different factors that change the opinions of people on what time frame is best for

them. “When people thought of a mortgage 10 to 50 years ago, they thought of a 30-year fixed

rate mortgage. This traditional favorite is not the only choice nowadays because volatile financial

times created a whole new range of selections (Mortgage-X, 2009, Fixed Rate, para 2).” These

volatile financial times that are spoken of refer to the rise and fall of the economy. As the world

around us changes we find other forms of investing and financing to better accommodate our

personal financial needs.

Bi-weekly Fixed Mortgage Rates

       The available time frames for these mortgages range anywhere from bi-weekly to 40

years. Bi-weekly fixed mortgage rates require that a set amount be paid every two weeks. This

process causes the actual amount paid per year to rise about 8% higher than the normal amount.

In doing this, combined with more frequent payments, the actual principle of the loan is taken

away faster. Because the principle of the loan is decreased at an increased rate the amount of

interest applied is lower. Thus by using these types of fixed mortgage rates the customer is able

to pay less money overall in a shorter amount of time, but a larger amount of money in

comparison within that time frame.
                                                                                   Finance        12


       Although these bi-weekly loans take care of the mortgage faster, a larger time frame loan

may be what you want and need. As stated by Mortgage-X.com, “the 30-year fixed rate

mortgage may still be the best mortgage for your circumstances. It offers the lowest monthly

payments of fixed rate loans, while providing for a never-changing monthly payment schedule

(Mortgage-X.com, Fixed Rate, para 2).” This security is something that attracts customers to

these loans.

Convertible Fixed Interest Rate Mortgages

       Convertible fixed interest rate mortgages are mortgages that allow the home-buyer the

freedom of changing the interest rate after a given period of time. Often referred to as reduction

option loans, these ROL’s are designed to allow the long-term loan to be treated as though it was

a short-term small loan. This lets a lower interest rate to be applied for a small amount of time

ranging from 13 to 59 months.

Adjustable Rate Mortgages

       The second type of mortgage is the adjustable rate mortgage. Adjustable mortgage rates

have become the most popular form of loans for mortgages in today’s economic frenzy. ARMs

could be the better solution for you. According to The Federal Reserve Board, “your ARM

could be less expensive over a long period than a fixed-rate mortgage--for example, if interest

rates remain steady or move lower (The Federal Reserve Board, 2009, What, para 3).” These

mortgage rates are filled with possible jumps and plummets of interest rates. It is highly

recommended that a steady high income is present to accommodate for the ever changing rates.

       These adjustable rate mortgages, or ARM’s, can be more easily split into 4 sub

components; initial interest rates, adjustment interval, index, and margin. Initial interest rates for

ARM’s are very low and are usually what attracts new home-buyers to these types of loans.
                                                                                    Finance        13


These lower interest rates make the process for being approved for these loans much broader and

easier to qualify for. The adjustment interval happens between the monthly payments and the

changes in the interest rates. The index is the way that the lenders of the loan measure the

amount of profit that they are turning in on the loan compared to other possible investments.

This allows them to see if the rate of interest being charged is worth the effort and time put into

the lending process. Margins are also used in the indexing. Margins are usually between 1.5 to

2.5 percent and are applied to the index to permit the lender to see the adjusted interest rate on

the ARM (Mortgage-X.com, 2009, Adjustable, para 2).

Safeguards

       There are however, more safeguards in place to protect the customer. Interest caps, for

one, are put into place. Interest caps put a limit on how high the interest rate can rise per year,

and over the entire life of the loan. “There are two types of rate caps – periodic and lifetime.

The periodic cap limits how many percentage points your interest rate can rise at any one time.

A lifetime cap sets the maximum that your rate can increase over the loan term (Money

Instructor.com, 2009, para 5).” This is a great benefit to the customer because it keeps interest

payments from reaching levels that would make it hard for the customer to afford. Another one

of these safeguards put into place is a monthly payment cap. The monthly payment caps work in

a similar fashion to that of the interest caps, but in this case it is the actual monthly payment that

is affected. The monthly payment is restricted from reaching to a level that is not possible for

the customer to comply with. This proves to be a two edged sword. It is a benefit because the

customer has an idea of what the worst case scenario would be for monthly payments.

Unfortunately this cap on the monthly payment restricts the customer as well in that they cannot
                                                                                 Finance         14


make larger payments than are permitted thus not allowing them to pay off the loan quicker and

allowing the interest to pile up.

Reverse Annuity Mortgage

       A more recent addition to the mortgage varieties is the Reverse Annuity Mortgage.

RAMs are designed, “for older Americans, especially retirees living on fixed incomes, the equity

in their paid-for or almost-paid-for home represents a large but liquid asset. The RAM is

designed to help supplement those homeowners' income (Mortgage-X.com, 2009, An Option,

para 1). This means that instead of making a payment to the lender each month, the lender

makes a payment to the customer. The idea is that the amount now borrowed on the built up

equity of the home would not have to be paid back until the death of the borrower, or the home

of which the loan is for is no longer the main residence of the borrower. There are problems that

arise from these RAMs. As you are given money from the lender you are essentially taking out

another loan. By taking out another loan there is interest that is accrued on the amount taken out.

So when it comes time to pay back the loan the principle amount borrowed is not the only

amount that needs to be accounted for. Another thing that the borrower needs to be mindful of is

that, “because you retain title to your home, you remain responsible for property taxes,

insurance, utilities, fuel, maintenance, and other expenses. So, for example, if you don’t pay

property taxes or maintain homeowner’s insurance, you risk the loan becoming due and payable

(Federal Trade Commission, 2005, Loan Features, para 1).”

       Mortgages are designed for the benefit of the people. They make it possible for someone

to afford a home and a place to raise their family. But we must not forget that the lenders are in

business to make money. As customers we must always be attentive to the options that surround

us, and the different possibilities that are afforded us. Looking into what many companies offer
                                                                                  Finance       15


is a key factor in deciding how you want to finance your home. Contracts are also a critical point

in the decision making process. Be careful in reading the contract that is being agreed upon

because these terms and conditions that are set forth will be the law to which you are held

accountable for the entire life of the loan.

                                       Business Loans

       Managing and running a business is difficult, especially for most small companies. These

companies often experience problems in their cash flow. They are unable to expand their

businesses, let alone sustain it. Perhaps the greatest problem that cash flow concerns affect is the

salary of the employees. Normally, small and medium firms are not able to pay the salary of their

employees on time. You can’t expect employees to remain loyal to the firm if they are not

compensated on time and the right amount. For this reason companies face the risk of losing

skilled employees, which may affect the operations of the business in the long term. This is

where business loans can help any company.

                                            Figure III
                                      Approved Business Loan




      http://www.creditcards.com/credit-card-news/business-credit-score-paydex-1270.php
                                                                                 Finance        16


Types of Business Loans

        Esteri Maina, a writer for Article Dashboard, wrote the article General Information on

Small Business Loans. In her article she discusses different types of loans that work for a future

or existing business.

        Maina suggests the three major sources for loans are given from Banks, Government and

Partners. There are many sources for funds to help a business but these particular loans are the

most typical among small businesses throughout the United States. (ArticleDashboard.com, 2008

para. 2).

Loan Requirements

        Each source for business loan includes different requirements. Government Loans for

example channel minority groups to be able to start or expand their businesses. As simple as that

sounds, it includes a lot of work on the entrepreneurs end. “The government will always demand

a comprehensive and logical business plan from the small business.”

        Loans from banks work great for businesses that can prove being operational for a period

of time. Banks want to see results where as loans from partnering want to view a logical business

plan and realistic predictions. Before they invest their money they want to insure the maximum

gains from that investment.

Risks with Business Loans

        Precautions should be taken on how much money businesses should borrow. For

example, taking too much money could lead to failure. You should borrow enough to be able to

reach your potential but not so much that you have severe difficulty paying it back. Business

owners should understand the basics about business loans before seeking one for their particular

business.
                                                                                   Finance       17


       Companies need to be aware of whom they are borrowing money from and what they

expect from them in return. This means knowing and understanding what type of interest you

will be paying. They need to understand the basic terminology for loans and business and be

aware of the types of lenders that await them. They must also realize the importance of staying

organized and reducing the amount of risk creating a successful business in the end.

Motivations

       There are many purposes and motivations of business loans. Many companies are able to

mortgage their assets and take advantage of a loan that can temporarily manage the cash flow

problems. Businesses are able to use this loan to buy their own property. After this purchase,

instead of paying rent for their office, the business can then allot the monthly rent for the salary

of their employees, or to support in their plans for expansion.

       Business loans can be taken in to help manage a smoother flow of the company’s

expenses as well. Working capital can also be taken care of with a business loan. Alternatively a

company may decide to renovate its property, or buy equipment that can help it improve its

operations. Small and medium scale firms may take advantage of business loans to enable them

to jumpstart their business. Business loans are very much essential in any business since it allows

small and medium firms to expand and potentially develop into a bigger firm.
                                                                                 Finance        18


                                       Figure IV Receiving loans




                                 http://keetsa.com/blog/page/454/

Applying for a Business Loan

       When applying for a business loan, companies have to prepare a well-planned business

plan. The business plan will be critical in applying for a business loan. Performing a SWOT

analysis helps the firm in justifying their plan, and makes it more possible for bank financing and

financial institutions. The SWOT analysis is a marketing tool that clarifies the strengths,

weaknesses, opportunities and the threats of starting a business. The bank will take a close look

at these results and decide on the loan amount and plan of action for a particular payment tactic

according to the credit application passed by the business. (Zoneeleven.net, 2009 para. 4)

       Businesses can also apply for working capital loans depending on their credit history.

Businesses can also avail commercial loans in a certain amount and access the fund, while they

only have to pay a certain interest for the loan amount that they borrowed.

Business Loan in Summary

       In summary, no business loan is a bad business loan as long as the company can afford its

payments and is accomplishing their goals. It is important to understand the principles and basic
                                                                                Finance        19


foundation of where you are receiving your loan whether it is from a bank, the government, or

business partners. The business plan should be clear and concise. It is also extremely important

to be well aware and educated of the risks that are involved with each individual loan. The

purpose should be clearly stated and distinct.

                                                 Conclusion

       From your reading you now have the ability to understand what takes place in purchasing

your first home and starting your first business. You now know the steps and challenges that

await you with buying a new home. You also know your options for the loans that best suit your

family in this financial purchase. You will also understand the risks involved in beginning a new

business or expanding a small business and the types of loans that one must consider.
                                                                             Finance       20


                                         References
Access.com, (2009), First Time Home Buyers, www.access.com
Christie, L, (2009), Homebuyers get a Bonus in the Stimulus Bill, CNNMoney.com
Mullins, L, (2009), 5 Tips for Buying a Home during a Recession, ole0.bmp
Pilon, M, (2009), For Some, It’s finally Time to Dive into Housing Market, wsj.com
Federal Reserve Board. What is an ARM. (2009, February 10). Retrieved February 24, 2009,
       from The Federal Reserve Board:
       http://www.federalreserve.gov/pubs/arms/arms_english.htm
Federal Trade Commission. (2005, June). Loan Features. Retrieved February 23, 2009,
       from Federal Trade Commission:
       http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea13.shtm
Federal Trade Commission. (2008, April). Glossary. Retrieved February 20, 2009,
       from Federal Trade Commission:
       http://www.ftc.gov/bcp/edu/pubs/consumer/homes/rea09.shtm
Money Instrctor. (2009). Understanding Adjustable-Rate Mortgages (ARM's). Retrieved
       February 23, 2009, from Money Instructor:
       http://www.moneyinstructor.com/doc/arms.asp
Mortgage-X. (2009). Adjustable Rate Mortgages. Retrieved February 21, 2009, from
       Mortgage-X: http://mortgage-x.com/brochure/mortgage_loans.htm
Mortgage-X. (2009). An Option For Older Home Owners. Retrieved February 21, 2009, from
       Mortgage-X: http://mortgage-x.com/brochure/mortgage_loans.htm
Mortgage-X. (2009). Fixed Rate Mortgages. Retrieved February 21, 2009, from
       Mortgage-X: http://mortgage-x.com/brochure/mortgage_loans.htm
Esteri Maina (2009) General Information on Small Business Loans
       http://www.pressemeldungen.at/71708/general-information-on-small-business-loans/
Nolo.com (2009) The Lowdown on Business Loans
       http://www.nolo.com/article.cfm/pg/1/objectId/383D366C
Businessloan.org (2008) Business Loans Information
       http://www.businessloan.org/
Govloans.com (2009) Small Business Loans
      http://www.govloans.gov:80/govloans_en.portal;jsessionid
Zoneeleven.net (2009) The Many Benefits of Business
       Loanshttp://www.zoneeleven.net/loans/the-many-benefits-of-business-loans/
                             Finance   21


        Appendix
Figure V. Calculated Risk

    February 25, 2009




www.calculatedriskblog.com

				
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