Month: March 2021

Guarantor Loans

Written by altitudehl on March 26, 2021. Posted in Guarantor Loans.

There has been a lack of knowledge about guarantor loans in the recent past and it was not as widespread. But in the past year or so after the onset of the COVID-19 pandemic, there has been an increase in the number of guarantor loans.

People who have little in the way of financial resources or credits go for these loans if they could produce a guarantor with good credit history. They are usually a trusted family member or friend who accepts the financial responsibilities of the borrower.

This article takes you through everything you need to know about Guarantor Loan, how it works, eligibility, liabilities, interest rates, etc.

Guarantor Loan

A Guarantor Loan is an unsecured loan that requires someone(a friend or a family member) to act as a guarantor. These loans are a great way to borrow money if you have poor credit or no credit at all. However, the catch is that the person who co-signs the loan becomes the guarantor and agrees to repay if the borrower cannot make the repayments. Having one gives confidence to the lenders about getting their money back since the loan doesn’t have collateral of any kind.

The interest rates are usually high, with a 50% APR. Larger loans are often paid over several years.

How Does a Guarantor Loan Work?

Guarantor loans work just like your unsecured loans in a way that both the loans don’t require security from the borrower. Instead, it requires a guarantor who co-signs the loan, thereby providing a guarantee for the repayments.

In most cases, the borrower will have a low income and would not have a home or a car for collateral. Sometimes, borrowers may have had one too many credit applications or poorly managed their credit, leading to your low credit score.

The lender credits the loan based on the paying ability of the guarantor. But first, they will be asked to prove their repayment capacity via their income, assets, or savings. They can also secure the loan against their property.

In order to prevent fraudulent activity, the loan is first transferred to the guarantor, who then passes it on to the borrower.

Guarantor Eligibility Criteria

Any person can become a guarantor, but they need to fulfill the eligibility criteria set by the lender:

The guarantor should:

Not have a direct financial link to the borrower
Be over 18 years of age
Not exceed 75 years
Have good credit history without any issues on the credit report
Maintain stable income to cover the loan repayments in case the borrower defaults
Have a home, property, or a car to act as collateral
Be a U.S. citizen

Guarantor Check

As a part of being a guarantor, the lender runs a series of checks to assess if they will be able to make the repayments on time (if needed).

Credit check
Post-application check to confirm the identity and address
Check their income, including assets, salary, etc.

Documents Required from a Guarantor

As a guarantor, you will have to provide documents:

Identity proof
Address proof
Occupation
Pay stubs
Bank statement
Assets and liabilities

Benefits of a Guarantor Loan

A guarantor loan benefits the borrower greatly:

It allows people with no credit score or lower income to secure loans and help get started in life.
With every repayment, the credit score increases.
Interest rates are lower than payday loans.
It is widely available and is a simple process once you have secured yourself a guarantor.
A better credit score makes applying for loans and credit cards easier.

Risks of a Guarantor Loan

The guarantor loans are always risky for a guarantor:

They have to make monthly repayments if the borrower defaults.
They may also be liable to pay extra charges
There will be a negative impact on the credit history if the guarantor is unable to repay.
The APRs charged on the loans may vary depending on the market situation.

Interest Rates on Guarantor Loans

Interest rates for guarantor loans are considerably higher than conventional loans due to the risk to the lender and can be 40% to 50% APR. But considering the payday loans at 1500% to 2000% this is definitely lower.

Points to Look for in Guarantor Loans

Apart from the risk to the guarantor, there are some points you may want to know before applying for guarantor loans:

Consider other avenues of lending, such as bad credit scores or loans from credit unions.
Look for low-interest options on comparison websites and agencies which run a soft credit check that doesn’t leave a mark on your credit file.
Getting a loan on the guarantor’s name may be a better option since they might be able to get a better interest rate and APR.
While secured loans may give you a lower interest rate, you may lose your asset upon default.
For unsecured loans, the lender doesn’t have a claim to your property.
Consider the overall cost of the loan, which includes the arrangement fees (only applicable to loan providers)

What Is a Guarantor for a Loan?

A guarantor is someone maybe a family member or a trusted friend who knows the financial situation of the former. They should meet the lending criteria set by the creditor and provides a guarantee for the borrower by co-signing for them.

In the event that the borrower is unable to repay the loan, the guarantor takes over and does the monthly repayments. As such, the latter should be able to rely on the former to make the monthly repayments on time and be on top of his/her finance.

In some cases, your spouse or partner can be a guarantor provided you have no financial links such as a joint bank account. Most times Guarantors are often parents who help out their young adult children get a start in credit history.

Loan Guarantor Responsibilities and Liabilities

The guarantor is solely accountable for the payments on the loan. By signing the loan agreement, they agree to be responsible for the financial decisions made by the borrower.

In case the borrower defaults for some reason, he/she is liable to repay the loan amount. Otherwise, they may face legal action or lose the asset used as security.

Does Being a Guarantor Affect My Credit Rating?

No, simply being a guarantor doesn’t affect your credit rating; however, your actions as one might. If the borrower defaults, you are liable to make the repayment. In this case, the non-payment will negatively impact your credit record and lower your credit scores.

Things to Consider While Being a Guarantor

While there is no harm in being a guarantor, your credit history takes a hit if the borrower defaults on the loan. Here are some pointers you may want to consider:

Consider the financial situation of the borrower even if the person is your family.
Reconsider if you are planning on taking loans for yourself. Few lenders do not consider you eligible for a loan when you are a guarantor yourself.
Make sure you can repay if the borrower defaults. Agree only if the amount is within your capacity to repay.

Can I Stop Being a Loan Guarantor?

No! You cannot stop being a loan guarantor if you have signed the agreement. You have to continue as long as the loan term. However, you can try the following options:

Either the borrowers or the guarantors should pay the loan in full.
The lender goes bankrupt
Get another loan at a lower interest rate to pay the guarantor loan in full.
Talk with the lender about revisiting the terms.

Guarantors for Personal Loans

Personal loans are considered to be unsecured loans. So, if the creditworthiness of the borrower comes into question, the bank may ask for a guarantor to co-sign the loan for you. And if the borrower doesn’t repay, the guarantor will be expected to make the repayments.

Is a Guarantor Required for Personal Loan?

Banks generally do not ask for a guarantor unless they doubt the borrowers’ financial standing and the ability to repay loans. Having a guarantor ensures the safety of their money.

Here are a few reasons why a financial institution may ask for guarantors:

The credit history doesn’t meet the set requirements.
Bad financial decisions.
Unstable employment and income which make repayments difficult.
Job stability

No Guarantor Loans for Poor Credit History

Not everyone has a guarantor to co-sign the loan for them, especially in the case of immigrants. In this case, you may avail for a no-guarantor loan.

However, your desperate situation may attract one too many scammers. Here are a few points to watch out for:

The loan process happens via a phone call.
There are no physical addresses for the lenders.
Lenders don’t have permission to operate in the state.
The financial institution asks for money to be sent to them.

Guarantors vs. Co-Signers

Both the co-signers and the guarantors help get the loan approved and that is where the similarity ends. Simply put, co-signers are co-owners of an asset, while guarantors have no claim to the asset purchased by the borrower.

If the borrower doesn’t meet the income criteria set by the lenders, the co-signing arrangement happens. In this case, the asset is owned equally by both parties: the borrower and co-signer. However, a guarantor may be asked to step in when borrowers have sufficient income but don’t qualify for the loan because of poor credit histories.

Also, co-signers take on more financial responsibility than guarantors do as co-signers are equally responsible right from the start of the agreement, whereas guarantors are only responsible if the borrowers default and fail to meet their financial obligation.

What Happens if a Guarantor Loan is Not Repaid?

The guarantor loan has a significant impact on the family member or friend who co-signs if you do not make the repayments. If they secure the loan against property, they run the risk of losing it.

If the borrower cannot repay the loan, the lender reaches out to the guarantor, who is obliged to catch up with the repayments.
Lenders have the Continuous Payment Authority (CPA) with which he/she can make the payments directly from the bank accounts.
In case the account has insufficient funds, the usual debt collection process starts where the debt is passed on to the debt recollection agency.
In the worst case, the lender could take court action against both the guarantors and borrowers. The same will be recorded on the credit file too.

Can a Guarantor Sue a Borrower?

Yes, the guarantor to the loan can sue if he/she defaults and the guarantor had to repay the entire debt amount.

Conclusion

Getting a loan is a pretty cumbersome process, especially for people with poor or no credit. A guarantor loan on the other hand is an awesome way of helping others get the money that they need by having someone co-sign for them. On the downside, however, the interest rate is typically pretty high and so is the APR.

Whatever type of loan you apply for, ensure that you read the terms of the agreement carefully before signing up. Take your time to understand the risks and weigh the pros and cons before proceeding. Finally, ensure that you compare guarantor loans and cherry-pick the one that suits your needs the best.

The people at Altitude Home Loans bring many decades of experience in doing loans the right way. If you are interested in purchasing a home, contact one of our Loan Officers today and we’ll help you through the Home Loan application process.

Cash-Out Refinance Mortgage

Written by altitudehl on March 9, 2021. Posted in Refinance Mortgage.

Cash-Out Refinance

Experts suggest that home prices are steadily climbing and could reach new heights in 2021, increasing by nearly 5.7%.

Buying a home is a costly affair and a big investment for the ordinary person, such that you’d want to make the space warm, cozy, and comfortable. However, with the rising costs, you are neither left with money to make the necessary changes nor be able to save up for it.

With cash-out refinancing, you can renovate, remodel and update your home without having to resort to high-interest loans such as personal loans and credit cards. Apart from that, you can also negotiate the payment terms, get a lower interest rate, etc.

This article takes you through everything you need to know about cash-out refinancing, including reasons, pros, cons, closing, how cash-out refinance works, and many more.

Cash-Out Refinancing

A cash-out refinance is where you take a new loan with a higher loan amount than the current mortgage. The new loan replaces your existing mortgage, and the remaining amount is handed over to you minus the closing costs. The lump-sum you get is yours to do as you please.

The cash-out refi depends on the home’s value. Most lenders let you borrow 80%, while you can take the entire home equity in the case of VA loans.

Also, the higher loan amount may result in higher interest rates.

Calculate Cash-Out Refinance

Cash-out refinance lets you take advantage of the equity you’ve built on your home. For example, if your home is worth $200,000 and you have paid off $60,000. You still owe $140,000 as a mortgage balance.

Let’s say that you want to make $20,000 worth of renovations to your home; You can take a cash-out refinancing to fund your renovations.

The cash-out refinance replaces the original mortgage. So, your new mortgage would be:

$140,000 + $20,000 = $160,000

You would receive the remaining $20,000 a couple of days after closing.

How Does Cash-Out Refinancing Work?

The cash-out refinance works similarly to any other loan process. You (the borrower) start with finding a lender with better interest rates and payment plans, submitting an application, and documentation.

Here are the detailed steps your lender may take you through:

Meet the Requirements Set By Your Lender

The lender first sets their terms and conditions, upon the qualification of which you are eligible for a cash-out refinancing:

You should have a credit score of at least 620.
Your debt-to-income ratio should be less than 50%
You should have at least 30% of the equity in your home.
No late payments on your mortgage within the last 12 months.
Refinance is available only for the primary residence.

Decide How Much Cash You Need

The next step is to determine how much capital you may need. If you are planning for renovations, it is a good idea to contact your contractor and get an estimate prior to the application.

For debt consolidation, sit with your bank statements, credit cards, etc., and work out how much cash you would need to cover your debts.

Complete the Application Process

To complete the application process, you may need to provide the following documentation:

Bank statements
W-2
Pay Stubs

After you get the approval, the closing process starts. You may have to wait for a couple of days after closing to receive your lump sum.

Reasons to Consider a Cash-Out Refinance

A cash-out refinance provides better financial benefits than a personal loan or a second mortgage. Here are some of the reasons why you may want to consider a cash-out refinance:

Funding renovations and home improvements

Constant upgrades and renovations are needed to maintain your home and also to increase the home’s value. From broken HVAC systems to kitchen remodeling, cash-out refinancing helps to use the home equity to fund your home improvements.

Consolidate and pay your debt

With a refinance, you can opt to consolidate your debts for a lower interest rate and pay them off.

Lower interest rate

Personal loans and credit card debt can have a higher interest rate, while mortgage and refinancing generally have a lower interest rate. Hence it makes sense to pay off your credit card debt and personal loan using a cash-out refinance.

Better investment opportunities

Refinancing may make sense to withdraw cash from refinancing for investment opportunities and retirement plans rather than having funds ties with your home. You can also use a cash-out refinancing towards financial needs such as college funds since the interest rate is lower.

Cash-Out Refinance: Pros and Cons

Cash-out refinancing provides you with a considerable amount of money when you require liquid cash and at a competitive interest rate. But the risk is real. Since you use your home equity to fund the refinancing, you run the risk of losing your home.

Hence it makes sense to evaluate the pros and cons:

Pros of a Cash-Out Refinance

The equity in your home is worth a significant amount, and tapping gives you access to a lump sum of cash. You can use the money to either further your/your child’s education or maybe invest in a business with assured success.
Mortgage rates are generally lower when compared to credit cards and personal loans since it is secured by your home.
Increase the monthly payments by replacing the original loan with a new one.
In case the cash is used to fund any substantial renovations that increase the home’s value.

Cons of a Cash-Out Refinance

Restarting the monthly payment terms increases the interest costs. Dragging out the payment does not yield the savings you expect from paying off a lower interest loan.
The loan is secured against your home. Failing to repay, you run the risk of losing your home. Do not withdraw more than you need.
Withdrawing up to 90% of your home equity increases the borrowing costs since you have to bring it back to the 80% threshold.
Mortgage loans have higher closing costs which run in hundreds to thousands of dollars. You can either pay them upfront or roll them into your loan amount.
You tend to use it as your personal piggy bank for lavish vacations or purchases with access to home equity. Consider seeking help for your spending habits through a non-profit counseling agency.

To Cash-Out Refinance or Not

Cash-out refinance is a good idea if you require access to your home equity for home renovations or something that gives you a better return for your investment. It also gives you a chance to lower your mortgage rate if you are in the higher mortgage interest bracket.

However, it may be a bad idea to avail yourself of cash-out refinancing if you plan on using the money for a new car or vacation since they do not have little to no investment.

Closing on Your Mortgage Refinancing

The final step in cash-out refinancing is the closing, where you sign documents, pay the fees, and then walk away with a new loan (hopefully a better interest rate). The process itself may take up to a few hours in the least.

Three days before the closing process, you get the Closing Disclosure which contains

Closing costs
New Terms
Monthly Payments
Miscellaneous costs and credits
Fees

The closing costs for a cash-out refinance would be 2% to 5% of the new mortgage, i.e., $4000-$10,000 for a $200,000 loan. You can either pay closing costs with a cashier’s check or roll them into your loan amount.

The closing costs may cover:

Early repayment fees
Discount points
Origination fees
Appraisal and inspection fees
Mortgage and title insurance fees

Once everything is signed, the “Right of Rescission,” the three-day grace period for the borrower, starts. It may take 3 -4 days to complete the transaction and get cash.

On a side note, you would be required to read and sign a lot of documents, affidavits, and declarations. Make sure that you read them meticulously before signing as they are legally binding.

Which Is Better? – Cash-Out Refinance vs. Home Equity Line of Credit

Cash-out refinance and home equity line of credit both access your home’s equity and uses your home as collateral. But that is where the similarity ends.

Cash-out refinance settles the existing mortgage and kick starts a new mortgage with different terms and lower interest rates. It gives you a significant amount of liquid cash, which is yours to use as you wish. On the downside, they have high closing costs.

HELOC, on the other hand, is a new one in addition to your first mortgage loan. Considered to be a second mortgage, it has its payments and terms, which don’t influence the original loan in any way. Unlike refinancing, you get a line of credit from where you withdraw as you require. Home equity line of credit has very little to no closing costs.

Which Is Better? – Home Equity Loan vs. Cash-Out Refinance

Home equity loan and cash-out refinance lets you convert your home equity into cash. But both operate differently.

A home equity loan acts as a second mortgage and is secured against your home. The amount you get depends on the home’s equity. You will be responsible for the mortgage and also the new mortgage loan at the same time. With a home equity loan, the lender pays the closing costs.

With a cash-out refinance, you take out a new one to replace your mortgage loan with the home equity used to pay for the cash-out. It will have new terms, including a lower mortgage rate and more extended monthly payments.

The mortgage interest is lower for the cash-out, but the high closing costs more than makes up for it.

Conclusion

Cash-out refinance is the best option if you require a significant amount of liquid cash to pay off high-interest loans or home renovation. But the catch is that your home is used as collateral, and if you are unable to make payments, you may end up losing the home. And then there are the closing costs. But to your advantage, they also come with tax benefits. Your auditor should be able to guide you with these.

Tapping into your home equity is not a decision to be taken lightly. If you are not sure about cash-out refinancing, you may want to talk with your financial advisor or a home loan expert.