Choosing a Home Equity Loan:  Fixed Rate vs. Variable Rate

Looking to replace your home’s roof, build an addition, or remodel your kitchen?  Wondering how to pay for it? “Home Equity Loans are a still one of the cheapest ways to borrow money,” advises Kevin Peterson, Empower Federal Credit Union’s Vice President of Consumer Lending. “Deciding whether you want a fixed rate or variable rate loan is an important decision you will have to make.”

Fixed Rate Home Equity Loan

A fixed rate home equity loan allows you to borrow a specified amount of money in one lump sum.  You will have a set loan term, static monthly payment amount, and your interest rate is fixed, meaning it the will remain the same for the life of the loan, usually between 5 and 15 years.  Even if interest rates in the market fluctuate, your payments stay the same, month after month.  “This is a definite advantage for those with a strict budget who must carefully plan out monthly expenses and want no surprises,” recommends Peterson.

A fixed rate loan is essentially risk-free when it comes to the interest rate.  Your rate will never get any higher, but on the flip side, it will never get any lower if interest rates go down.

Variable Rate Home Equity Line of Credit

Variable rate home equity loans are typically open-ended, meaning they are structured as revolving lines of credit that allow you to borrow money as you need it, using your home as collateral.  Commonly known as a Home Equity Line of Credit, or HELOC, most institutions allow you to withdraw funds over a set period of time.  Once the draw period expires, borrowers are obligated to begin repaying both principal and interest over the specified term, usually 10 or 20 years. You must make minimum monthly payments, and your payments can vary based on your loan balance and fluctuating interest rates.

On a variable rate HELOC, your interest rate will change based upon a certain market index (usually the U.S. Prime Rate).   This means your monthly payments can go up or down along with the indexed rate.  An advantage of this is that you will pay less when rates go down, but you’ll also pay more when rates go up.

Institutions may have different underwriting guidelines for HELOCs.  Keep this in mind when you’re shopping for a home equity loan. “Don’t just get the line of credit because it’s most convenient,” cautions Peterson.  “Be sure you completely understand all of the terms of the variable rate loan—how often the rate can reset and the cap on how much your interest rate can increase over the life of the loan.”

Which One?

Deciding between the two requires a closer look at your personal financial picture, determining how long you expect to take to repay the loan, and evaluating what’s likely to happen to interest rates in the future.  Your lender will be able to give you an idea of where rates are today and the short and long-term outlook.  

If interest rates are at an all-time low, locking into a fixed rate can be wise and save you money when rates inevitably rise in coming years.  However, if rates are expected to come down in the near future, locking into a fixed rate could be leaving money on the table.  In this scenario, a variable rate home equity loan might be a better fit.  

Just be forewarned that variable rates have been known to go up and increase monthly payments significantly—sometimes even doubling them in only a couple of years.  If you don’t have extra funds in your budget to be able to absorb this additional expense, then a fixed rate might be a better choice.


Information in this table is just an example. Ask your lender prior to deciding which program is best for you.

Run the Numbers

Variable rate loans may offer lower introductory interest rates than fixed rate loans (check with your financial institution).  This can allow you to save money early on and worry about changing interest rates later.  Also, if you plan to pay off your home equity loan quickly, the lower rate may benefit you.

To help decide, most lenders recommend comparing monthly payments using the assumption that the variable rate loan will reset at the higher maximum rate in the shortest period of time possible.  

If you won’t be able to afford the monthly payments once your loan resets above a certain level, this analysis is redundant.  Most people don’t have the discipline to bank their savings in the initial years in order to make the higher payments in the later years.  In this situation, even though the variable rate is more attractive, a fixed rate loan offers the security of affordable, set payments.

If you plan to sell your home or pay off the loan quickly (e.g. in less than 5 years), the variable rate usually offers you a better deal.  If you plan to take the full term to repay the loan, the fixed rate loan will likely save you money on interest, depending on the interest rate outlook.

For most homeowners planning a major home project, the fixed rate will be a better option especially if you’ll need the entire 15 years to pay off the loan.  If you're planning to do several smaller projects, one right after the other, and anticipate paying off the loan between projects, then the lower interest rate on a HELOC is probably your best choice.

Be sure to discuss the advantages and disadvantages of each with your lender before signing on the dotted line.

Should You Lease or Buy Your New Car?

It’s difficult to resist the allure of a brand-new car, fresh off the lot with its new car smell, flawless finish and new technology.  Then, there’s the constant stream of ads on the radio and TV promoting lease deals, with all of the bells and whistles, for a pretty reasonable monthly payment.  Does it really make financial sense to lease?  The answer is:  it depends.

“Leasing a vehicle often advertises a lower monthly payment when compared to financing a vehicle with the same loan terms,” explains Empower Federal Credit Union’s Vice President of Consumer Lending, Kevin Peterson.   “On a lease, you’re paying for the depreciation of the car during the lease term, rather than the whole vehicle cost.  If you need access to additional cash every month, leasing may be a more favorable option.”  Peterson goes on to caution that if you plan to put a lot of miles on your leased vehicle or do not take the best care of the interior/exterior, leasing may not be your best bet.  Most leases require you to pay additional fees at the end of your term for above normal wear and tear on the vehicle.  This includes exceeding mileage allowances and repairing any damage, interior and exterior.

A lease can make sense for someone who is just starting out in a career and has no savings but needs a reliable car.  “A lease is like renting an apartment versus buying a home,” says Peterson.  “If you’re not proactive about setting aside the money you’re saving every month (versus buying) for your next vehicle, you can get caught in the renting/leasing cycle forever.”  While leasing, you will never develop any equity in your vehicle to put toward your next vehicle.

If low monthly payments and the opportunity to drive the newest car model with the latest technology and safety features are worth the extra cost to you, leasing may make sense.  Keep in mind that you should be able to afford the lease for the entire period, since the early termination penalties can be costly.  Plus, you'll have nothing to show for it when your lease is up and you have to return the car.

Leasing Pros:  low (or no) down payment; lower monthly payment; drive a new/nicer car; low maintenance costs; you can return car at end of lease term

Leasing Cons: always have a car payment; limited auto insurance options; mileage limitations; can’t modify or customize vehicle; no trade-in value/no equity; potential for return fees/penalties at end of lease

If you'd like to work toward owning a vehicle outright, for the long-term, and would like more flexibility and control over how you use your vehicle, you might want to finance or buy it.  Paying cash is often the optimal scenario, but not all of us have lump sums sitting around in our savings account.  Most of us will need to finance an auto purchase.  Be sure to research lenders and interest rates in advance.  Local banks and credit unions frequently have the most competitive rates.  Use online sites to research the type of vehicle that is right for you.  They can be great one-stop-shops to research, locate, insure and finance your next vehicle.  

Be careful when choosing your loan term.  Opting for a longer-term auto loan (e.g. 6+ years) to keep your monthly payments lower sounds good, but makes it easier to get “upside down” on your loan, where you owe more than your vehicle is worth.  If you decide to get rid of your vehicle before it’s paid off, you will have paid so much in finance charges compared to principal, that you may as well have leased.  

Best advice:  If you decide on a long-term loan, hold on to the vehicle until it’s paid off.

Buying Pros:  no mileage limitations; more auto insurance and financing options; don’t have to worry about wear and tear; no payments at end of loan term; equity is yours when loan term expires

Buying Cons:  higher down payment; higher monthly payment; maintenance costs; longer term financing can be as costly as leasing

Buying and leasing both have their pros and cons.  It's important to ask yourself what your priorities are and what’s your ultimate goal.

“Buying your vehicle and planning to own it for 8 to 10 years is, from a purely economic perspective, the best financial decision.  Some, not all decisions are financial though” adds Peterson.


Car Depreciation: How it Affects Your Next Car Purchase

Whether you’re looking to buy a new or used vehicle, they both face a simple reality:  all cars lose value.  New cars reliably lose as much as 20 percent of their value in their first year – 10 percent the moment you drive it off the lot and another 10 percent by its first birthday.  Depreciation rates for used cars vary a bit more.  They are affected by many factors, including consumer demand for a specific vehicle, new/used car inventory, lease returns, consumer trends, manufacturer pricing and promotions, and the car’s specific features/options.  The “trendy” car of the moment will tend to hold its value much better, until it’s no longer popular or fashionable.

Depreciation rates have fluctuated quite a bit in the last nine years.  2008 saw a record high rate of 26.5 percent, while the very next year recorded a recession-low of 11.1 percent.  Low depreciation levels continued through 2014, but times have changed and rates are in an up-tick once again.  Industry experts expect the vehicle depreciation rate to reach 17.8 percent in 2017, just slightly higher than 17.3 percent recorded in 2016.

“To put this into real terms, if you purchased a used vehicle for $10,000 in 2017, it will only be worth $8,220 at year-end.  In 2009, your car would still have been worth $8,890,” said Kevin Peterson, Empower Federal Credit Union’s Vice President of Consumer Lending.

What does this mean for prospective car buyers?  A number of things:

If you buy new, your new vehicle will be worth even less and will not retain its value as long as it had in previous years.  This means the trade-in value for your new vehicle, several years down the line, will be less than it was just a few years ago.  Of course, this will vary by make, model, condition, and trim package, but as a general rule, expect your car to be worth less at a faster rate.  You can help maintain your car’s value by servicing it regularly and keeping the interior clean.

If you’re buying used, look for cars with all of the bells and whistles.  New car buyers often skimp on upgrades to keep the purchase price low.  If you’re shopping for a used vehicle, it pays to look for cars with extra features, particularly optional safety features.  You’ll pay a bit more, but cars with strong safety features will hold their value better in the long-term, even with higher depreciation rates.

Declining car values mean some lenders will be a little more stringent in their approval process.  They may urge potential buyers to take out additional insurances as part of their loan package.  An example of this is GAP insurance, or Guaranteed Asset Protection.  If you finance a vehicle and have an accident that’s declared a total loss, the insurance company will only reimburse you for your car’s value before the accident.  This may or may not be enough to pay off your vehicle loan.  In most cases, GAP insurance will cover the difference between the value of your totaled vehicle and what you still owe.  At the same time, in a market in which vehicles are depreciating faster, lenders may be less likely to finance more expensive insurances, like extended auto warranties.  

Regardless of whether you’re buying new or used, Peterson recommends buyers do their homework when it comes to making such a big purchase.  It’s no surprise that the internet is the number one resource for researching vehicles.  Peterson adds, “Use online sites to research the type of vehicle that is right for you.  They are great one-stop-shops to research, locate, insure and finance your next vehicle”.  

Peterson also suggests, “Many local lenders accept loan applications via in-branch, over the telephone or online.  In addition, they offer auto insurance options and have existing relationships with car dealers, which may help to streamline the auto buying process.”

Home Equity Loans Are Still a Smart Financing Option Even with New Tax Laws

New IRS tax laws for 2018 confused even the most seasoned CPAs, but the IRS has issued some clarification about the deductibility of interest on Home Equity Loans. For borrowers planning to use a Home Equity Loan to finance home projects like replacement windows, a new roof, or building an addition/remodel, the news is good. That interest is still deductible as long as the total home mortgage interest falls below the new 2018 limit (covered later in this article). Unfortunately, for folks planning to use the equity in their home to pay off credit cards, pay for college, or take a vacation, that interest is no longer deductible.

Some might ask, does it still make sense to use a Home Equity Loan to pay for expenses now that the interest deduction is gone? Kevin Peterson, Empower Federal Credit Union’s Vice President of Consumer Lending says, “Yes,” and here’s why:

Even without the Deduction, Home Equity Remains One of the Cheapest Ways to Borrow Money: “Because Home Equity Loans are secured by real estate, interest rates are much lower than unsecured personal loans or credit cards. Interest rates on Home Equity Loans can usually range between 3% and 5%, depending on your lender and certain underwriting criteria. Personal loan interest rates typically start above 8%, and can go much higher. Credit cards average just under 15%,” explains Peterson.

Your Interest Rate is Fixed: Most people have a variable APR on their credit cards, meaning the interest rate on the card is tied to interest rates in general. Most credit card companies link APRs to the prime rate, which is the rate banks charge their biggest, best customers for loans. So, if the prime rate goes up, so does your interest rate. On a Fixed (or Closed-End) Home Equity Loan, your interest rate is locked for the term of the loan, usually between 60 and 180 months, meaning there are no surprises.

Consolidating Your Debt Can Save You Money: Say you have $40,000 in combined credit card debt at interest rates ranging from 9.99% up to 15%. Even though you make the minimum payment on your cards every month, you’re still incurring interest expense. If you were to take out a Home Equity Loan for $40,000 to pay off your credit card debt, your interest rate on the Home Equity Loan would be much lower. You’re still paying interest on this debt, but at a much lower rate. The bottom line is you still own the debt, but your carrying costs decrease.

You Can Boost Your Credit Score: Paying down credit card debt will help your credit rating. “Wiping the slate clean is always a good idea,” confirms Peterson. “It will have an immediate impact on your credit score and improve your debt ratio, making you more attractive to lenders in the future. This can help you to secure better rates on other loans going forward.”

You Can Pay Off Debt Faster: Lower interest rates means more of your monthly payment goes toward paying down principal on your loan, so your debt gets repaid faster.

You Have Access to Greater Loan Amounts for College:  Interest rates on Home Equity Loans can sometimes be lower than those on student loans depending on what’s available, and the U.S. Department of Education does impose annual loan limits on federal loans. These loan caps may not provide families with sufficient borrowing power, especially if the student is attending a high-cost college or university. Home Equity Loans can be beneficial when higher funding amounts are needed, providing homeowners have sufficient equity.

Home Equity Provides a Tax-Deductible Source for Home Improvement Funding:  As long as the proceeds from your Home Equity Loan are used “to buy, build or substantially improve the taxpayer’s home that secures the loan," then the interest is deductible, within limits. The new law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Beginning in 2018, taxpayers may only deduct interest on $750,000 of new qualified residence loans ($375,000 for a married taxpayer filing separately). The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.

You Control the Term: Using equity in your home to finance projects, education, or consolidate debt also provides the borrower with greater flexibility in terms of loan term. Student loans typically have a specified repayment period of 10 years.  Using a Home Equity Loan allows the borrower to stretch out the payment through extended terms, sometimes up to 180 months.

Be Sure You Have Adequate Insurance: Lastly, Peterson recommends homeowners who are interested in taking out a Home Equity Loan as a financing solution get their homeowner’s insurance in order. To finance a Home Equity Loan, you need to have adequate insurance coverage. This is a great time to talk to your Insurance Agent to ensure you have proper coverage and possibly even save money on your annual premium.

Empower Federal Credit Union does not provide tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on, for tax or legal advice. You should consult with your own tax and/or legal advisors on the deductibility of all home loan interest.



What’s Stopping You from Buying a Home or Refinancing Your Mortgage?


“I don’t have enough saved for a down payment or closing costs.”

A recent Zillow-sponsored online survey of 10,000 renters ages 18 to 75 nationwide found that 67.9 percent of participants believe their inability to save for a down payment was their biggest barrier to homeownership.  This was heard from market to market, regardless of geography or average home cost.

“There is a common misconception among would-be home buyers that twenty percent down is the only financing option available to them,” says Bob Padula, Empower Federal Credit Union’s Vice President of Mortgage Lending.  “The reality is that as home prices continue to adjust back to their pre-recession levels, fewer and fewer home buyers will have that 20 percent sitting in the bank.  But there are several loan products available to first-time home buyers that don’t require 20 percent down.”

A HomeReady™ mortgage is one such product.  With down payments as low as 3 percent and competitive interest rates, a HomeReady™ mortgage is an ideal solution for someone with limited funds for a down payment and/or who needs to use income from a household member not listed on the loan, or someone who needs to have a co-signer.

Padula also suggests buyers research programs like the First Home ClubSM which allow first-time home buyers to earn up to $7,500 toward the purchase of their first home by opening a dedicated savings account and making monthly deposits into that account.  Through this and similar first-time home buyer programs, you may be able to purchase a home with as little as 3 percent down and use grants and gifts from family members toward closing costs.

Seller concessions are another way to help offset the burden of closing costs.  Your realtor can advise you as to what is realistic and appropriate for your local real estate market.

“My credit is not great.  I probably will not qualify.”

In the same Zillow survey, 53.2 percent of respondents attributed their home buying difficulty to the ability to qualify for a mortgage. And 50 percent said debt from credit cards and other loans was their most significant hurdle.

“To qualify for a mortgage, your credit score can be as low as 620.  And, if you have 20 percent equity in the property, there is no minimum credit score requirement,” advises Padula.

Leading up to the purchase, potential home buyers should do everything in their power to boost their credit scores. Be sure to double-check your credit reports to ensure you’re not being unfairly penalized for old, paid or settled debts.  It’s also best to stop applying for new credit a year or so before you apply for a mortgage and until after you close on your home.

If you’ve accrued substantial debt, Padula recommends looking into debt consolidation with an unsecured personal loan and starting to pay down what you owe at the lowest possible interest rate.  Consolidating credit card debt from multiple sources into one loan can immediately improve your credit score.

“Renting is cheaper than buying.”

Many believe that monthly mortgage payments will far exceed what they are currently paying in rent.  With the exception of a handful of mostly west coast markets, this is usually not the case.  Although the savings of buying versus renting vary from market to market and change as interest rates change and rents fluctuate, on average, buying a home is currently 33.1 percent cheaper than renting .

“I can’t afford to maintain a home.”

Recognizing that there are costs associated with home ownership that go above and beyond the down payment and monthly mortgage bill is important and being financially prudent.  When you’re house hunting, look to buy a home that has been well-maintained and/or recently had major components upgraded or replaced, such as a new roof, new HVAC, new water heater, plumbing or electrical upgrade.  Sometimes it pays to buy a newer home, but not always.

Regular home maintenance can prevent small problems from becoming major (and costly) repairs. Maintaining an “emergency fund” and adding to that fund every month ensures you have the necessary cash on hand to pay for a repair or replacement that takes you by surprise.  A thorough home inspection prior to purchase can give you a better idea of the condition of the home you’re considering and the types of repairs you may be faced with if you become its owner.


“I’m not sure if it makes sense for me to refinance, and I don’t even know where to begin.”

If you’re like many homebuyers, your realtor held your hand through the process of buying your first home and qualifying for your first mortgage.  Now that you’re considering refinancing, you just don’t know where to begin.

A good mortgage lender will be able to address all of your concerns and some you weren’t even thinking about.  He or she can help you with the financial analysis and help you determine which mortgage product and term will work best for you and your income level.  Just like with first-time home buyers, there are refinancing options that can reduce your out-of-pocket costs at closing and your monthly payments going forward.



Mortgage Rates Still Low Enough to Put Money Back in Your Pocket

While low interest rates may not be helping to grow your savings account or share certificates, they can help your pocket book in a very real way if you’re looking to purchase a home or refinance an existing mortgage.  Despite recent rate hikes by the Federal Reserve, interest rates on home mortgages continue to be at historically low levels, offering homeowners and prospective homebuyers some significant advantages.

“For those homeowners who think they missed out on the ‘refinance boom’, this could still be a great time to refinance,” advises Robert Padula, Empower Federal Credit Union’s Vice President of Mortgage Lending.  “Even though rates have increased since December, they're still at multi-decade lows. If you look at the 30-year fixed mortgage rate over the past 10 years, it peaked around 6.76%. Right now, rates are just above 4.0%, and if you’re looking to pay off your mortgage faster, 10 and 15-year fixed rate terms are in the high 2% to low 3% range.  Rates have risen, but they're still historically low.”

Reduce Your Monthly Payment:  If you currently own a home and have good credit, consider refinancing your existing mortgage to lower your interest rate and your monthly payment.  Lowering the interest rate on your mortgage allows a bigger chunk of your monthly payment to go toward paying down principal instead of interest, if you continue to make the same monthly payment.  Or, you can use your monthly savings to make home improvements or pay down other higher interest debt like credit cards.

Increase Your Purchasing Power:  Simply put, purchasing power is the amount of home you can afford to buy for the budget you have available to spend. The interest rate on your mortgage impacts not only your monthly housing costs, but also your overall purchasing power.  If you’re buying your first home, or are considering buying a second-home or investment property, lower interest rates can help to increase your purchasing power by allowing you to buy a slightly more expensive home and still stay within budget.  As interest rates increase, the price of the house you can afford will decrease if you plan to stay within that same monthly housing budget.

Tap into Home Equity:  Now is also a good time to borrow money at inexpensive rates.  Homeowners can elect to take out a Home Equity Loan by borrowing against the value of their home. In doing so, homeowners receive funds in a lump sum so they can undertake home remodeling projects or finance an education or vacation.  However, if you take money out of your home, it is always a good idea to use that money wisely. One of the smartest decisions is to pay off higher interest rate debts, like credit cards, to lower your overall monthly payments. This allows you to free up cash each month and to start saving for the future.

Future Outlook:  Many experts predict that mortgage rates will continue to rise and could be closer to 5% by this time next year.  If you’ve been putting off refinancing or buying a home, now is the time to pull the trigger.  Padula advises homeowners to shop around and compare interest rates, closing costs, and other features to find the combination that works best for them.


8 Things Every First-Time Home Buyer Should Do:

It’s the American Dream. Picket fences.  Window boxes.  Shade trees and a lawn to mow at your own Home Sweet Home.  Even if that isn’t your dream house, owning a home, whether it’s an apartment, duplex, townhouse, ranch or quaint Cape Cod is often a top priority among many Americans.  Thanks to record low interest rates over the past several years, many first-time home buyers have been able to make their dreams come true. By thinking ahead and doing a little planning, owning your own home is possible.  Here are some helpful tips:

1:  Start saving for a down payment before you think you’re ready to buy a home or even start looking.  Put away a little from each paycheck into a separate account each month.  You’ll be surprised how quickly it adds up.

2:  Look into first time home buyer programs in your area.  “Many banks and credit unions have specific programs for first time home buyers,” suggests Empower Federal Credit Union’s Vice President of Mortgage Lending Bob Padula.  “Some of them require you to open an account and save a minimum amount per month for a specific period of time.  In return, you’re offered a first-time home buyer grant to put toward your first home.  This can often be several thousand dollars.  That combined with your own savings is a great start on a down payment or to put toward closing costs.”

3:  Don’t commit before you’re ready financially or otherwise. Owning a home is a huge commitment and more expensive than many home buyers realize.  Be sure you are ready for the financial commitment that comes with a mortgage and the responsibility of maintaining your home and investment.

4:  Think ahead.  The house you need today won’t likely be exactly what you need in 3-5 years.  It’s smart to plan for the future so that you’ll outgrow your home a little slower.  If you think you might have children or need a yard for a pet, those are good things to keep in mind.  The average first-time home buyer only owns his/her first home for an average of 4-10 years.  But planning for your future today can save you money in the long run.

5:  Set priorities in advance about location, size, number of rooms, school district, etc.  If you know in advance what trade-offs you’re willing to make, you’re better able to make well thought out decisions during the home buying process and avoid the disconcerting feeling of buyer’s remorse.

6:  Secure financing and understand your budget before falling in love with a property.  Buying a home should not be a decision you make based on emotion.  It’s best not to find your dream house and fall in love with it before you understand if it’s even within your budget.  “Generally speaking, most prospective homeowners can afford to mortgage a property that costs between 2 and 2.5 times their gross income,” advises Padula.  It’s usually a good idea to fill out a home mortgage worksheet or use an online affordability calculator so you have a rough idea of what you can afford.  Then meet with a mortgage lender to fill out the necessary paperwork so you are pre-approved for a certain loan amount before you even start going to open houses.

7:  Understand all of the financial costs associated with home ownership.  Depending on your down payment, these can include paying Private Mortgage Insurance (PMI), homeowner’s insurance, property/school taxes, and home owner’s association (HOA) fees on top of your monthly mortgage payment.  It’s also smart to have an idea of the age and replacement costs of various components of your home, particularly things that are rather costly to replace such as the roof, HVAC and water heater.  If you’re likely to be replacing one of these within the first few years of ownership, that’s an additional expense you’ll need to plan for sooner rather than later.

8:  Don’t spend every dollar you qualify for.  It is usually the smartest decision to be fiscally conservative and set an upward spending limit that is less than the total mortgage for which you’ve been approved.  This can open up additional options such as buying a less expensive home and remodeling or qualifying for different lending programs with lower rates that save you money in the long term.

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What do you want out of life?

Empower Federal Credit Union welcomes employees of many companies, immediate family/household members of employees and retirees, as well as our outreach to underserved communities to enjoy personal and business banking solutions including auto loans, mortgages*, credit cards and more. Bank online, in any central NY branch, or call us at 315.477.2200.

* Home mortgages available in FL, PA, CT, NY and NC.