The Fundamentals of Getting a Mortgage
ARE THERE ANY FIRST TIME BUYER PROGRAMS AVAILABLE?
Depending on your location and the mortgage company you chose to use, there can be many different programs out there. Not all programs are the same and can vary from location to location. For more information you can contact your agent or your local housing authority.
WHAT IS THE BEST WAY TO SHOP FOR A MORTGAGE?
There are many ways to find out information on which mortgage is best for you. The choices vary and you want to choose one based on your own situation. There are many different rates and terms for fixed or adjustable home loans.
One way to get information is to speak to your agent or broker. Either one can help you learn of the different financing opportunities being offered.
Another way is to compare the mortgage market. Compare different lenders and rates. Rates can change daily so you want stay updated. Checking the real estate section of your local newspaper is a great way to compare both lenders and rates all at once. Lastly, I would suggest using the yellow pages or the internet. You can shop for quotes over the phone or request them through email.
HOW DO I KNOW HOW MUCH MORTGAGE I COULD BE APPROVED FOR?
The cost of the home you are looking to purchase and your income will be the determining factors on the amount a lender is willing to lend you. A lender will use housing expenses and long term debt as the two guidelines in determining how much they will loan you.
When using a conventional loan, lenders will tell you that housing expenses which include your mortgage payment, homeowner’s insurance, taxes and so forth, should not surpass 28 percent of your gross monthly income. When considering a Federal Housing Administration (FHA) loan, your housing expenses should not surpass 29 percent of your gross monthly income. If it is a VA (Department of Veteran’s Affairs) loan you seek, then the figures are calculated minus your monthly expenses. The amount that remains will be calculated according to the size of your family and geographical statistics in order to qualify you. Any long-term debt (expenses that will extend past 10 months) should not surpass 36 percent of your gross monthly income. The FHA and VA loans include this as part of your monthly income.
WHAT TYPES OF LOANS ARE AVAILABLE?
There are two basic types of mortgages available. There are those that have fixed rates and others that fluctuate over time or, in other words, have an adjustable rate.
Fixed Rate Mortgages give the homebuyer the advantage of a fixed interest rate over the life of the loan allowing the housing costs to be more predictable. There are 30 year fixed-rate mortgages and 15 year fixed-rate mortgages. The 30 year fixed-rate mortgage is chosen by many because it offers a fixed-interest rate with the lowest monthly payments; however with a 30 year payment schedule you will be paying more interest over the life of the loan. The longer the loan, the more interest paid to the lender.
A 15-year fixed-rate mortgage also offers a fixed interest rate, but allows the homeowner to pay off the loan in half the time as well as paying less interest over the life of the loan. The only disadvantage to a 15-year fixed-rate mortgage is the higher monthly payments. This allows many people to own their home free and clear sooner and is a smart choice if you can afford the 10-15% higher monthly payment.
Some lenders will offer a bi-weekly mortgage which requires the borrower to make half the monthly payment every two weeks. This can shorten your loan term to 18 or 19 years. In comparison to the traditional once-a-month payment totaling 12 payments a year, this bi-weekly mortgage works out to 13 monthly payments per year or 26 payments bi-weekly. This will cut down on the total interest paid over the life of the loan since the interest will be calculated every fourteen days rather than monthly. This will reduce the principal quicker, therefore saving you the interest. The downside is you will be sacrificing more mortgage interest deductions on your federal income tax in exchange for the lower interest.
Adjustable Rate Mortgages vary, and can have substantial advantages as well as their disadvantages. Depending on the financial situation you are in at the time of purchase will determine whether or not you feel an adjustable rate is best suited for you.
A “Two-Step”, “Super Seven” or “Premier” mortgage gives the homebuyer the advantage of a fixed-rate for a specific amount of time before the rate is adjusted to the rate of the current market, usually anywhere from 7-10 years from the time the home is purchased. This can allow you to make lower monthly payments until the interest rate is adjusted. Many people will choose this loan if their plan is to sell before the rate is adjusted. When it is time for the rate to be adjusted, the rate can increase by as much as 6 percentage points. The lender can also treat this similar to a “balloon” mortgage by making the loan due within 30 days.
A “Lender Buy-Down” mortgage allows the borrower to receive a discounted rate for the first year, with the rate gradually increasing over the next two years. This gives the borrower the advantage of lower monthly payments for the first two years of the loan.
A “Convertible” mortgage gives the borrower the option to lower the interest rate of the loan after a period of time or when a lower interest rate is available. The homebuyer will typically pay up to 3/8 of a percentage point on the interest rate of the mortgage as well as up to 3/8 of the loan amount at closing. This allows the borrower to lower the rate without having to refinance, which could become very costly.
A “Convertible Adjustable Rate Mortgage” (ARM) is similar to any other adjustable rate mortgage, however it offers the borrower to turn an adjustable-rate into a fixed-rate over a after a certain amount of time usually before the 5th year of the loan. are another new loan product on today’s market. It works like any other ARM, but it offers homeowners a distinct advantage, it allows them to turn their ARM into a fixed-rate mortgage after a set period (usually during the second through fifth years of the loan). This is perfect for homebuyers who want the advantage of a lower interest rate with the option of a 15 or 30 year fixed rate later on. Fees do apply, however they are still less than the cost of a refinance.
Adjustable rate mortgages can help those that initially thought they couldn’t afford homeownership achieve their dream. They are usually easier to qualify for, but keep in mind, these interest rates will fluctuate running the risk of higher interest rates in the future. If you intend on an increased income or even short-term ownership of the home, this may be a good choice. You still need to be prepared to keep up with the rising rates if necessary. The initial interest rate will usually be up to 3 percentage points lower than a fixed-rate mortgage. These loans usually include safeguards such as interest rate caps so that the rate cannot be increased higher than a specific percentage or monthly payment.
A Reverse Annuity Mortgage is designed to supplement the income of older or retired individuals whose equity on a home is plentiful, but also a liquid asset. The RAM is based on a percentage of the home’s appraised value. This loan allows the borrower to still claim ownership while the property makes the loan secure. Each month, the lender will pay annuities to the borrower up to the amount of equity that is in the home. This allows retirees or older individuals to receive tax-free income each month. The plan is in effect until the house sells, however there is a down side to this form of loan. If the borrower wants to sell and purchase another home, there may not be enough equity to do so. Plus, the lender may only determine the monthly payment based on the current market value of the home without considering any future increase in value.
Federal Housing Administration and Veterans Administration Mortgages offer 30 year and 15 year fixed-rate mortgages in addition to adjustable rate mortgages. Qualified military individuals may qualify for the VA loan and are offered this form of loan with little or no down payment. FHA insured loans are available to all qualified borrowers, but are done so with limitations.
Seller-Assisted Mortgages were seen more when interest rates rose extremely high in the past. With this form of loan, the seller of the house assists with the financing of the entire loan or a portion of the loan. This type of mortgage typically has a lower interest rate and monthly payment, however the seller will usually be in possession of the deed. In the past, this type of creative financing has brought on problems. With the various types of loans available today, seller-assisted mortgages are not used very often.
Balloon Mortgages offer the borrower a fixed-rate over the course of several years with a large payment due at the end of the loan, hence the “balloon” term. Usually this loan type has terms of 3, 5, and sometimes, though rare, 15 years. Payments are calculated as if it were a thirty year loan. Borrowers of this loan type sometimes find it challenging to save up enough money for the large payment due at the end of the term , which is the remainder of the principal, while continuing to make the required monthly payments and interest payments. Some lenders will allow refinancing at the end of the term when the large payment comes due, but if a lender does not allow this, you may be forced to sell the home. This loan should not be considered if you plan on living for a short period of time in a home that is due to increase significantly in value.
HOW SHOULD I COMPARE DIFFERENT LOANS?
Don’t only concentrate on interest rates. Study the mortgage loan you are considering and review the quoted rate, any points (pre-paid interest) that you may have to pay plus any other fees that may be included. You also want to thoroughly read any terms that are included such as adjustable or fixed rate, the amount of down payment that is required and whether or not there will be prepayment penalties. The Annual Percentage Rate (APR) is very helpful when comparing loans. This is the “effective rate of interest” that will be paid each year. This rate includes any fees or points that you would be expected to pay, and extends them out over the entire loan term. Keep in mind, you will need to choose a loan that best suits your needs and your personal situation.
ARE THERE ANY TERMS THAT I SHOULD KNOW REGARDING LOANS?
It is helpful if you are familiar with the different terms lenders may use in processing a loan. Here are some common terms:
An Acceleration Clause gives the lender permission to speed up the term in which your loan is to be due if you miss a monthly payment. It also gives them permission to require you to pay the entire balance due under the same circumstance.
Assumability of a mortgage is the taking over of the loan from the seller and becoming responsible for repayment of the loan.
A Buy-Down mortgage is when the seller lowers the interest rate during the first period of the loan, typically within the first three years. This loan type will eventually have increased monthly payments after that first period, but is also easy to qualify for due to this lower rate.
Settlement is the meeting in which the seller and homebuyer fill out required paperwork allowing the property to legally change hands.
Closing Costs are usually out-of-pocket costs paid by the homebuyer at settlement. In certain situations the seller will offer to pay any non-recurring closing costs. Closing costs typically include appraisal and deed recording fees, title insurance, points (if any), tax adjustments, and other costs. These closing costs are figured in advance and provided to you on a paper entitled a Good Faith Estimate. You should receive this estimate from the lender well before settlement.
Non-recurring closing costs include closing, escrow and settlement fees, title insurance, notary fees, recording fees, pest inspection, home inspection, and a home warranty (if included).
Escrow is an account set up by the lender for the borrower. This account is paid into each month by the borrower as part of their monthly payment. Each year, the borrowers property taxes, homeowners insurance and mortgage insurance (if applicable) will be paid by the lender from this account. Sometimes, you can choose not to set up an escrow account and be responsible for saving up and paying these yearly expenses on your own. Many people like to have an escrow account to ensure that these expenses are saved for as part of their monthly payment, rather than having to come up with a large sum of money when these expenses come due. Some people who are good about saving money may choose to put the funds in a savings account and pay these items on their own.
A Due-on Sale Clause allows the lender to require the immediate payment of the remainder of the mortgage when the sale is finalized.
A Negative Amortization happens when a borrower’s monthly payments are too small to pay the interest that is required on the loan. This results in the unpaid interest being tacked onto the balance of the loan. This can cause the borrower to owe more than the original loan amount in the end.
PMI or Private Mortgage Insurance is required when a borrower can only afford to put down less than 20% of the cost of the home. This gives the lender security if the borrower fails to make the required payments. PMI carries an additional initial payment of up to 1% and can also carry a monthly fee added into your monthly payment. This PMI can usually be canceled when the equity in your home has increased.
WHAT FEES CAN I EXPECT TO PAY AT CLOSING?
A Loan Origination Fee, or POINTS, allows the borrower to receive a lower interest rate by paying this fee. A DISCOUNT POINT is a term used by FHA or VA loans when more than one point is paid.
An Appraisal Fee is the cost of the appraiser who comes and calculates the value of the property based on comparisons to other homes in the area of the same size and recent home sales. This fee varies based on the value of the home and any difficulty the appraiser may have in determining a value. More expensive homes, as well as VA loans, usually carry a higher appraisal fee. This is required and offers the lender the certainty of the property’s value.
A Credit Report is required by the lender and allows them to view your credit history. This is only fair considering the lender is about to loan you a large sum of money. Credit reports usually cost under $60.
On a new construction, you will usually find what’s called a Lender’s Inspection Fee in conjunction with a 442 inspection. This inspection is required since the home is usually not completed when the appraisal is conducted. This inspection will ensure that the home is completed and flooring has been installed.
A Mortgage Broker Fee is include if a broker was used in the purchase of your home. Usually if this is the case, your points will also be included in this section and is used in place of a Loan Origination Fee.
Tax Service Fee is typically under $80 and allows the lender to monitor property tax payments through an outside service to ensure there are no tax liens.
A Flood Certification Fee is charged to determine if your property is in a flood zone.
Other Lender fees that may be included, but vary from lender to lender are document prep fees, underwriting fees, administration fees, appraisal review fees, and warehousing fees.
WHAT ARE SOME CLOSING COSTS THAT NEED TO BE PAID IN ADVANCE?
Pre-paid Interest is interest paid to keep the loan up-to-date until the first of the month. Most monthly payments are due on the first of each month. If you close in the middle of the month, the pre-paid interestwill cover the interest for the remainder of that month until your next payment is due.
Homeowner’s Insurance is insurance that is required and covers any damage that may occur to your home and its contents. Typically, the first year’s premium is due at closing.
A VA Funding Fee is a fee paid to the Veterans Administration for guaranteeing your loan. It is usually a percentage of your loan balance and depending on whether or not you’ve had a VA loan before, the percentage can be higher or lower. You can opt to finance this percentage into the loan instead of paying it up front, making your loan balance higher than the original purchase price.
An Up Front Mortgage Insurance Premium (UFMIP) is a percentage of the loan balance charged on the purchase of FHA approved single family homes or Planned Unit Developments or PUD’s. Like the VA Funding Fee, it can be financed into the balance of the loan, however this is different as it also requires a monthly fee.
I WANT TO REFINANCE. WHAT COSTS CAN I EXPECT TO PAY THAT ARE ASSOCIATED WITH MY CURRENT LOAN?
Any unpaid interest will be due when you refinance. If you made your last monthly payment, you will be required to pay any interest that has accumulated since that last payment was made.
A reconveyance fee is charged when the current lender transfers any collateral interest in the borrowers property back to the borrower by recording a reconveyance. This fee is usually less than $125.
Other fees include, demand fees for calculating payoff figures, a sub-escrow fee, a loan tie-in fee, and a homeowner’s association transfer fee (if applicable).