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 What is a mortgage, and what are the benefits of different kinds
of mortgages?
 Simply put, a mortgage is a loan that a homebuyer obtains directly
from a lender to purchase real estate. The mortgage is a lien on
the property that secures a promissory note (promise to repay the
debt) that states the terms of the loan, including the interest
rate and the number of payments.
What are the different types of lenders, and how do I choose the
right one for me?
Before someone lends you the money to purchase your home, they'll
want to know a lot about you. And you're entitled to know as much
as you can about them too. It's important because getting a mortgage
is not just a one-time signing of documents, a handshake and a
check. You will be depending
on your lender to fund the loan as promised, on time, and over
the life of the loan; to keep good payment records, pay your taxes
and insurance (if included in your monthly payment); and to perform
many other continuing services.
Are there any mortgages especially designed for first-time buyers?
Today,
first-time buyers enjoy a number of mortgage options that make
purchasing a home more affordable by minimizing down payments
and keeping monthly payments as low as possible during the early
years of the loan. Most ARMs feature an interest rate that is below
market for the first year and may only rise gradually after that.
VA- and FHA-insured loans call for extremely low down payments
(zero to five percent of the purchase price) and often offer a
below-market interest rate. Similarly favorable terms can be arranged
with the help of private mortgage insurance or PMI. Finally, first-timers
who can find a cooperative seller or third-party investor can look
into such non-traditional financing methods as
a lease/buy arrangement.
Can I get an FHA or VA mortgage?
Just
about anyone can apply for an FHA-insured mortgage through banks
and other lending institutions. They are particularly well-suited
for buyers of moderate income; the low down payment requirements
(as low as five percent of the purchase price) are matched by
a relatively low maximum mortgage amount. Similarly, VA-guaranteed
loans often require no down payment for
up to four times the amount guaranteed by the VA. These loans are
reserved for either active military personnel or veterans, or spouses
of veterans who died of service-related injuries. If there is a
downside to these loans, it's the qualifying process. Though you
apply for government-insured financing through a lending
institution, the Federal Housing Administration or the Department
of Veterans Affairs must insure or guarantee the loan and may require
specific documentation or procedures not necessarily required for
conventional financing. That may take more time than is generally
required for conventional mortgage approval. Additionally, FHA-required
insurance must be added to your payment.
How much of a down payment will I need to buy a home?
The amount of money that a buyer must put down at closing depends
on the loan-to-value ratio — the percentage of the property's
appraised value or sales price (whichever is less) that a lender
is willing to loan.
For example, if a property is appraised at $100,000 and the loan-to-value
ratio is 90 percent, the lender would be willing to loan $90,000.
The buyer's down payment is the remaining $10,000. Because the
loan-to-value is a percentage, the higher the sales price of a
house, the higher the down payment. A down payment of 20 percent
has been the benchmark for conventional financing, but today, many
options are available, some requiring
as little as five percent down.
How does a lender determine the maximum mortgage I can afford?
The three primary areas lenders examine in determining the size
of mortgage you can handle include your monthly income; non-housing
expenses; and cash available for down payment, moving expenses
and closing costs.
The most common way lenders interpret these variables to estimate
your mortgage capacity is the Percentage Method. Most lenders feel
a family should spend no more than 28 percent of its income on
housing costs, including the mortgage, insurance, and real estate
taxes. In addition, these housing costs plus your long-term debts
(car loans, child support, minimum credit card payments, student
loans, etc.) shouldn't exceed 36 percent of your income. Some mortgage
companies, have relaxed ratios to help
you purchase the home of your dreams.
What are the steps involved in the loan process?
When you apply for a mortgage, you will need to furnish information
regarding your income, expenses and obligations. It will be very
helpful, and save time, if you have the following items available:
- Two most recent pay stubs from your employer
- W-2s for the last two years
- Last two months' bank statements
- Long-term debt information (credit cards, child support, auto
loans, installment debt, etc.)
What are typical closing costs?
You can expect to pay the following closing costs at the time of
settlement:
- Appraisal fee — covers the cost of a professional written
estimate of the property's value.
- Attorney's or escrow fees — your own and the lender's
if they have one.
- Credit report fee.
- Points
- Documentation preparation — covers the cost of preparing
the deed and other paperwork.
- First year's premium on fire and hazard insurance.
- Impounds (also known as "escrow account") — sufficient
to cover real estate taxes on the purchased property for the
current tax period to date. The lender then pays these bills
when they
come due.
- Interest — paid from the date of closing until 30 days
before your first monthly payment.
Title insurance.
- Mortgage insurance if required.
- Origination fee — covers the lender's administrative
costs.
- Recording fees.
- FHA mortgage insurance (FHA loans only).
- VA guarantee fees (VA loans only).
What are points, and what's the point in paying them?
In real estate, the term "point" refers
to one percent of the total mortgage loan amount. Buyers often
pay lenders a supplemental
fee, calculated in points, to get a better interest rate on a particular
mortgage. For instance, a lender may offer you a choice of two
30-year mortgages: the first at eight percent with no points, and
the second at 7.5
percent with an additional three points. If the loan is for $100,000,
those three points will cost you an extra $3,000 up front — but
you'll get a payback of significantly lower monthly payments for
the lifetime of the loan. Many lenders will advise you to pay the
points for the better rate if you can afford it, especially if
you plan on keeping the
home for more than a few years. Like interest, the money you pay
for points may be tax-deductible, and the investment may pay for
itself through savings generated by lower monthly payments. We
suggest you call your tax preparer.
Is the lending process regulated by the government?
Most
definitely. There are many laws and government regulations that
all lenders must follow to ensure that all applicants are
given fair and equal treatment. For example, in 1968, Congress
passed the Truth in Lending Law, which requires that lenders provide
borrowers with information about a loan's true interest rate. By
law, lenders must reveal a loan's annual percentage rate (APR).
The law also stipulates that for refinancing and second mortgage
loans, the borrower has up to three days after closing to change
his or her mind and call the deal off. The lender may not disburse
money until after this three-day "recession period" has
passed.
What is APR and how is it calculated?
The
annual percentage rate (APR) is a calculated rate of interest for
a loan over its projected life. This rate includes the interest,
all points (which are considered prepaid interest), Mortgage insurance,
and other charges associated with making the loan that the lender
collects from the borrower. The APR is calculated by a standard
formula that all lenders use. This enables the borrower to comparison-shop
between lenders and/or
loan products.
What is a good-faith estimate?
Your
lender or loan agent must provide you with a good-faith estimate
within three days of your application. This is the information
you need to make a fair and accurate judgment when shopping for
a loan. Your estimate is a written document that shows all the
costs that can be estimated in advance by the lender. You need
this information
so there are no surprises on the day you close your sale on the
property to be purchased. You will be expected to pay closing costs.
What does my monthly mortgage payment include?
The bulk of your monthly mortgage payment goes toward paying off
the principal and interest of your loan. In addition, most lenders
require that you pay a sufficient amount to cover your local real
estate tax, plus your homeowner's or hazard insurance. This amount
is placed in an escrow account, from which your lender then pays
your tax and insurance bills as they come due.
What are the respective advantages of 15-year and 30-year loans?
The 30-year fixed-rate mortgage remains the standard mortgage,
with an array of valuable benefits designed especially for buyers
who expect to stay in their homes for a long time. Because the
borrower pays more interest than principal for the first 23 years,
the tax deduction is substantial. And as inflation causes both
living expenses and income to increase, your unchanging monthly
mortgage payments account for a relatively smaller portion of income
as the years go by.
As you'd expect, a 15-year monthly mortgage means higher monthly
payments than an equivalent 30-year loan...but not as much higher
as you may think. At the same rate of interest, payments on the
15-year mortgage are roughly 20-25 percent higher than a loan that
takes twice as long to pay off. And one of the benefits of choosing
a 15-year mortgage is that you can generally get a lower interest
rate for an otherwise similar loan. Another advantage is faster
equity build-up because a larger portion of your early payments
is going to pay off principal. This makes the 15-year mortgage
an ideal alternative for couples approaching retirement or anyone
else interested in owning their home free-and-clear as quickly
as possible.
Do adjustable-rate mortgages offer any protection against rising
rates?
Yes. ARMs and other variable-rate-of-payment plans offer lower-than-market
interest rates initially, but because they are tied to the interest
rates of U.S. Treasury Bills or other indexes, interest rates later
in the loan term may rise. However, many such loans offer built-in
safeguards designed to minimize the effect of any rapid escalation
in interest rates.
One such safeguard is the rate cap. Many ARMs include provisions
for the maximum amount your rate can rise, both annually and over
the life of the loan. For example, if your initial rate is 6.5
percent, the loan may include one-percent annual and five-percent
lifetime caps...which means even if rates rise dramatically, you'll
pay no more than 7.5 percent next year, 8.5 percent the following
year and so on, until a maximum rate of 11.5 percent is reached.
An ARM may also allow your rate to decrease when the index it is
tied to goes down. As you might expect, decreases are usually
capped as well.
A second protective device included in some ARMs is the payment
cap. Under this provision, your monthly payments may rise by only
a set dollar amount. The potential disadvantage of this type of
cap is that it can slow or even reverse your equity build-up. If
rates rise dramatically, you could actually wind up owing more
principal at the end of the year than you did at the beginning.
Of course, ARM holders can also consider refinancing to a fixed-rate
loan after a few years. Some ARMs even include a provision for
converting to a fixed-rate loan after a set period of time.
What can I do if I have a fixed-rate loan and interest rates go
down?
When interest rates drop significantly as they have in recent times,
the homeowner should investigate the financial advantages of refinancing.
Essentially, this means taking out a new loan to pay off your existing
loan.
Refinancing may require paying many of the same fees paid at the
original closing, plus origination fees. Most mortgage experts
agree that if you can get a rate two percent less than your existing
loan, and you plan on staying in your home for at least 18 months
more, refinancing is a good investment.
What is the difference between pre-qualifying and pre-approval?
A pre-qualification consists of a discussion between you and a
loan officer. The loan officer will collect information regarding
your income, monthly debts, credit history and assets, and based
on this information calculate an estimated mortgage amount for
which you qualify. The pre-qualification is not a mortgage approval,
but more an estimate on what you can afford.
A pre-approval, on the other hand, is a more comprehensive approach
giving an actual decision on a home loan. A
credit report is ordered electronically and is received within
30-60 seconds. This is an actual credit approval and it carries
with it some considerable benefits. From this information, a loan
approval is given agreeing to finance a home and specifying the
total mortgage amount available to you.
What could be more comforting than the peace of mind that goes
with knowing that your mortgage is fully approved?
You will have a greatly improved negotiating position when you
are pre-approved for a mortgage. Sellers are more apt to negotiate
with someone who already has a mortgage approval in hand. The pre-approval
letter lets the seller know they are working with a serious cash
buyer. A pre-approved buyer can also close on a property more quickly — another
major consideration for a motivated seller.
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