There
are two basic types of mortgages:
Generally, lenders require 10% down for purchases, or 10% equity
for refinances. To avoid mortgage insurance, the requirements
are 20%.
Also,
you can expect to pay closing costs, generally three to four
percent of the loan amount. For refinance loans, these closing
costs can be financed into the loan amount so that you don't
have to contribute cash.
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Probably the most important factor when shopping for a mortgage
is the annual percentage rate (APR).
The APR
is the "bottom line" and includes all the costs of credit, such
as interest, points, and other charges required as a condition
to the loan. Under the Truth-In-Lending Act, lenders are
required to disclose the APR to provide you with a uniform and
simple way of comparing loans and to prevent hidden finance
charges.
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A
general rule is that you usually can qualify for a mortgage loan
of up to four times your household's pre-tax income (assuming no
debt). For example, if your family has an income of $30,000 a
year, you can qualify for a mortgage of up to $120,000. With the
same income and $500 of monthly debt, you can qualify for a
mortgage of up to $50,000.
Lenders
use many factors to determine how large a mortgage you can
obtain. For example, lenders generally prefer that your housing
expenses (including mortgage payments, insurance, taxes, and
special assessments) do not exceed 28% of your gross monthly
income. Other debt added to your housing expense should not
exceed 38% of your gross monthly income. Federal Housing
Administration (FHA) and Department of Veteran Affairs (VA)
mortgage loan percentages may vary.
In
addition, lenders want to know about your employment and credit
history. This includes finding out about your job and income and
how well you handled and repaid loans in the past.
Legal
safeguards exist to ensure this information is used fairly. For
example, the Fair Credit Reporting Act requires that lenders
certify to the credit bureau the purpose for which this
information is sought and that it will be used for no other
purpose. The Equal Credit Opportunity Act prohibits
discrimination in lending based on sex, marital status, race,
national origin, religion, age, or because someone receives
public assistance.
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Lenders
usually expect you to be able to make a downpayment of at least
five percent of the house's price and to pay closing costs,
which are often three to four percent of the loan amount. If you
make a downpayment as little as five to twenty percent, the
lender will require you to pay for private mortgage insurance.
If you make a downpayment over twenty percent, you will not be
required to pay for private mortgage insurance. (Requirements
for VA or FHA loans may differ.) Under the Federal Real Estate
Settlement Procedures Act, the lender must provide you with
information on known and estimated closing costs.
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Points,
also known as discount points, are usually the largest fee that
the lender charges. Each point equals one percent of your loan
amount. If you borrow $100,000 and have to pay two points, you
pay $2,000 in points to obtain the loan.
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If
you downpayment or equity is less than twenty percent, you will
be required to pay for mortgage insurance. Mortgage insurance
insures the lender against default and foreclosure. If the
borrower default on his or her payments and the property is
foreclosed, the mortgage insurance company must repay the lender
all or a portion of its losses.
Do not
confuse "mortgage insurance" with "mortgage life insurance".
Mortgage life insurance is an optional life insurance policy
that you can buy from your insurance agent. It pays off your
mortgage in the event of your death.
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Compare
the mortgages rates offered by several lenders before you apply
for a loan. Mortgage packages vary widely, and it is important
to investigate several options to find the one best for you. If,
for example, you are using a real estate agent or broker to shop
for a home, you may want to consider their suggestions about
lenders and mortgage packages. Check the real estate section of
newspaper for tables on mortgages. Look in the Yellow Pages
under "Mortgages" for a list of mortgage lenders in your area.
Call several lenders for rates and terms on the type of mortgage
you want. SelectLenders also provides you with 100's of lenders
to choose the loan that is right for you.
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There
are two major types of mortgage loans: those with fixed interest
rates and fixed monthly payments and those with varying rates
and changing monthly payments. However, there are many
variations of these plans on the market and you should shop
carefully for the mortgage that best suits your needs.
Fixed
Rate Mortgages
Common
fixed-rate mortgages include 30-year, 15-year, and balloon
repayment terms. The 30-year mortgage usually offers the lowest
monthly payments, with a fixed monthly payment schedule.
The
15-year fixed-rate mortgage enables you to own your home in half
the time and for less than half the total interest costs of a
30-year loan. These loans, however, often require higher monthly
payments.
Balloon
mortgages are like a 30-year fixed loan except that at the end
of five, seven, or ten years (the "balloon term"), the loan
becomes due and payable. Monthly payments are identical to a 30
year fixed loan, however when the loan matures (at the end of
the "balloon term"), you must pay it off or refinance. Balloon
loans are best suited for people who know they will sell or
refinance their home before the loan matures. The benefit is
that the interest rate is typically one-half of one percent
lower.
Adjustable Rate Mortgages
Mortgages with changing interest rates and/or monthly payments
exist in many forms. The adjustable rate mortgage (ARM) is
probably the most common, and there are many types of ARM loans
available. The ARM usually offers interest rates and monthly
payments that are initially lower than fixed-rate mortgages. But
these rates and payments can fluctuate, often annually,
according to changes in a pre-determined "index" commonly linked
to the rate of return on U.S. Government Treasury bills.
Some
adjustable loans, contain a provision permitting you to convert
later to a fixed-rate loan. Another type of mortgage loan
carries a fixed-interest rate for a number of years, often
seven, before adjusting to a new interest rate for the remainder
of the loan. A "buydown" or "discounted mortgage" is another
type of loan with an initially reduced interest rate which
increases to a higher fixed rate or to an adjustable rate
usually within one to three years. For example, in a "lender
buydown," the lender offers lower monthly payments during the
first few years of the loan.
Bi-Weekly Mortgages
The
bi-weekly mortgage shortens the loan term from 30 years to as
little as 17 years (depending on the interest rate of your loan)
by requiring a half payment every two weeks (26 half payments
versus 12 full monthly payments). While you pay an amount equal
to approximately one more payment per year than you would with a
conventional mortgage, you save a substantial amount of interest
over the life of the loan. A bi-weekly mortgage payment feature
typically costs $500. Although the benefits seem to outweigh the
costs, a nearly identical result can be accomplished by making
one annual pre-payment equal one month's payment -- the cost $0.
Also,
keep in mind that with shorter-term loans, you trade lower total
costs for smaller mortgage interest deductions on your income
tax. Please see an accountant for the tax considerations before
making a decision.
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Interest, points, and some closing costs are deductable for some
borrowers. Please consult your tax advisor.
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If you
have any question regarding mortgages or any information on this
site, please feel free to contact us directly.
