What are the basics of a mortgage?
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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How do I shop for a mortgage?
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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How large a mortgage will you be able
to get?
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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How much money will you need for a
downpayment and closing costs to
purchase a home?
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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What are points?
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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What is mortgage insurance?
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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How do you shop for mortgage loans?
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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What kind of mortgage should you
select?
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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What are the tax considerations?
Interest, points, and some closing
costs are deductable for some
borrowers. Please consult your tax
advisor.
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Where do you go for more information?
If you have any question regarding
mortgages or any information on this
site, please feel free to contact us
directly.
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