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   10 Frequently Asked Questions


If you are thinking about buying a house, getting a 2nd mortgage or if you just have some basic questions... here are 10 FAQ'S 

  1. What are the basics of a mortgage?
  2. How do I shop for a mortgage?
  3. How large a mortgage will you be able to get?
  4. How much money will you need for a downpayment and closing costs?
  5. What are points?
  6. What is mortgage insurance?
  7. How do you shop for mortgage loans?
  8. What kind of mortgage should you select?
  9. What are the tax considerations?
  10. Where do you go for more information?

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What are the basics of a mortgage?

There are two basic types of mortgages:

  • Fixed interest rate with fixed monthly payments.

  • Adjustable (ARM) with variable rates and changing monthly payments.

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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