You've been looking at houses
for months, and finally you’ve found it--the house that's
just right. So now, all you have to do is to purchase your
new home, move in, and get settled, right? Not quite. There’s
one more big step to go-getting a mortgage loan. You’re going
to want to decide on the type of mortgage and payment terms
that fit within your budget. And you’re going to have to prepare
yourself by doing some research. What follows is valuable
information that will be crucial in helping you make loan
decisions that will fit your budget and circumstance.
Series: 3 Finding a Perfect Match for your Home Mortgage
Factors That Affect Your Mortgage
Mortgage payments are determined based on the following criteria:
Amount of the loan
Length of the loan
Lock in period
Loan Amount: The amount of your loan can increase your interest
rate if the amount financed exceeds the conforming loan limits
set by Fannie Mae and Freddie Mac, (private corporations regulated
by the federal government) that administer loans. The conforming
loan limit changes at the beginning of each year.
Shorter loans, such as a 30 year or 15 year note, can save
you thousand of dollars in interest payments over the life
of the loan, but your monthly payments will be high. An adjustable
rate mortgage may get you started with a lower interest rate
than a fixed rate mortgage, but your payments could get higher
when the interest rate changes.
Down Payment: A large down payment will give you the best
possible rate. If you've got the cash now and want to lower
your payments, you can pay points on your loan to lower your
mortgage rate. The concept is simple: In exchange for more
money upfront, lenders are willing to lower their interest
rate, cutting the borrower's payments. Remember to consider
upcoming expenses and closing costs in your down payment decision.
Closing costs. In addition to your down payment, you will
need to pay closing costs for processing your loan and transferring
the property ownership from the seller to you, the buyer.
Closing costs can range from 3%-5% of your loan amount, depending
on where you live, the loan you choose and your closing date.
In some cases, you can finance certain closing costs in your
mortgage loan. When you apply for loan, your lender will give
you an estimate of closing costs, which usually include:
Costs of processing your loan (includes property survey and
appraisal). Items paid in advance, such as first-year mortgage
insurance premium, first-year hazard insurance premium and
first-year flood or earthquake insurance premiums, if required.
Escrow accounts – an account held by the lender into which
the homebuyer usually pays for city/county property taxes,
mortgage insurance, and hazard insurance, if required.
Title insurance charges.
Recording and transfer charges.
Credit Score: Your credit and debt-to-income-ratio affect
the terms of your loan through your FICO score which is used
to determine your credit rating. If you have good credit and
your monthly income exceeds your monthly debt obligations,
you will get approved at a lower interest rate. However, if
your monthly income barely covers your minimum debt obligations,
you will not receive the lowest available interest rate even
if you have a good credit report.
Lock-in Rate: When shopping for a loan remember that interest
rates change frequently. It is important to ask your mortgage
representative if a lock-in rate is possible. This will guarantee
you a specific rate, provided the loan is closed, with a set
period of time. Determine How Large a Monthly Mortgage Payment
You Can Afford
Your choice of mortgage will be influenced by questions such
as How many years do you expect to live in your new home?
How important is it to be free of mortgage debt before facing
your children’s college bills or planning your future retirement?
How comfortable are you with the certainty of a fixed mortgage
payment vs. a payment that can change over time?
Your monthly payment will vary depending upon the type and
length of the loan and the amount you put down. Most lenders
will help you select the loan that’s best suited to your financial
How Low an Interest Rate Can You Expect?
Shorter term loans offer lower interest rates and are divided
into two types. A Fixed mortgage means that the rate is locked
in for the life of the loan. Adjustable Rate, also called
an ARM or variable rate note, is a note that generally offers
lower payments for the first year and then changes periodically
based on the terms and conditions of your note. Paying discount
“points” can lower your interest rate. If your loan requires
you to pay points or if you want to buy “down” the interest
rate using points, remember that one point equals 1% of the
Choosing the Right Mortgage
If you want the stability and predictability of a set rate
for the life of your loan, then a fixed rate mortgage may
be for you. Usually the longer the term of the mortgage, the
more interest you pay over the life of your loan. Though,
a longer term means your monthly mortgage payments will be
less than they would be with a comparable shorter-term mortgage.
30 year vs. 15 year fixed rate mortgage.
A 30-year mortgage will have a lower monthly payment and
a higher interest rate than a 15-year mortgage. You'll have
a smaller monthly obligation but you'll pay more for your
house over time because you're paying it off with interest
for a longer period. On the other hand, a 15-year mortgage
will have a higher monthly payment and a lower interest rate
so you'll pay less for your house because you're paying it
off in a shorter period.
Adjustable Rate Mortgage.
ARMs, are short-term fixed-rate loans: After the fixed rate
term is up, the rate adjusts at regular intervals in accordance
with current interest rate conditions at that time. A 5/1
ARM, for example, has a fixed rate for five years and then
adjusts every year for the next 25 years. (ARMs typically
run on a 30-year schedule.)
The length of the fixed-rate term on an ARM typically can
range anywhere from one month to 10 years. The longer the
rate is fixed, the higher the interest rate you'll get. But
generally speaking -- and there have been exceptions in the
past -- ARMs will cost you less in the short-term. With the
ARM, both your monthly payments and interest rates should
be lower than either a fixed rate 15-year or 30-year mortgage.
The risk with an ARM is that when interest rates rise, you
could end up paying much more than you bargained for. Check
to see if your ARM has a cap rate so that if rates increase,
your change cannot exceed a certain pre-defined limit.
If you know you'll be in a home for 12 years or more, a 30-year
fixed rate mortgage might work better for you than, say, a
5/1 ARM, where you fix a rate for five years and then it adjusts
every year after that. But if you think you won't be in the
home longer than five or six years, a 5/1 ARM might make more
Mortgage Shopping Tips.
Talk to the mortgage specialists at your bank. If you are
starting to look for a home they can asses your financial
situation and help you determine a purchase price that is
within your budget and a mortgage program that suits your
lifestyle and income. In many cases your advisor can prepare
a pre-approved mortgage before you finalize your purchase.
Ask a mortgage specialist at your bank to help you calculate
payments at different interest rates. This will help you determine
a monthly payment that can be comfortable integrated into
Types of Mortgage Programs.
Most lenders are committed to ensuring that your home financing
experience is rewarding and effortless. To this end, there
are many programs available to suit a variety of situations,
lifestyles and your financial profiles. These include:
Fixed-rate loan. If you’ve found a home you plan to live
in for 10-30 years, consider a fixed-rate loan. It’s predictable
and stable since the interest rate is set for the full length
of the loan. Because the monthly payment for the principal
and interest stays the same for the life of the loan, it’s
easier to plan a budget. Most lenders offer many fixed-rate
loans with terms to fit your budget, including loans that
require no money down.
If you plan on being in your home for a shorter period of
time, or expect your income to increase of the years, an adjustable-rate
mortgage (ARM) may just be the right fit for you. An ARM loan
usually starts with a lower initial interest rate than traditional
fixed-rate loans. After a set initial payment period (usually
one, three, five, seven or ten years), the interest rate may
change periodically (usually annually or semiannually) based
on market conditions. As the rate changes, your monthly payment
changes. ARM loans feature an adjustment “cap” which limits
how much the interest rate can go up. This helps protect you
from large increases in your monthly payment.
Loans for first-time homebuyers.
Most banks offer affordable loans to make it easier for first-time
homebuyers with limited savings to qualify for a home loan.
Specifically, FHA and VA government loans are available to
qualified buyers, based on income or property location. These
affordable financing programs can help make it easier to buy
a home since they require little or no money down and also
offer flexible credit and income guidelines.
Also consider how quickly you’d like to repay your loan –
within 15 years, 20 years, 25 years, 30 years? Do you want
to make biweekly mortgage payments? Typically, the sooner
you repay the loan, the more you’ll save in interest payments.
However, the longer you extend the term of your financing,
the lower your monthly payments maybe. So when choosing a
loan term, consider your budget, your long-term spending patterns,
your income over the life of the loan and how long you plan
to stay in your home.
Which loan is right for me?
The lifestyle situations below can help you decide which
loan you might want to consider.
”Getting the lowest monthly payment is most important to
me, and I’ll be in my home for less than five years.” An intermediate
ARM (five years or longer) if your income is fixed or expected
to decline. A short-term ARM (three years or less) if you
expect your income to increase.
“Getting the lowest monthly payment is most important to
me, and I’ll be in my home for more than five years.” A fixed-term
mortgage (for example, 30-year fixed). An intermediate ARM
if you expect your income to keep increasing.
”I have little money saved for a down payment.” AN FHA loan.
A VA loan, if you are a veteran.
“I have no traditional credit references (for example, car
loan or credit cards) but I pay my rent and other bills on
time.” An FHA loan. A VA loan, if you are a veteran.
“Paying off my mortgage faster and saving money by paying
less interest long-term is what’s most important to me.” A
shorter-term mortgage, such as 15- or 20-year fixed-rate loan.
A biweekly 30-year mortgage accelerates the reduction in principal
by applying more than one extra payment a year, reducing the
total interest and term of the loan
Borrowers Protection Plan
Borrowers Protection Plan is an optional feature of your
loan that can provide peace of mind during difficult times
– like an unexpected job loss or disability. Borrowers Protection
Plan will cancel your monthly principal and interest payment
should you lose your job or are unable to work due to illness
or injury. Borrowers Protection Plan may cancel a total of
up to 12 months, depending upon the protection option and
benefit period selected. And if you should die in an accident
your entire loan balance will be canceled.
Benefits of protection.
Affordable. Decide what you and your family need and we'll
help make it affordable.
Easy to obtain. There are no health requirements or medical
exams and any size loan qualifies.
Supplemental benefits. Your monthly benefits will not be
reduced because of other state unemployment benefits or disability
income you may receive. Protection options available prior
to loan closing include involuntary unemployment and disability
and can be purchased individually, or as a combination. These
options also include accidental death protection and are available
on a single or joint basis.
Fast answers and streamlined processing. The approval process
should be fast and simple. Many homebuyers who have excellent
credit history can be approved for a mortgage at the time
of the application and with very little documentation.
Hassle-free mortgages with 80% less paperwork.
Use a proprietary process to determine if you qualify for
this streamlined loan feature. This means less digging, sorting
and collecting paperwork for you.
Your qualification for reduced paperwork depends on a number
of factors: Strong credit — doesn't have to be perfect Type
of mortgage you choose — many mortgage types and loan amounts
up to $750,000 are eligible Even if you don't qualify for
the 80% less paperwork mortgage feature, your mortgage request
can still be approved.
Buying a home is one of the most important events in your
life. So talk to the mortgage professionals, do your homework
and select a loan that fits your lifestyle and your budget.
And enjoy the satisfaction of owning your own home.
Bill Tanebring is a Southern California based writer. His
web address is http://www.billtannebring.net