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Home ownership is often called the "American Dream" because of the pride that comes with owning a place you can personalize and call your own. In addition, buying a home is one of the most stable and solid investment providing tax benefits and allowing you to build equity.
Searching for a mortgage is a complex process. As a borrower you want the lowest rate and best terms, but attaining such results is not easy. Do you go for a low rate and more points? No points and a somewhat higher rate? How about a loan with a higher rate but no costs at closing? And do you lock-in today or hope rates decline and "float" with the market?
Fortunately for buyers, there are a variety of mortgages to choose from.
It is in your best interest to investigate each of them to determine which mortgage is the best in your situation. You probably won't qualify for all of them. In fact, you may only qualify for one. But if you do qualify for more than one, you may save yourself money (and worry) in the long run if you do your homework before signing on the dotted line.
As Your Real Estate Agent I can recommend you a qualified mortgage broker that can assist in finding the right mortgage for you.
The mortgage brokers I work with are experienced, knowledgeable, and always strive to offer you the best mortgage rates available.
Mortgage Tips
I prepared this handy Mortgage Tips which shows you some things to keep in mind as you’re hunting for a mortgage.
A lower interest rate means a lower monthly mortgage payment, which can save you money in the long run. Also, it is easier to qualify for a lower payment than a higher one.
Rates change quickly. That great rate you find today might not be there tomorrow. Once you find the rate you are looking for, submit a loan application and lock in that rate.
When comparing loans, make sure that you're comparing loans of the same type. For example, you find that "Loan A" for a 30-year loan has a much lower interest rate than "Loan B" (also for 30 years). Upon further inspection, you find that "Loan A" is technically an adjustable rate mortgage. Its payment is based on a 30-year amortization, but becomes due through either payment or refinancing at the end of 5 or 7 years. These are frequently referred to as a 5-year or 7-year fixed-rate mortgage. While both said "30-year", they are not the same type of loan.
Ask the lender for a statement detailing all fees associated with the loan. Factors such as "points" (loan fee), interest rate and "garbage fees" (extra fees which some lenders charge) can vary greatly from one lender to another.
Should I choose a fixed rate or adjustable rate loan?
Fixed rate loans have a stated interest rate that does not change over the life of the loan, whereas the rates on adjustable rate loans are linked to an index and change as the index rate changes. Many mortgages, such as a 5-Year Fixed (30 Year), start as a fixed rate loan and then convert to an adjustable rate. Adjustable rate loans have more risk due to the possibility that the interest rate could increase. However, because you are assuming some of the risk the lender will generally reward you with a lower interest rate. These loans are best for borrowers who do not plan on keeping the loan for the full term.
When does it make sense to pay points?
Points are a one-time fee that a borrower pays to lower the interest rate. Points are defined as a percentage of your loan amount, with one point being equal to one percent of your loan. For example, if you borrow $200,000, one point would be equal to $2,000. Paying one point will generally reduce your interest rate by approximately .25%.
An alternative to paying points is to receive a "credit" from the lender in exchange for a higher interest rate. Whereas points are added to your closing costs, a credit is used to reduce your closing costs. Once again, you can receive a credit of approximately one point by raising your interest rate .25%.
Whether you choose to pay points or receive a credit, this amount will be applied to your closing costs when your loan funds.
Should I consider an Interest-Only loan option?
Interest-Only loans are a good means of either increasing your home purchasing power or maximizing your flexibility to control cash flow. You can save significant amounts of cash for investment, savings, or other expenditures during the first ten years of your loan. This is also a solid strategy to maximize tax deductibility, with more funds available for paying down higher cost, nondeductible consumer debt. With these loans, the minimum payment required covers interest only-you decide how much or how little of the principal to repay each month. These loans should not be confused with negative amortization loans-with Interest-Only the principal balance NEVER increases.
Should I choose a loan with Negative amortization?
Many loan brokers generally recommend that people stay away from these types of loans due to the high risk. Most adjustable rate mortgages (ARM) adjust the payment when the interest rate changes. However, negative amortization ARMs have a fixed payment option, even when the interest rate increases. Therefore it is possible that the total loan balance may actually grow over time.
The Basic Loan Types
Conventional
A conventional mortgage is a loan that is long term (typically 30 or 15 years) and meets the guidelines as put forth by FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corp.).
Mortgage Insurance (MI) is required on a conventional loan if the loan-to-value is more than 80%. Mortgage insurance is typically paid on a monthly basis.
A conventional mortgage is generally non-assumable and does not have a pre-payment penalty.
Fixed Rate Conventional Mortgage
The most common type of Conventional Mortgage is a fixed rate mortgage. Two distinct characteristics of a fixed rate loan are an interest rate that doesn't change and a loan amount that is repaid in equal monthly payments.
The most common term lengths for fixed rate mortgages are 30 years and 15 years. A 15 year term usually has a lower interest rate than a 30 year term mortgage.
Adjustable Rate Conventional Mortgage
Another type of Conventional Mortgage is an adjustable rate mortgage (ARM). The main difference between an ARM and a fixed rate is that an ARM has an interest rate and monthly payment that is subject to change.
An ARM is a mortgage with an interest rate that is subject to change periodically, based on an index that is determined at the time of obtaining the mortgage. The interest rate may go up or down, and the monthly payments of the mortgage will adjust accordingly.
There are advantages to an ARM. Usually, the beginning interest rate of an ARM is lower than a fixed rate mortgage. This can be great for someone that is going to live in his or her home for a short time (usually less than 5 years). With a lower interest rate, the loan's payments are smaller. With a smaller monthly payment, a borrower can sometimes qualify for a larger loan amount. Some adjustable rate mortgages can be assumable. If interest rates remain steady or actually decrease, an ARM Mortgage can be less expensive than a fixed rate mortgage over the long term.
The main disadvantage of an ARM is the possibility of a higher monthly payment. The details of an ARM can be complex; borrowers should consult their loan officer with any specific questions.
Balloon Conventional Mortgages
One last type of Conventional Mortgage is a balloon mortgage. This type of mortgage has a fixed interest rate, but at some point requires the borrower(s) to make a final lump sum payment.
Usually, a balloon mortgage has a fixed interest rate and monthly payments are based on a 30 year fixed payment schedule. However, the actual term of the loan is shorter than the 30 year payment schedule. Most balloons have a 5 year term or a 7 year term. At the end of the 5 or 7 years, the loan is due and payable in a lump sum. However, most balloon mortgages include an option to refinance the loan at the end of the 5 or 7 years.
A borrower might choose this type of mortgage if he or she plans on living in the home a short amount of time and does not plan on needing a mortgage for 30 or 15 years. Therefore, he or she would want to take advantage of the lower interest rates offered with a balloon mortgage.
Jumbo Mortgage Program (also known as Non-Conforming)
A jumbo mortgage consists of the same features as a conventional mortgage (see definition above), however the loan amount exceeds the loan limit set by FNMA and FHLMC.
Fixed Rate Jumbo Mortgages
One type of jumbo mortgage is a fixed rate mortgage. The characteristics of a jumbo fixed rate mortgage are the same as a conventional mortgage. Depending on the loan amount however, certain loan-to-value restrictions may apply.
Adjustable Rate Jumbo Mortgages
Jumbo mortgages can have adjustable rates also. The features of a jumbo adjustable rate mortgage (ARM) are similar to those of a conventional mortgage. Depending on the loan amount however, certain loan-to-value restrictions may apply. Consult a qualified loan officer for details.
Balloon Jumbo Mortgages
Balloon jumbo mortgages are another option for a borrower. The guidelines for this type of jumbo mortgage vary depending on lender/broker. Consult a qualified loan officer for details regarding this type of loan.
FHA Mortgage Program (a type of Government-Guaranteed mortgage)
A FHA mortgage is obtained through a local lender/broker, however the Federal Government guarantees these mortgages through the Department of Housing and Urban Development (HUD).
A borrower might choose a FHA mortgage because it allows for greater flexibility in income, credit, and down payment requirements. A loan that might not be approved as a conventional loan might be approved as a FHA loan.
All FHA loans require Mortgage Insurance (MI). An up front premium of 1.75% of the loan amount is required and is typically added to the loan amount. A FHA loan also requires a monthly MI premium of .5%. In comparison, a conventional mortgage only requires a monthly MI premium if the loan-to-value is over 80%.
The Federal Housing Association offers loans to lower-income Americans. Look for the phrase "FHA approved" when looking at ads for homes.
VA Mortgage Program (a type of Government-Guaranteed mortgage)
A VA mortgage can be obtained through a local lender/broker, and similar to a FHA mortgage, it is guaranteed by a government agency, the Veterans Administration.
Unlike any other mortgage programs described, only eligible veterans that have served in the armed forces (as defined by VA) can obtain a VA loan.
One feature of a VA loan is the ability of an eligible veteran to finance up to 100% of the purchase price of a property. The veteran can also add the VA funding fee to the purchase price, thus lowering the amount of cash the borrower needs to purchase a home. The VA funding fee is a fee charged by the Veterans Administration to insure the payment of the mortgage.
There is a limit on the amount you can borrow, so this option works best for those buying a lower priced home.
All veteran borrowers should consider this mortgage program when reviewing their borrowing options. Regional VA offices can answer any questions regarding a veteran's eligibility status.
Before you apply for an adjustable rate, interest only or payment option mortgage see the following important information:
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What is the process for getting a Loan?
Step 1: Consult with a professional loan broker
- Let him know what your personal needs are
- Discuss loan programs & your options.
Step 2: Complete Loan Application
- Fill out the application
- Sign an application and legal disclosures
Step 3: Your Appraisal and Title Report are ordered.
Lock your rate (when applicable)
- The appraisal fee is usually paid by the borrower when the appraiser comes
to inspect the property.
- The cost for an appraisal is determined by the value of your property.
Step 4: Completed File is Submitted to the Lender
- Your application, disclosures, credit report, bank and asset statements, escrow
instructions, preliminary title report and appraisal are submitted to the lender
once the loan broker have received these and any other needed
documentation.
- To process your loan broker will need documentation from you to verify
your income and assets. Documentation may vary depending on your loan
program.
- Loan broker will need copies of the following:
1. Recent pay stubs covering the most recent 30 day period.
2. W2’ forms for the previous two years or verification of other types of
income.
3. Most recent three months worth of statements for your checking, savings
and investment accounts.
Step 5: Lender's Approval Received with List of Conditions to be Met
- The lender accepts the loan request and may have additional
documentation that they will need before docs are drawn or
before they fund the loan.
Step 6: Docs are Ordered and Sent to Escrow for You to Sign
- Once prior to doc conditions are reviewed by the lender; they will draw your
docs and forward them to the escrow company.
- Escrow will prepare the docs for signing and contact you to arrange a time and
place for you to meet with a notary.
Step 7: Lender Reviews Docs and Final Conditions
- Escrow sends the signed docs back to the lender for final review.
- Any final prior to funding conditions are also received and reviewed.
Step 8: Lender Funds Your Loan
- The lender sends a wire to the title company.
- Escrow will disburse the funds to the appropriate parties.
- Your loan closes, Congratulations!
Do not hesitate to if you Need HELP
finding the right financing option for your home,
i.e. first mortgage, refinance, etc…
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