Mortgage
"How To"
"Home mortgage loan information from Consumer Finance Portal.COM. Information on different types of mortgage loans and how to arrange your mortgage loan."
The Basics of Getting a Home Mortgage Loan
There are several different types of loans or mortgages
that you can get.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.
1.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.
2.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.
3.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.
4.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.
5.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.
6.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.
7.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.
8. What are the tax considerations?
Interest, points, and some closing costs are deductable
for some borrowers. Please consult your tax advisor.
9. 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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