Money Matters

Mortgage Advice


Basic Mortgage FAQ's

How do I know which homes I can afford?

Use a simple mortgage calculator to see approximately how much of a monthly payment you can expect. A Realtor or broker will know what kinds of mortgages the lenders are currently offering and can help you choose a program that's right for you. Another good idea is to get pre-qualified for a loan. That means you go to a lender and apply for a mortgage before you actually start looking for a home. Then you'll know exactly how much you can afford to spend, and it could help speed the process for final approval. For example, many on-line mortgage websites offer a quick 10-minute form to fill out for pre-qualification.

 

How do I find a good lender?

You can finance a home with a loan from a bank, a savings and loan, a credit union, a private mortgage company, or various state government lenders. Shopping for a loan is like shopping for any other large purchase: you can save money if you take some time to look around for the best prices. Different lenders can offer different interest rates and loan fees; and as you know, a lower interest rate can make a big difference in how much home you can afford. Talk with several lenders before you decide. Your Realtor will be familiar with lenders in the area and what they're offering.

 

What do I need to take with me when I apply for a mortgage?

You should have: 1) social security numbers for both you and your spouse, if both of you are applying for the loan; 2) copies of your checking and savings account statements for the past 6 months; 3) evidence of any other assets like bonds or stocks; 4) a recent paycheck stub detailing your earnings; 5) a list of all credit card accounts and the approximate monthly amounts owed on each; 6) a list of account numbers and balances due on outstanding loans, such as car loans; 7) copies of your last 2 years' income tax statements; and 8) the name and address of someone who can verify your employment. Depending on your lender, you may be asked for other information.

 

What is a Loan-To-Value (LTV) ratio?

The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: with a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay $2,500 as a down payment.

The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV ratio, the less cash home buyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require a mortgage insurance policy.

 

What types of loans are available and what are the advantages of each?

The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.

1. Fixed Rate Mortgages: Payments remain the same for the life of the loan (usually 15-year or 30-year)
Advantages:
- Predictable
- Housing cost remains unaffected by interest rate changes and inflation Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits.

2. Balloon Mortgage: Offers very low rates for an initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is due or refinanced (though not automatically)

3. Two-Step Mortgage: Interest rate adjusts only once and remains the same for the life of the loan.

4. ARMS (Adjustable Rate Mortgages): are linked to a specific index
- Generally offer lower initial interest rates
- Monthly payments can fluctuate
- May allow borrower to qualify for a larger loan amount

 

Can I pay off my loan ahead of schedule?

Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.

 

Are there special mortgages for first time homebuyers?

Yes. Lenders now offer several affordable mortgage options, which can help first-time homebuyers, overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.

 

How large of a down payment do I need?

There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you'll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and possibly repairs and decorating.

 

What is included in a monthly mortgage payment?

The monthly mortgage payment mainly pays off principal and interest. But lenders may also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable). Keep in mind that you'll have monthly utilities -- water, trash, electric, heating & cooling, cable/internet, phone, mobile phone service, etc...Your Realtor will be able to help you get information from the seller on how much utilities normally cost. In addition, you might have homeowner association dues.

 

What happens if interest rates decrease and I have a fixed rate loan?

If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus origination and application fees.

 

What are discount points?

Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1.8.1 (or.125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for many years, since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.

 

What is an escrow account? Do I need one?

Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property taxes or homeowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.

 

My offer was accepted on a house. Now what?

When closing on a home, you will basically sit down with your broker, the broker for the seller, possibly the seller, and a closing agent. The closing agent will have a stack of papers for you and the seller to sign. While he or she will give you a basic explanation of each paper, you may want to take the time to read each one and/or consult with your agent to make sure you know exactly what you're signing. After all, this is a large amount of money you're committing to pay for a lot of years! Before you go to closing, your lender is required to give you a booklet explaining the closing costs, a "good faith estimate" of how much cash you'll have to supply at closing, and a list of documents you'll need at closing. If you don't get those items, be sure to call your lender BEFORE you go to closing. Be sure to read our booklet on settlement costs. It will help you understand your rights in the process. Don't hesitate to ask questions.