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what
loan is best for me? what
will my closing costs be? what
points will I be charged? what
items must be prepaid? can
I lock in the quoted interest rates? how
long will it take to get approved? is
there a prepayment penalty? is
there a call option? what are the costs of obtaining a mortgage? There are five elements involved in the total cost of a mortgage:
The amount of the loan, or principal, is the total amount of money you borrow (purchase price of the house minus the down payment). The interest rate, whether fixed or variable, has the greatest impact on the total cost of a mortgage. By the time you own your house, you will have spent at least as much in interest as the house cost in the first place. The term of the loan is the length of time over which you borrow the money, or the length of time until the loan will be paid off. Loans of longer terms have lower monthly payments since the cost is spread out over more time, but will cost you more in interest payments over the long run. Points are interest that is paid on the loan at closing. Generally, by paying more points at closing, the borrower reduces the interest rate of the loan, and therefore lowers his or her monthly payments. Remember that one point is equal to one percent of the principal. Fees include all other costs of your mortgage, including application fees, loan origination fees, title search, survey, inspection, appraisal and any other charges imposed by a lender. Points and fees are paid along with the down payment at closing, and are referred to as closing costs, which usually total 3-6 percent of the purchase price of the house. how lenders decide on loan approval After you apply for your loan, your lender will begin processing your mortgage application. Knowing how lenders make their lending decisions will help you better understand your own financial situation. The "Four C's of Credit" are critical in a lender's decision-making process:
capacity
Monthly income - What is your total monthly income? If you are self-employed, or if your income includes commissions and bonuses, your lender will use a monthly income averaged over the last two years. Housing expenses include the monthly payments on the proposed loan, as well as the monthly cost of property taxes and insurance (and any condominium fees or other costs). Total debt includes any credit card debts or car (or other installment) loans that will take longer than 10 months to pay off, including mortgage expenses. Payments of tuition or child support will also affect this amount. Lenders use this information to calculate two helpful ratios:
credit If you had a mortgage before, lenders will consider your past repayment history as a good indicator of how you will repay another. If you rented, they will check your rental history. Use of credit cards and payment of installment loans can also indicate your attitude toward managing debt. While a few late payments probably won't present a problem, collections, repossessions, foreclosures or bankruptcies on your record can be more serious. Even a previous bankruptcy won't necessarily prevent your loan from being approved, although you should be prepared to explain any problems in your credit record. collateral
The lender will also want to know if you have enough cash for the down payment and closing costs, and that you'll have enough left over after closing for the first few mortgage payments. character
compensating
factors
This depends on the monthly payment you can afford. You may not be able to qualify for a 10-year loan because the payments are too high. A 30-year fixed rate mortgage can be a good investment when rates are low if you plan to live in your new house for many years and want to keep housing costs down. However, you will save tens of thousands of dollars by opting for a shorter term if you can afford slightly higher monthly payments. You might also want to finish paying off your mortgage before your children go to college, or before you reach retirement. Although the 30-year fixed mortgage keeps your monthly payments low, it also means you have 30 years of payments! Fixed rate loans with shorter terms will have higher monthly payments, but cost significantly less, overall. For one thing, they have less time to accrue interest, so the payments on a 15-year loan will actually be less than half the amount of payments on a 30-year mortgage. Furthermore, mortgages with shorter terms usually have lower interest. So, payments on a 15-year loan will only be about 10-15 percent higher than payments on a 30-year loan. An example should help you understand the costs and savings involved. Let's suppose that you borrow $100,000 at 8.5%. Here's what it would cost over various terms: benefits of bi-weekly payments This payment plan can be particularly helpful for those who only qualify for a 30-year loan, but want the benefits of a shorter term loan. Simply stated, you make 26 bi-weekly payments each year instead of 12 monthly ones. By paying half of your monthly payment every two weeks, you actually make 13 monthly payments in a year, enabling you to pay off your loan and build equity more quickly. To give you an example, a 30-year mortgage will usually be paid off in about 22 years on this plan. You also gain substantial savings in interest by paying down the principal more quickly and by shortening the term of the loan. The 30-year fixed rate mortgage is the most common and popular mortgage in the U.S - probably because it is the easiest to apply for. It also offers the lowest monthly payments of any of the fixed-rate mortgages, and is therefore the most affordable. Predictable low monthly payments for the life of the loan make this the best option for many people. There are also 10-, 15- and 20-year fixed rate mortgages that allow you to pay off your mortgage in less time, with less interest. A fixed rate loan is one in which principal and interest are amortized, or evenly spread out over the term of the loan, so that both interest rate and monthly payments remain unchanged for the life of the loan. Interest rates fluctuate constantly. Fixed rate mortgages protect you from the risk of rising interest rates. So, if interest rates are particularly low when you purchase your new home, or if you expect them to rise, a fixed rate mortgage could be a wise investment. On the other hand, unlike adjustable rate mortgages (ARMs), fixed rate loans won't take advantage of falling rates. Since you're locked into one rate for the life of your loan, you could end up with interest higher than current market rates in the years to come. At that point, however, refinancing might enable you to take advantage of those lower rates. Adjustable rate mortgages (commonly called ARMs) are flexible loans with interest rates and monthly payments that rise and fall with the economy. With an adjustable loan, the borrower shares in the benefits and risks of having the loan tied to market changes. Because the borrower shares in the risk of rising rates, lenders are able to offer lower initial interest rates than on fixed rate mortgages. The interest rate on your loan is then adjusted periodically according to whatever market index you chose when selecting your ARM. The interest rate on an adjustable mortgage changes according to a financial index, such as CDs, T-Bills or LIBOR rates. When your interest rate is up for adjustment, your lender will take the current rate of the index to which your loan is tied and add a margin, a certain set number of interest points laid out in your loan agreement, to determine your new rate. So, your interest rate and monthly payments could increase or decrease over the life of your loan, depending on the activities of the market. caps
and ARMs In short, caps protect you from drastic changes in interest rate, but do not guarantee you the stability of a fixed rate loan. With an ARM, you exchange the possibility of lower interest rates for the possible risk of rising rates. Some adjustable loans offer payment caps which limit the amount your monthly payment can increase. This might sound appealing, but these caps do not limit the amount by which interest can increase. So, payment caps can lead to deferred interest. If interest rises by more than your payment cap requires you to pay, the additional interest not added to your payments is added to the unpaid balance of your loan. This is called negative amortization. With a negative amortization ARM, it is actually possible for you to owe more later in the loan term than you did at the beginning, so be careful. Federal
Housing Administration (FHA) Loans With FHA insurance, eligible buyers can purchase a home with a down payment as little as 3 percent of the FHA appraisal value or the purchase price, whichever is lower. These loans offer slightly better rates than conventional loans and qualifying standards are not as strict. Closing costs can be paid by nearly anyone: a family member, the seller or the broker. Both fixed and adjustable rate FHA loans are available, and in most states, FHA loans can be used for refinancing. In fact, one of the best refinance loans in the marketplace is the "FHA Streamlined Refi." You can use this program when interest rates fall and you just want to lower your interest rate. Many times you only need to prove to your new lender that you have made your house payments on-time for the last 12 months. These are fixed rate, government-insured loans administered by the U.S. Department of Veterans Affairs. Their highly competitive interest rates are designed to make housing affordable for U.S. veterans, reservists, active-duty personnel, and surviving spouses of veterans with 100 percent entitlement. Owner-occupied loans for properties of 1-4 units, condos, and town homes are available. Eligible buyers can purchase a home with no down payment, no cash reserve, no application fee and lower closing costs. And, in most states, VA loans are also available for refinancing. In fact, one of the best refinance loans in the marketplace is the "VA Streamlined Refi." You can use this program when interest rates fall and you want to lower your interest rate. Many times you only need to prove to your new lender that you have made your house payments on-time for the last 12 months. Many lenders are approved to handle VA loans. To find out if you are eligible, contact your nearest VA regional office.
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