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Examine your finances
and shop around before you apply.
Shopping
for a mortgage is the first step toward owning a home and
perhaps the most daunting, especially if you are not prepared.
Once
a simple task, that meant comparing fixed rates from among
perhaps a dozen or fewer savings and loan companies, the
mortgage hunt today is like finding your way through a maze.
There
are dozens of loan types and hundreds of loan programs
available through thousands of mortgage brokers, bankers,
lenders, finance companies, credit unions, even stock
brokerage firms.
Contrary
to popular belief, finding a mortgage doesn’t begin with an
application.
Education
is a better first choice. Mortgage information sources are
vast as the number of mortgages available. Web sites, topical
newspaper articles, mortgage books, consumer seminars and
workshops, financial planners, real estate agents, mortgage
brokers and lenders are all available to assist you along the
way.
First
and foremost, you must determine how your mortgage payment
will fit your current budget and, to some extent, your future
obligations 15 to 30 years down the road.
If
you discover to late that you can’t afford your mortgage,
you’ll not only face the possibility of losing the roof over
your head, but you could also damage your ability to purchase
a home later.
Step 1: Examine your
finances:
If you can afford to buy a home, you must then determine how
much mortgage you can afford. Lenders are apt to put your loan
application in the best light and qualify you for as much as
they are willing to lend, which can be more than you can
afford.
It’s
up to you to take stock of your income and expenses, both
current and projected to determine what you can comfortably
manage each month. Along with your mortgage payment, don’t
forget related insurance, taxes, homeowner association dues
and any other costs rolled into the mortgage payment.
Step 2: Shopping for
your loan:
When you are ready to shop for a loan you have two basic types
of mortgage stores to shop. District lenders and mortgage
brokers.
Direct
lenders have money to lend. They make the final decision on
your application. Brokers are intermediaries who, like you,
have many lenders from which to choose. Lenders have a limited
number of in-house loans available. Brokers can shop many
lenders for each lender’s store of loans. If you have
special financing needs and can’t find a lender to suit
them, an experienced broker may be able to ferret out the loan
you need. Mortgage brokers, however, are paid with a slice of
the amount you borrow, some more than others some less.
Internet brokers today perhaps receive the smallest cut,
sometimes none at all, and can prove to be a real bargain.
Along
with shopping the source, you’ll also have to shop loan
costs, including the interest rate, broker fees, points (each
point is one percent of the amount you borrow), prepayment
penalties, the loan term, application fees, credit report fee,
appraisal and a host of others.
Step 3: Apply For a
Loan:
The application process is the easy part. Provided you’ve
gathered documents necessary to prove claims you make on the
application.
The
application will ask for information about your job tenure,
employment stability, income, your assets (property, cars,
bank accounts and investments) and your liabilities (auto
loans, installment loans, mortgages, credit-card debt,
household expenses and others).
The
lender will run a credit check on you to take a look at your
credit status, but you’ll have to supply additional
documentation including paycheck stubs, but you’ll have to
supply additional documentation including paycheck stubs, bank
account statements, tax returns, investment earning reports,
rental agreements, divorce decrees, proof of insurance, and
other documentation. If the lender deems you creditworthy, it
will likely hire a professional appraisal to make sure the
value of the home you are about to buy is truly worth your
loan amount.
Break down the home
mortgage and determine the better one for you.
Mortgage.
It’s a word and a concept that can strike terror in even the
most stouthearted of potential homeowners. With its often
baffling intricacies that determine how much more you do or
don’t pay every month, it’s a justifiable anxiety.
Take
heart, for we have the 10 essentials you need to soothe your
mortgage-addled soul. In fact, the basics of mortgage loans
are pretty easy to understand.
The rate remains the
same
When you choose a fixed-rate mortgage, you’re assured your
interest rate will remain the same for the life of the loan.
1.
Loan Length.
The life, or term of a mortgage is 30 years by industry
standards, but 15 and 20 year term loans are also available.
2.
Rate Reduction.
Should you opt for a shorter term loan, you can reduce your
interest rate even further. For example, a 15 year rate is
typically one-quarter to one-half percent lower than one for
30 years. The smaller rate and shorter term mean you’ll pay
less over the life of the loan than if you borrowed the same
amount over a longer term.
3.
Monthly Money. Of
course, the shorter the loan term, the higher the monthly
payments.
4.
Higher rates?
Fixed-rate mortgages protect you from the risk of rising
interest rates. But you could end up with a higher rate should
interest rates fall.
ARMed and Ready
The second major mortgage category is the adjustable rate, or
ARM. Initially, an ARM rate is lower than one that is fixed,
about one-quarter to two points, depending upon the economy.
5.
Larger Loans.
With its lower preliminary rate, ARMs can help you qualify for
a larger loan or start off with smaller payments than with a
higher fixed rate.
6.
Rate Cap.
Generally, ARMs have caps on how high it can adjust during
each adjustment period and over the life of the loan. This
protects you from drastic market changes, but doesn’t offer
the stability of a fixed rate loan.
7.
Income Increases. ARMs
are a good choice for someone who knows there income will rise
and at least keep pace with the loan rate’s periodic
adjustment cap.
8.
Moving On? If
you plan to move in a few years and aren’t concerned about
the possibility of a higher rate, an ARM could be a good
choice.
9.
Rate changes. When
the first adjustment occurs (usually between six and twelve
months) and how often it adjusts depends upon the terms of the
loan. After the first adjustment, subsequent modifications can
occur every six months, once a year or longer. Should rates
fall, so does your monthly payment.
10.
Rate Configurations. To
come up with an ARM rate, the lender adds a “margin,”
usually two to four percentage points, to the index. Its
interest rate adjusts up or down, depending upon current
economic trends and is based on a money market index. The one
year U.S. Treasury bill is commonly used because its yield is
similar to the 30 year U.S. Treasury bill used to set rates on
30 year fixed mortgages.
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