|
- What is a Mortgage?
- What is a Loan to Value (LTV)
ratio and how does it
determine the size of my loan?
- What types of loans are available
and what are the advantages of each?
- When do ARMs make sense?
- What are the advantages of
15- and 30-year loan terms?
- Can I pay off my loan ahead
of schedule?
- Are there special mortgages
for first-time homebuyers?
- How large of a down payment
do I need?
- What is included in a monthly
mortgage payment?
- What factors affect mortgage
payments?
- How does the interest rate
factor in securing a mortgage loan?
- What happens if interest rates
decrease and I have a fixed rate loan?
- What are discount points?
- What is an escrow account?
Do I need one?
- How do I choose the right
lender for me?
- How do I learn about my credit
history?
- What do I do if I find a mistake
in my credit history?
- What is a credit bureau score
and how do lenders use them?
- How can I improve my score?
- How can I get help with my
credit report?
1. What is a Mortgage?
Generally speaking, a mortgage is a loan obtained to purchase
real estate. The "mortgage" itself is a lien (a
legal claim) on the home or property that secures the promise
to pay the debt. All mortgages have two features in common:
principal and interest.
<Top of Page>
2. What is a Loan to Value (LTV) ratio
and how does it determine the size of my loan?
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 specifies an 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 the less cash homebuyers
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.
<Top of Page>
3. What types of loans are available and
what are the advantages of each?
Fixed Rate Mortgages: Payments remain the same for
the life of the loan
Types:
- 10, 15, 20, & 30 years
- Balloon Mortgage
Advantages:
- Predictable – housing cost remains unaffected by
interest rate changes and inflation.
- The Balloon Mortgage offers a very low fixed rate for
an initial period of time (usually 5, 7, or 10 years); when
the time has elapsed the balance is due or refinanced (though
not automatically).
Adjustable Rate Mortgages (ARMS): Payments increase or decrease
on a regular schedule with changes in interest rates. Increases
are subject to limits.
Types:
- Two-Step Mortgage – your interest rate adjusts
only once and remains the same for the life of the loan.
- ARMS linked to a specific index or margin.
Advantages:
- Generally offer lower initial interest rates.
- Monthly payments can be lower.
- May allow borrower to qualify for a larger loan amount.
<Top of Page>
4. When do ARMs make sense?
An ARM may make sense if you’re confident that your
income will steadily increase over the years or if you anticipate
a move in the near future and aren't concerned about potential
increases in interest rates.
<Top of Page>
5. What are the advantages of 15 and 30-year
loan terms?
30-Year:
- In the first 23 years of the loan, more interest is paid
off than principal, meaning larger tax deductions.
- As inflation and costs of living increase, mortgage payments
become a smaller part of overall expenses.
15-year:
- The loan usually is made at a lower interest rate.
- Equity is built faster because early payments pay more
principal.
<Top of Page>
6. Can I pay off my loan ahead of schedule?
Yes! Send in extra money each month or make an extra payment
at the end of the year and 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.
<Top of Page>
7. Are there special mortgages for first-time
homebuyers?
Yes! Lenders offer several affordable mortgage options that
help first-time homebuyers overcome obstacles that historically
have made purchasing a home difficult. 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 who
have experienced income irregularities.
<Top of Page>
8. How large of a down payment do I need?
There are mortgage options now available that require a down
payment of only 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.
<Top of Page>
9. What is included in a monthly mortgage
payment?
The monthly mortgage payment mainly pays off principal and
interest. But most lenders also include local real estate
taxes, homeowner's insurance, and mortgage insurance (if applicable).
<Top of Page>
10. What factors affect mortgage payments?
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.
<Top of Page>
11. How does the interest rate factor
in securing a mortgage loan?
A lower interest rate allows you to borrow more money than
a high rate with the same monthly payment. Interest rates
can fluctuate as you shop for a loan, so ask you lender if
it offers a rate "lock-in". Rate locks guarantee
specific interest rates for a certain period of time.
**Remember, a lender must disclose the Annual Percentage
Rate (APR) of a loan to you. The APR shows the cost of a mortgage
loan by expressing it in terms of a yearly interest rate.
It is generally higher than the interest rate because it also
includes the cost of points, mortgage insurance and other
fees.
<Top of Page>
12. What happens if interest rates decrease
and I have a fixed rate loan?
If interest rates drop significantly you may want to refinance.
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. However, refinancing may
involve paying many of the same fees paid at the original
closing, plus origination and application fees.
<Top of Page>
13. What are discount points?
Discount points allow you to lower your interest rate. Essentially,
they are 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 (or.125) of a
percentage point. When loan shopping, ask lenders for a 0-point
interest rate and see how much the rate decreases with each
point paid. Since they can lower your monthly loan payments,
discount points are smart if you plan to stay in a home for
some time. 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.
<Top of Page>
14. What is an escrow account? Do I need
one?
An escrow account, which is established by your lender, allows
you to set aside a portion of your annual charges for homeowner's
insurance, mortgage insurance (if applicable), and property
taxes. These annual charges are broken down into a monthly
amount. This monthly amount is paid by you to the lender with
your monthly mortgage payment. Escrow accounts are a good
idea because they assure money will always be available for
these annual charges when they become due.
**If you use an escrow account to pay property tax or homeowner's
insurance, make sure you are not penalized for late payments
since it is the lender's responsibility to make those payments.
<Top of Page>
15. How do I choose the right lender
for me?
Choose your lender carefully by looking for financial stability
and a reputation for customer satisfaction. Choose a company
that gives helpful advice and that makes you feel comfortable.
A lender that has the authority to approve and process your
loan locally is preferable, since it will be easier for you
to monitor the status of your application and ask questions.
Plus, it's beneficial when the lender knows home values and
conditions in the local area.
**Do research and ask family, friends, and your real estate
agent for recommendations.
<Top of Page>
1. How do I learn about my credit history?
There are three major credit reporting companies: Equifax,
Experian, and Trans Union. Obtaining your credit report is
as easy as calling and requesting one. Once you receive the
report, it's important to verify its accuracy. Double check
the "high credit limit", “total loan,"
and “past due" columns. It's a good idea to get
copies from all three companies to assure there are no mistakes
since any of the three could be providing a report to your
lender. Fees, ranging from $5-$20, are usually charged to
issue credit reports but some states permit citizens to acquire
a free one. Contact the reporting companies at the numbers
listed for more information.
CREDIT REPORTING COMPANIES
Experian 1-888-524-3666 - http://www.experian.com/
Equifax 1-800-685-1111 - http://www.equifax.com/
Trans Union 1-800-916-8800 - http://www.transunion.com/index.jsp
<Top of Page>
2. What do I do if I find a mistake in
my credit history?
Simple mistakes are easily corrected by writing to the reporting
company, pointing out the error, and providing proof of the
mistake. You can also request to have your own comments added
to explain problems. For example, if you made a payment late
due to illness, explain that for the record. Lenders are usually
understanding about legitimate problems.
<Top of Page>
3. What is a credit bureau score and
how do lenders use them?
A credit bureau score is a number that is based on your credit
history. It represents your potential for repaying a loan,
and lenders use it to determine your ability to qualify for
a mortgage loan. The better the score, the better your chances
are of getting a loan. Ask your lender for details.
<Top of Page>
4. How can I improve my score?
There are no easy ways to improve your credit score, but you
can work to keep it acceptable by maintaining a good credit
history. This means paying your bills on time, not having
too many inquiries, and not carrying high balances to credit
limits.
<Top of Page>
5. How can I get help with my credit
report?
There are companies you can hire to help you verify, dispute,
and monitor items on your credit report. Contact
us for information about credit repair companies.
<Top of Page>
|
