Mortgages: Choosing the Best
Choosing the Best Mortgage
Contents:
Fixed Rate & ARM Mortgages
Credit and Work History
Down Payment Assistance Programs
PMI
Gifts and Grants
Disadvantages of 100% financing
Pre-Approval vs. Pre-Qualification
. Pre-qualification is a simple estimate of what you can afford based on income alone.
. Pre-approval requires review of income, debt, and credit in relation to a specific loan product.
While the Pre-Qualification will take just a few minutes, the Pre-Approval process could take several days depending upon the borrowers ability to provide the required documents.
Questions to Consider
. How long do you plan on living in the home?
. How important is it to you to be free of mortgage debt before facing additional debts like college
bills or change in income such as retirement?
. How uncomfortable are you with a payment that can change over time versus one with a fixed
payment for the entire term of the loan?
. Terms: 30-year, 25-year, 20-year, 15-year, 10-year ./
. Fixed payments each month for length of the loan
. Amount of payment applied toward principal balance increases as term is paid down
. Interest rate drops as the term shortens, however, total monthly payment increases
. Most programs require a 5% down payment
. PMI required for loan-to-value greater than 80% Ideal for buyers planning on staying in the
house for an extended period of time
Adjustable Rate Mortgage (ARM)
1, 3, 5, 7, and 10 year options are available.
Interest rate is fixed for the determined length of time of the chosen ARM program after the fixed time period has ended.
The Lender has the option of increasing the rates depending upon the money market conditions at that time.
Often a good choice for a person not planning to occupy the home for an extended time period.
Pre-Payment Penalty
If you're considering getting a home loan that has a prepayment penalty attached, here's what you need to know: A prepayment penalty means that you cannot sell your home or refinance within the penalty period without getting penalized. That penalty can be thousands of dollars. It can even mean that you might owe money to the bank above and beyond the sales price for the home.
There are no "ifs, ands or buts." Your lender won't care if you get a job transfer, if your child gets sick, or you die. (If you die, your estate will have to pay the prepayment penalty out of the closing proceeds.)
Most lenders look for a minimum 2-year steady work history . Acceptable reasons for less than 2-year employment history include:
. Recently discharged from military service
. Recently finished school
. Seasonal work with gaps between seasons
Credit History
Your credit history plays a big role in determining the rates the Lender will charge for loaning the money necessary to buy your dream home.
. Do you pay your bills on time each month?
. Bankruptcy or foreclosure in the last 7 years?
. Traditional vs. Non-traditional
. Traditional credit includes mortgages, revolving debt (credit cards), and installment loans (including student loans)
. Nontraditional credit can include rent, telephone services, utilities, car insurance and other debts that are incurred each month but not reported to credit agencies
Funds Required to Purchase
. Down Payment (Minimum 3% FHA and 5% for conventional conforming loans)
. Closing Costs
. Pre-paid Escrows (property taxes and homeowners insurance)
Can you afford to pay a mortgage each month?
. Principal, Interest, Taxes and Insurance ( Commonly referred to as P I T I )
. Private Mortgage Insurance
. Taxes
. Homeowners Insurance
Down Payment Assistance Programs
. Provide grants to the buyer to cover down payment and/or closing costs and pre-paids for a
conforming FHA loan
. Seller must agree to contribute the amount being provided to the buyer plus a service fee to for
the program (Is not limited to first time homebuyers)
. www.nehemiah.com
100% Financing
. Generally require minimum 680 credit score
. Typically have higher rates than loans with lower LTVs
. Loan finances 100% of sales price plus may cover a portion of closing costs and prepaids
Understanding Private Mortgage Insurance (PMI) . Required for Conventional and FHA loans with less than 22% equity of purchase price.
. Monthly payment amount is based on total loan amount times a LTV factor.
. Options for eliminating PMI after purchase
. Protects lender in case of default
. Payment is not tax deductible Automatically terminated one (1) year after 22% equity
. Achieved through pre-determined amortization schedule
. You must request termination after 22% equity
. Achieved through proof of appreciation of home (appraisal by a certified appraiser)
. FHA as well as some Conventional loan programs allow for cash gifts to be applied toward down
payment and/or closing costs and prepaids
. Individual gifts are limited to family members and / or Non-Profit Organizations (
. State homebuyers programs provide grants to first time homebuyers
Disadvantages of 100% Financing
. Minimal or zero equity in property
- Limited refinance options
- Difficult to sell for profit
. Higher interest rate and higher loan amount lead to higher monthly payments
. Higher PMI
