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Patricia May
RE/MAX Around
Atlanta |
Mortgage Information |
Mortgage Considerations
Things you'll want to consider when applying for a mortgage.
1.Your present income
2.Your expected income over the next few years
3.Outstanding long-term debt
4.How long you expect to stay in your home.
Essentially, the amount of money you can borrow will be determined by the size of the
monthly payment you can afford. As a general rule, your lender will not allow your housing
payment to exceed 25% to 33% of your gross monthly income, including payment of
principal and interest.
Start by taking a careful look at your current assets (including income, savings,
investments, IRAs, life insurance, pensions and corporate thrift plans and equity in other real estate, etc.) and your liabilities
(including outstanding loans, credit card balances, alimony, etc.).
Next, think about how your income -- or household income if there are two wage
earners in the family -- might change over the next several years.
Then take a look at a unique factor only you can determine: your loan "personality". Since
some mortgage options are less conservative than others, it's important to determine if you
are a "risk-taker", or if you prefer more stability in your financial dealings.
Do you invest in the stock market? Or put your money into Certificates of Deposit?
These are two different ways of handling money. Depending on your answers to these
and other questions that my be asked by your lender, you will be able to choose the
mortgage that is right for you.
How a Mortgage Works
Application Credit Check and Appraisals
This is your first step on the way to your new home or refinancing your existing one. To get
things started you should consider your needs, choose a lender and determine if you are
eligible for the loan amount you need. Then you are ready to gather the personal
information needed to apply for your mortgage. The typical application is basically
an outline of who you are, the property you want to buy or refinance, and your financial assets and liabilities.
Next, the lender will initiate a credit check and arrange for an appraisal on the property
you plan to buy. The appraisal assures you and the lender that the property has fair
market value. The lender is investing in you, and in the unlikely situation of default on your
loan, the property must be worth enough to settle the debt.
Approval and Commitment
Once your credit check, appraisals and verification are complete, this "credit
package" will be reviewed by an
underwriter, who will make the loan decision.
If your loan is approved, your lender will issue you a loan commitment -- a binding
agreement -- to lend you the money. The
commitment spells out all the details of your loan, including all charges and fees, closing
requirements and any important conditions including:
A list of documents you need for the closing,
Information on when the commitment expires,
Important information you should know about when closing on your home
It also may have certain conditions you must meet before your loan is granted -- bills you
must pay off, or special requirements of a homeowner association. In the case of a new
construction, your lender will want the appraiser to inspect the home just prior to
closing. This is to ensure that it is in accordance with the plans and specifications
furnished by the builder or contractor.
You and an attorney (if you choose to consult an attorney) should review the commitment
carefully. Since it is possible that the terms of the mortgage being offered may vary from the
time of your initial application, you must make sure the terms are acceptable to you.
Assuming you and the lender come to terms, your agreement with the lender is now
complete.
At the same time, your lender also checks the title to the property to make sure there are no
outstanding liens or title problems. The
lender requires and sometimes will arrange for title insurance to protect it against
unforeseen problems. This is called a "lender's" title insurance policy. You may
want to obtain title insurance to protect your own interest in the property. This is called
"owner's" title insurance policy. If the down payment on your home is less than
20%, your lender will normally require that you get private mortgage insurance
(PMI). This insurance will insure the lender against your possible default on the loan. It is not to
be confused with mortgage life insurance or homeowners insurance.
Closing Costs
Closing costs and procedures will vary from state to state, and from county to county. In
some jurisdictions, an attorney represents the lender. In others, the title company represents
the lender. There may be state or county transfer taxes to be paid. There may also be
fees to be paid for recording certain documents. There are also standard charges which are paid at all closings, some of which
are appraisal and credit fees, title insurance premiums and interest on the loan pro-rated
from the closing date to the end of the month.
Types of Mortgages
Fixed Rate Mortgages
When shopping for mortgage rates, be sure to ask the lender for the annual percentage rate,
or APR. The APR reflects the interest charged on the loan as well as pre-paid finance charges. These costs are expressed in
terms of percent, and may include among other costs the following: origination fees, loan discount points, private mortgage
insurance premiums, and the estimated interest pro-rated from closing date to month
end.
If you're looking for a mortgage with payments that will remain essentially
unchanged over its terms, or if you plan to stay in your new home for a long time, a fixed
rate mortgage is probably right for you.
With a fixed rate mortgage, the interest rate you pay and the monthly principal and interest
payments are agreed upon from the outset and will not change throughout the term of the
mortgage. In other words, the interest rate you close with won't change -- and your payments
of principal and interest will remain the same each month -- until the mortgage is paid off.
As you can see, the fixed rate mortgage is an extremely stable choice. You are protected
from rising interest rates. And it makes budgeting for the future very easy.
But in certain types of economies, the interest rate for a fixed rate mortgage is considerably
higher than the initial interest rate of other mortgage options. That is the one
disadvantage of a fixed rate mortgage. Once your rate is set, it does not change and falling
interest rates will not affect what you pay.
Adjustable Rate Mortgages
An adjustable rate mortgage (ARM) is considerably different from a fixed rate
mortgage. ARMs have only been around since the early 1980s, and were created in order to provide affordable mortgage financing in a
changing economic environment. As relatively new phenomena, their purpose is often misunderstood.
An ARM is a mortgage where the interest rate you pay may change at preset intervals
according to rising and falling interest rates and the economy in general.
In most cases, the initial interest rate of an ARM is lower than a fixed rate mortgage.
The Convertible ARM
The convertible ARM is an option that is currently very popular. This product allows
you to convert to a fixed rate mortgage after a certain period of time has elapsed. For
instance, you could get a one-year ARM with the option to convert any time after the first
through the fifth adjustment period.
Convertible ARMs offer the ability to take advantage of lower rates initially and
possible savings -- and the option of converting to a fixed rate loan later on when
you may be able to better afford it. If your financial needs are right, you might find this
option the best of both worlds.
Balloon Mortgages
A third type of mortgage that has become popular in recent years is the balloon
mortgage, so-called because it requires you to pay off your loan in full or refinance at the
end of the mortgage term (usually five or seven years). The advantage of a balloon
mortgage is that your monthly payments during the mortgage term are generally lower
than they would be for a traditional 30-year
fixed rate mortgage.
Balloon mortgages are traditionally popular with first-time homebuyers with growing
families and with individuals who expect to be relocated by the employer. If you
anticipate moving in five to seven years, you can take advantage of lower interest rates
(sometimes from three-eighths to three-quarters of a percentage point less than
traditional fixed rate loans) for that time period. If you end up staying longer in your
residence then you'll have to pay the balance at the end of the term, or more likely,
refinance your mortgage at the then current interest rate. Many lenders also offer an
option that allows you to convert to a fixed rate mortgage, provided certain conditions
are met.
Qualifications for a balloon mortgage vary depending on the lender you choose, but most
require at least a 20% down payment.
Since some mortgage options are less conservative than others, it's important to
determine if you are a risk-taker or if you
prefer more stability in your financial dealings. Do you invest in the stock market?
Or put your money into Certificates of Deposit? These are two different ways of handling money. Depending on your answers
to these and other questions that may be asked by your lender, you will be able to choose the
mortgage that is right for you. |
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