|
 •
What should I know about buying a home?
• How much house can I
afford?
• Why should I refinance?
• What are the costs of
refinancing?
• What kinds of mortgages
are available?
• What is a Fixed Rate
Mortgage?
• What is an Adjustable
Rate Mortgage?
• How can I save on a Fixed
Rate Mortgage?
• What determines the cost
of a mortgage?
• What is a Private Mortgage
Insurance?
• What should I ask my
lender?
• What documents will I
need for my loan application?
• What is involved in the
closing meeting?
• What costs will I pay
at closing?
• How do lenders decide
loan approval?
• What decisions do credit
lenders make?
|
 |
|
|
|
What should I know before buying a home?
|
| Here are some tips that could
save you a lot of time, money and trouble. |
| Plan
ahead. Establish good credit and save
as much as you can for the down payment and closing
costs. |
| Get
pre-approved online before you start looking. Not
only do real estate agents prefer working with pre-qualified
buyers; you will have more negotiating power and
an edge over home buyers who are not pre-approved. |
| Set
a budget and stick to it. Our Online
Calculator can help you determine a comfortable
price range. |
| Know
what you really want in a home. How long
will you live there? Is your family growing? What
are the schools like? How long is your commute?
Consider every angle before diving in. |
| Make
a reasonable offer. To determine a fair
value on the home, ask your real estate agent for
a comparative market analysis listing all the sales
prices of other houses in the neighborhood. |
| Choose
your loan (and your lender) carefully.
For some tips, see the question in this section
about comparing loans. |
| Consult
with your lender before paying off debts.
You may qualify even with your existing debt, especially
if it frees up more cash for a down payment. |
| Keep
your day job. If there is a career move
in your future, make the move after your loan is
approved. Lenders tend to favor a stable employment
history. |
| Do not
shift money around. A lender needs to
verify all sources of funds. By leaving everything
where it is, the process is a lot easier on everyone
involved. |
| Do not
add to your debt. If you increase your
debt by financing a new car, boat, furniture or
other large purchase, it could prevent you from
qualifying. |
| Timing
is everything. If you already own a home,
you may need to sell your current home to qualify
for a new one. If you are renting, simply time the
move to the end of the lease. |
| TOP |
|
How Much House Can I Afford?
|
| How much house you can afford
depends on how much cash you can put down and how
much a creditor will lend you. There are two rules
of thumb: |
 |
You can afford a home
that's up to 2 1/2 times your annual gross
income. |
|
Your monthly payments
(principal and interest) should be 1/4 of
your gross pay, or 1/3 of your take-home pay. |
|
| The down
payment and closing costs - how much cash will you
need? |
| Generally speaking, the more money
you put down, the lower your mortgage. You can put
as little as 3% down, depending on the loan, but
you'll have a higher interest rate. Furthermore,
anything less than 20% down will require you to
pay Private Mortgage Insurance (PMI) which protects
the lender if you can't make the payments. Also,
expect to pay 3% to 6% of the loan amount in closing
costs. These are fees required to close the loan
including points, insurance, inspections and title
fees. To save on closing costs you may ask the seller
to pay some of them, in which case the lender simply
adds that amount to the price of the house and you
finance them with the mortgage. A lender may also
ask you to have two months' mortgage payments in
savings when applying for a loan. The mortgage -
how much can you borrow? A lender will look at your
income and your existing debt when evaluating your
loan application. They use two ratios as guidelines: |
|
Housing
expense ratio: Your monthly PITI
payment (Principal, Interest, Taxes and Insurance)
should not exceed 28% of your monthly gross
income. |
|
Debt-to-income
ratio: Your long-term debt (any
debt that will take over 10 months to pay
off - mortgages, car loans, student loans,
alimony, child support, credit cards) shouldn't
exceed 36% of your monthly gross income. |
|
| Lenders aren't inflexible, however.
These are just guidelines. If you can make a large
down payment or if you've been paying rent that's
close to the same amount as your proposed mortgage,
the lender may bend a little. Use our calculator
to see how you fit into these guidelines and to
find out how much home you can afford. |
| TOP |
|
Why Should I Refinance?
|
| If you have a low, 30-year fixed
interest rate you're in good shape. But if any of
these Five Reasons applies to your situation, you
may want to look into refinancing. |
| 1.
|
Decrease
monthly payments
If you can get a fixed rate that's lower than
the one you currently have, you can lower
your monthly payments. |
| 2.
|
Get
cash out of your equity
If you have enough equity you can get cash
out by refinancing. Just decide how much you
want to take out and increase the new loan
by that amount. It's one way to release money
for major expenditures like home improvements
and college tuition. |
| 3.
|
Switch
from an adjustable to a fixed rate
If interest rates are increasing and you want
the security of a fixed rate, or, if interest
rates have fallen below your current rate
you can refinance your adjustable loan to
get the fixed rate you're looking for. |
| 4.
|
Consolidate
debt
You can refinance your mortgage to pay off
debt, too. Simply increase the new loan amount
by the amount you need and the lender will
give you that cash to pay off creditors. You'll
still owe the lender but at a much lower interest
rate - and that interest is tax-deductible. |
| 5.
|
Pay
off your mortgage sooner
If you switch to a shorter term or a biweekly
payment plan, you can pay off your home earlier
and save in interest. And if your current
interest rate is higher than the new rate,
the difference in monthly payments may not
be as big as you'd expect. |
|
| Is refinancing
worth it? |
| Refinancing costs money.
Like buying a new home, there are points and
fees to consider. Usually it takes at least
three years to recoup the costs of refinancing
your loan, so if you don't plan to stay that
long it isn't worth the money. But if your
interest rate is high it may be smart to refinance
to a lower interest rate, even if it is for
the short term. If your mortgage has a prepayment
penalty, this is another cost you will incur
if you refinance. |
|
| Use the reasons above as a guideline
and determine whether or not refinancing is the
right thing to do. You can also use our refinance
analysis calculator to help you decide. |
| TOP |
|
What Are the Costs of Refinancing?
|
| Here's what you can expect to
pay when you refinance: |
| The
3-6 Percent Rule: Plan to pay between
3% and 6% of the amount of the new loan amount (if
want cash-out, the loan amount will be larger).
Yet some lenders offer no-cost refinancing in exchange
for a higher rate. |
| Getting
to the Points: Points play a big part
in how much it'll cost to refinance - the more points
you pay, the lower your interest rate. Points are
a good idea if you're planning to stay in your home
for a while, but if you'll be moving soon you should
try to avoid paying points altogether. |
| Negotiate
the Fees: Be aggressive and investigate
the fees your lender is asking you to pay. You may
not need an appraisal, or your loan-to-value may
be such that you no longer need Private Mortgage
Insurance. Sometimes if you refinance with your
current lender they won't need a credit report.
With a little research it's amazing how much you
can save. |
| Here,
we've explained the different loan refinancing fees. |
| Application
Fee: This covers the initial costs of
processing your loan application and checking your
credit. |
| Appraisal
Fee: An appraisal provides an estimate
or opinion of your property's value. |
| Title
Search and Title Insurance: A Title Search
examines the public record to discover if any other
party claims ownership of the property. Title Insurance
covers you if any discrepancies arise in ownership.
(A reissue of the title can save 70% over the cost
of a new policy.) |
| Lender's
Attorney's Review Fees: In any financial
transaction of this scope, a lawyer's participation
ensures that the lender isn't legally vulnerable.
This fee is passed on to you. |
| Loan
Origination Fees: This is the cost of
evaluating and preparing a mortgage loan. |
| Points:
These are basically finance charges you pay the
lender. One point equals 1% of the loan amount (for
example, one point on a $75,000 loan is $750). The
total number of points a lender charges depends
on market conditions and the loan's interest rate. |
| Prepayment
Penalty: Some mortgages require the borrower
to pay a penalty if the mortgage is paid off before
a certain time. FHA and VA loans, issued by the
government, are forbidden to charge prepayment penalties. |
| Miscellaneous:
Other fees may include costs for a VA loan guarantee,
FHA mortgage insurance, private mortgage insurance,
credit checks, inspections and other fees and taxes. |
| How
to Save Money Refinancing: |
|
Research all
costs and fees. |
|
Don't be afraid
to negotiate with your lender. |
|
Shop around for
the lowest rates. |
|
Check with your
current lender for lower rates with
costs that are reduced or waived. |
|
|
| TOP |
|
What Kinds of Mortgages Are Available?
|
|
Fixed-Rate
Mortgage: interest rates and monthly
payments remain unchanged for the life of
the loan |
|
Adjustable-Rate
Mortgage: interest rates and monthly
payments can go up or down, depending on the
market |
|
Hybrid
Loans: a combination of fixed and
adjustable mortgages |
|
| How
do you decide which loan is best? These questions
may help. |
|
How much cash
do you have for a down payment? |
|
What can you
afford in monthly payments? |
|
How might your
financial situation change in the near
future and beyond? |
|
How long do you
intend to keep this house? |
|
How comfortable
would you be with the possibility of
your monthly payments increasing? |
|
|
| Discuss these with your lender
so they can help you decide which loan would best
suit you. |
| TOP |
|
What is a Fixed Rate Mortgage?
|
| This is the most common loan arrangement
in the US With a fixed-rate mortgage the loan's
principal and interest are amortized,
or spread out evenly, over the life of the loan,
giving you a predictable monthly payment. |
| The upside is, if rates are low,
you can lock in for as long as 30 years and protect
yourself against rising rates. However, if rates
fall you can't change your rate without refinancing
the loan, and that could cost money. |
| The 30-year Fixed-Rate Mortgage,
the most popular and easiest to qualify for, will
give you the lowest payment. But you can also get
a 20-, 15- and even a 10-year fixed-rate mortgage
if you wish to save interest and pay your home off
sooner. |
| TOP |
|
What is an Adjustable Rate Mortgage?
|
| With Adjustable-Rate Mortgages
(Arms) interest rates are tied directly to the economy
so your monthly payment could rise or fall. Because
you're essentially sharing the market risks with
the lender, you are compensated with an introductory
rate that is lower than the going fixed rate. |
| How
often does the interest rate change? |
| That depends
on the loan. Changes can occur every six months,
annually, once every three years or whenever
the mortgage dictates. |
|
| How
much can my rate change? |
| Your ARM will
stipulate a percentage cap for each adjustment
period, which means your interest may not
increase beyond that percentage point. If
the market holds steady, there may be no increase
at all. You may even see your payment decrease
if interest rates fall. |
|
| How
are the changes determined? |
| Every ARM loan
is tied to a financial market index, such
as CDs, T-Bills or LIBOR rates. Your rate
is determined by adding an additional percentage
(known as a margin) to that index's rate.
When the index rises or falls, your rate rises
or falls with it. |
|
| Is there
a limit to how much interest I'll be charged? |
| Yes. It's called
a ceiling, or lifetime cap. This is
a guarantee that your interest rate will never
exceed a designated percentage. For instance,
if your introductory rate was 5% and you have
a lifetime rate cap of 6% (meaning that your
interest rate can never increase more than
6% during the life of the loan) then your
ceiling would be 11%. |
|
| What
are the benefits of an ARM? |
|
With a lower
initial interest rate (usually 2% to
3% lower than fixed-rate mortgages),
qualifying is easier and the payments
are more manageable at first. |
|
You may qualify
for a larger loan than you would with
a fixed-rate mortgage. |
|
If you're only
planning to stay a short time the interest
rate is likely to stay lower than that
of a fixed-rate mortgage. |
|
If you expect
regular pay increases that would cover
the increase in your interest, or if
you believe interest rates will fall,
an ARM might be the wiser choice. |
|
|
| A
few words of caution! |
Negative
Amortization
This happens when a lender allows you to make
a payment that doesn't cover the cost of principal
and interest. Watch for this. It may be used
as a lure to get you into a home with the
promise of low initial payments. Or, a lender
may give you a payment cap instead of a rate
cap. In this mortgage arrangement, if interest
rates increase, your monthly payments could
stay the same - but the higher interest will
still be charged to your loan, adding to it
instead of reducing it. Either way, if you
find yourself with a negative amortization
ARM, you'll be adding to your debt. |
Discounted
interest rates
Sometimes a lender will advertise an unusually
low initial rate. This is a discounted rate,
and it's essentially a marketing tool. If
your ARM offers a discounted interest rate
you are certain to see an increase at your
next adjustment period, even if interest rates
don't change. |
Convertible
ARMs
Some adjustable-rate mortgages allow you to
convert to a fixed rate at certain specified
times. This mitigates some of the risk of
fluctuating interest rates, but there will
be a substantial fee to do it. And your new
fixed rate may be higher than the going fixed
rate. |
Two-Step
Mortgages
This is an ARM that only adjusts once at five
or seven years, then remains fixed for the
duration of the loan. Not only will you benefit
from a lower rate for the first few years,
but the new fixed rate cannot increase by
more than 6%. It may even be lower, depending
on market conditions. Then again, you also
run the risk of adjusting to a much higher
rate. |
Convertible
Loans
Another ARM choice, the convertible loan offers
a fixed rate for the first three, five or
seven years, then switches to a traditional
ARM that fluctuates with the market. If you
strongly believe that interest rates will
fall a convertible loan might be a smart move. |
Balloon
Mortgages
These short-term loans begin with low, fixed
payments. Then, in five, seven or ten years
a single large payment (balloon) for all remaining
principal is due. While this saves money up
front, coming up with a large payment at the
end of the loan may be difficult. Some lenders
will allow you to refinance that payment,
but some won't, so be sure you know what you're
getting into. |
Graduated
Payment Mortgage (GPM)
With a GPM you pay smaller payments that gradually
increase and level off after about five years.
Lower payments can make it possible for you
to afford a bigger home, but they'll be interest-only
payments, adding nothing to the principal.
This could put you in a negative amortization
situation. |
|
| TOP |
|
How Can I save on a Fixed Rate Mortgage?
|
| The closing statement is a written
record, compiled at the close of escrow that itemizes
the charges and credits of your your account. Items
shown on the statement will include: |
| Short
Term Mortgages |
| You
don't have to finance your home for 30 years.
Granted, the payments will be lower, but you'll
be paying them longer. You could, instead,
opt for a period of 20, 15 or even 10 years,
pay your home off sooner and save in interest.
|
| Furthermore,
lenders offer much more attractive interest
rates with short-term loans, so your payments
may not be as much as you'd think. |
| The
table below shows you the interest savings
on a $100,000 loan at 8.5% interest: |
| Term |
Monthly
Payment |
Total
Interest Accrued |
|
|
|
$176,808.95
$108,277.58
$77,253.12 |
|
|
| By
paying $215.83 more a month on a 15-year mortgage,
you'd save $99,555.83 in interest over a 30-year
loan - and own the house in half the time. |
|
| TOP |
|
What Determines the Cost of a Mortgage?
|
| There
are five factors that determine the ultimate cost
of a mortgage. |
| The principal,
or amount of the loan, is the total amount
you borrow (the purchase price minus your dow npayment). |
| The
interest rate adds significantly to the cost
of your mortgage. Fixed or adjustable, the interest
paid at the end of the loan can exceed the original
cost of the home itself. For instance, a $100,000
loan balance at 8.5% for 30 years will cost you
$277,000 by the time the loan is retired. |
| The
term of the loan is the length of time until
the loan is paid off. A longer term means more interest
and higher cost. |
| Points
are interest paid on the loan and they're purely
optional. You pay points at closing if you want
to reduce the interest rate and make your monthly
payments smaller. One point equals one percent of
the loan amount. |
| Fees
are paid to the lender at closing to cover the costs
of preparing the mortgage. They can vary according
to where you live and what type of loan you're securing. |
|
While points and fees are not financed, they still
contribute to the cost of the mortgage. |
| TOP |
|
What is Private Mortgage Insurance?
|
| Private Mortgage Insurance,
or PMI, is insurance purchased by the buyer to protect
the lender in case the buyer defaults on the loan.
PMI is generally applied when you put down less
than 20% of the home's purchase price. The reason
is this: |
| With 20% down, you are considered
a low risk. Even if you default the lender will
probably come out ahead because they've only loaned
80% of the home's value and they can probably recoup
at least that amount when they sell the foreclosed
property. |
| But
with 5% or 10% down, the lender has a lot more invested
in the loan and if you default, they will almost
surely lose money. This is why lenders require buyers
to purchase PMI if they put down less than 20%.
It's insurance that, no matter what happens, the
lender will recoup its investment. |
| How
does PMI increase your buying power? |
| In
simplest terms, PMI allows you to put less
money down, and the benefits are as follows: |
|
If you have good
credit but are short on cash for a down
payment you can put as little as 5%
down. |
|
It doesn't take
as long to accumulate a 5% or 10% down
payment so you could buy a home much
sooner than you anticipated. |
|
A smaller down
payment allows you to purchase a larger
or nicer home. |
|
For repeat buyers,
a smaller down payment on the new home
can free up cash from the sale of their
previous home to use for other debts
or expenses. |
|
Your interest
will be higher if you put down less
than 20%, but that interest is tax-deductible. |
|
|
| What
does PMI cost? |
| A
Good Faith Estimate will be provided to you
within a few days after we received your loan
application. This disclosure will provide
you with an estimate of your monthly PMI premium
as well as the initial premium you'll need
to pay at closing. Additionally, we will be
providing you a disclosure on your rights
(if applicable) to cancel the PMI. |
|
| TOP |
|
What Should I Ask My Lender?
|
| What
type of loan is best for me? |
| If
you've done some groundwork you should have
a pretty good idea of what type of loan you
need. But your lender may offer options you
hadn't considered or even something you haven't
yet heard about. |
|
| What
will my closing costs be? |
| At
closing, you'll be required to pay a number
of fees such as transfer of title, origination
and appraisal, attorney services, credit report,
title insurance and inspections. Your lender
is required to provide an estimate of these
costs within a few days after your application
is received, but you can always ask for an
estimate sooner. |
|
| Will
I be charged points? |
| Sometimes
you'll have to pay points (one point = 1%
of the loan amount) in order to get the interest
rate the lender has quoted you. Before proceeding
with your loan application find out if there
are any points attached to your loan. |
|
| What
items must be prepaid? |
| Some
expenses, such as first year's property taxes
and insurance, must be paid at closing. Your
lender will let you know what's required. |
|
| How
long will I be guaranteed the quoted interest
rate? |
| This
is called "locking in" a rate and
most lenders provide this service. When you
apply for your loan, the lender will lock
in the agreed interest rate for an agreed
period of time. But there may be a fee for
this, so ask. |
|
| How
long will it take to get approval? |
| It
varies, so make sure you get an estimate of
how long approval will take, especially if
you have a deadline for closing on a new home. |
|
| Does the loan have
a prepayment penalty? |
| If
you even think there's a possibility you may
pay off your loan early (this includes refinancing)
find out if there's a penalty for doing so. |
|
| Is there
a call option attached? |
| A
call option allows the lender to require you
to pay off your loan balance before it's due.
You don't want this, so make sure it's not
in the contract. |
|
| TOP |
|
What Documents Will I Need for My Loan Application?
|
| When preparing a loan, the lender
will ask for substantial documentation. Here's a
list of what is usually required. |
| Personal
Information |
|
Address and telephone
numbers of each borrower |
|
Previous address(es)
over the last seven years |
|
Social Security
number(s) of inquirers |
|
Age
of inquirer(s) and dependent(s) |
|
Name and address
of landlord(s) or lender(s) for the
past two years and proof of payment
|
|
Your interest
will be higher if you put down less
than 20%, but that interest is tax-deductible. |
|
|
| Employment/Income
|
|
Name and address
of employer(s) for the past two years |
|
Pay stubs for
the past 30 days · W-2 forms
for the past two years |
|
A written explanation
of any employment gaps |
|
If you're self-employed you'll need:
Complete, signed Federal Income Tax
Returns for the past two years (personal
and corporate) |
|
Year-to-date
Profit and Loss Statement and Balance
Sheet |
|
|
| Other
Income |
|
If you receive
Social Security, a pension, disability
or VA benefits you'll need:
A copy of your awards letter (or tax
returns for the past two years)
A copy of your most recent check |
|
|
| Child
Support |
|
If you pay child
support you'll need:
A copy of the divorce or separation
agreement
Evidence of payment for the last 6-12
months (candled checks of pay history
from the courts) |
|
|
| Rental
Income |
|
If you receive
rental income you'll need:
A copy of the lease |
|
|
| Debt
Disclosure - Credit Cards, Loans and/or Current
Mortgages |
|
Name and address
of each creditor |
|
Account number,
monthly payment and outstanding balance
for each |
|
Proof of recent
payment or current statement for each |
|
Documentation of alimony or child support
you are required to pay |
|
Written explanation
of any past credit problems |
|
|
| Loan
Application for Home Purchase |
|
A complete, signed
copy of sales contract · Mailing
address and property description
(if it's not in the contract) |
|
A copy of your
canceled earnest money check Loan Application
for Refinance |
|
A copy of the
deed |
|
A copy of your hazard insurance policy |
| |
A copy of the
property survey |
|
Proof that your
home has passed a termite inspection |
|
|
| Evidence of Funds
for Down Payment |
|
If
the down payment is a gift you'll need
a signed gift letter, the giver's bank
statement showing sufficient funds,
a copy of the check and a deposit slip. |
|
If you have any
recent large deposits or new accounts
you'll need to show documentation. |
|
|
| Other |
|
If
your loan is for new construction the
lender will need to see plans and specifications. |
|
If there's a
bankruptcy in your financial history
you'll need complete documentation. |
|
|
| Fees |
|
Appraisal
fee (approximately $350) |
|
Credit report
fee (approximately $50) |
|
In some areas,
a flood determination fee (approximately
$20) |
|
|
| TOP |
|
What's Involved in the Closing Meeting?
|
| Transaction terms and the resulting
escrow instructions determine how the property taxes
are handled. Your Escrow Officer will not deal with
any credits or charges for prorated of taxes, are
handled. Your Escrow Officer will not deal with
any credits or charges for prorated taxes; there
is no mention of prorating in the escrow instructions.
If your escrow calls for a prorating of taxes, there
will be an item in your closing statement that will
reflect either a charge or credit to your account.
If the taxes have not been paid even though there
has been a charge or credit against your account,
the buyer is required to obtain a tax bill and pay
the taxes. A tax bill may be requested from the
tax collector by sending a photocopy of the deed. |
| Preparing
for Closing |
| Many
things must be taken care of before you come
to the closing meeting. Ask your lender for
a list of your responsibilities so you can
arrive fully prepared. |
|
| Set
a Closing Date |
| When
choosing a closing date give yourself time
to gather all your information and free up
any necessary funds. The lender will need
time to prepare and deliver loan documents
(usually 3-5 days), home inspections must
be scheduled and if any repairs are needed
allow enough time for them to be completed.
Also, if your rate is locked in, make sure
you close before the deadline so you'll be
guaranteed the quoted interest rate. |
|
| Other
Required Items |
| Your
lender will provide you with a commitment
letter that lists all the other documentation
that's required at closing. The following
are common examples. |
|
Survey:
This shows the property's boundaries
and any improvements made to it. It
also details any encroachments on the
property like fences or buildings. Major
encroachments must be corrected before
closing. |
|
Termite
Inspection: Many areas legally
require homes to pass a termite inspection,
and all FHA and VA loans require one.
If a termite inspection is required
you must bring the certification to
closing. |
|
Homeowner's
Insurance: Lenders require
you to carry insurance for the replacement
cost of the property. Bring the policy
with you to closing. |
|
Title
Insurance Policy: All lenders
require title insurance to protect them
against claims of property ownership
by anyone other than the borrower. The
title insurance issues the policy company
after conducting a title search. |
|
Flood
Insurance: A flood insurance
policy is necessary for any property
located in a flood plain. |
|
Water
and Sewer Certification:
If the property isn't served by public
water and sewer facilities you'll need
certification from the local government
that you have a private water source
and sanitary sewer facility. |
|
Certificate
of Occupancy: For a new home
you'll need one of these before you
move in. The builder should get it for
you from the city or county. |
|
Building
Code Compliance: An inspection
is often required to make sure the property
conforms to current building codes.
There will be an inspection fee, and
the contract should specify who pays
for any repairs needed to bring the
home up to code. |
|
|
| Final
Walk-Through |
| A
day or two before closing it's a good idea
to take one last look at the home to make
sure repairs have been made, there's no new
damage, and anything meant to be sold with
the property is still there. You can do this
on your own or with your real estate agent. |
|
| Closing
Costs |
| One
business day before closing your lender must
allow you to review your. |
|
| Settlement
Statement |
| This
is the final exact amount you'll owe at closing
and it must be brought in the form of a certified
or cashier's check. (Our Closing Costs Checklist
can help you keep track of these expenses.) |
|
|
|
