How much of a down payment will I need to buy a home?
A down payment of 20% has been the benchmark for
conventional financing, but today many options are available, some requiring
as little as 0% down. For buyers who qualify for conventional financing but
can’t handle the high down payment requirements, lenders offer this
financing with PMI (Private Mortgage Insurance). Designed to protect the
lender against default by the borrower, PMI allows you to obtain traditional
financing with a down payment significantly lower than the standard 20%.
Government insured loans are also available from 0% to 3% down.
How does a lender determine the maximum mortgage I can afford?
The three primary areas lenders examine in determining
the size of the mortgage you can handle are your monthly income, non-housing
expenses, and cash available for down payment and closing costs.
There are a number of different ways lenders interpret
these variables to estimate your mortgage capacity. The most popular method
is detailed here. Most lenders feel a family should spend no more than 28%
of its gross monthly income on housing costs, including the mortgage,
insurance, and real estate taxes. Also, these housing costs plus your
long-term debts (car loans, student loans, etc.) shouldn’t exceed 36% of
your income–or government loans at 29/41% ratio.
What are the steps involved in the loan process?
The information your lender needs is not much different
than what is needed when you apply for a major credit card: names and addresses of your
employer and bank account numbers and balances. The lender will also need
other financial information, such as installment payments, auto loans,
charge cards, and department store accounts. The location and description of
the property are also required, as well as a professional appraisal of the property you’re wanting to purchase.
Are there any mortgages especially designed for the first-time buyers?
Today, first-time buyers enjoy a number of mortgage
options that make purchasing a home more affordable by minimizing down
payments and keeping monthly payments as low as possible during the early
years of the loan.
Most ARMs (Adjustable Rate Mortgages) feature an
interest rate that is often below market for the first year and may only
rise gradually after that. Therefore lowering your house payment in the
beginning.
VA and FHA-insured loans call for extremely low down
payment (0-3% of the purchase price) and offer the benefit that 100% of your
downpayment can come as a gift.
Finally, first-timers who can find a cooperative seller
or third-party investor can look into such nontraditional financing methods
as a lease/buy arrangement.
Can I get an FHA or VA mortgage?
Just about anyone can apply for an FHA-insured mortgage
through banks and other lending institutions. They are particularly well-suited for buyers of moderate income; the low down payment requirements (as low as 3% of the purchase price) are matched by a relatively low maximum
mortgage amount.
Similarly, VA-guaranteed loans often require no down
payment for up to four times the amount guaranteed by the VA. These loans
are reserved for active military personnel, veterans, or spouses of veterans
who died of service-related injuries.
What are "points"?
In real estate, the term "point" refers to a
percentage, usually 1% of the total mortgage loan amount. Buyers often pay
lenders this supplemental fee, calculated in points, to get a better interest rate on a particular mortgage.
For instance, a lender may offer you a choice of two
30-year mortgages: the first at 10% with no points and the second at 9% with
an additional three points. If the loan is for $100,000, those three points
will cost you an extra $3,000 up front—but you’ll get a payback of
significantly lower monthly payments ($840.85 vs. $877.57) for the lifetime
of the loan.
Many lenders will advise you to pay the points for the
better rate if you can afford it, especially if you plan on keeping the home
for more than a few years. Like interest, the money you pay for points may
be tax-deductible, and the investment may pay for itself through savings
generated by lower monthly payments. We suggest you call your tax preparer
for more information.
What is APR, and how is it calculated?
The annual percentage rate is a calculated rate of
interest for a loan over its projected life. This rate includes the
interest, all points (which are considered prepaid interest), mortgage
insurance, and other charges associated with making the loan that the lender
collects from the borrower. The APR is calculated by a standard formula that
all lenders use. This enables the borrower to comparison shop between
lenders and/or loan products, based not just on interest rate charged but
also on fees incurred to obtain the best rate.
What is a good faith estimate?
Your lender or loan agent must provide you with a
good-faith estimate within three days of your application. This is the
information you need to make a fair and accurate judgment when shopping for
a loan. Your estimate is a written document that shows all the costs that
can be estimated in advance by the lender. You need this information so
there are no surprises on the day you close your sale on the property to be
purchased. You should review all costs, know which ones are non-refundable
in the event your loan is not approved, and be prepared to pay outstanding
fees. You may also want to compare these costs to those charged by other
lenders when shopping for your home plan.
What does my monthly mortgage payment include? And
what does PI and PITI stand for?
The bulk of your monthly mortgage payment goes toward
paying off the principal and interest of your loan (often lenders refer to
this as "PI" or Principal and Interest). In addition, most lenders require
that you pay a sufficient amount to cover your local real estate tax, plus
your homeowner’s or hazard insurance (this "total" payment is referred to as
"PITI" or Principal, Interest, Taxes, and Insurance). This amount is placed
in an escrow account from which your lender than pays your tax and insurance
bills as they come due. When shopping for a loan, it is important to ask the
lender if the monthly payment you are being quoted is PI or PITI. |
What are the respective advantages of
15-year and 30-year terms?
As you’d expect, a 15-year monthly
mortgage means higher monthly payments than an equivalent 30-year loan . . .
but not as much higher as you think. At the same rate of interest, payments
on the 15-year mortgage are roughly 20-25% higher than a loan that takes
twice as long to pay off. But one of the benefits of choosing a 15-year
mortgage is that you can generally get a lower interest rate for an
otherwise similar loan. Another advantage is faster equity build-up because
a larger portion of your early payments are going to pay off principal. This
makes the 15-year mortgage an ideal alternative for couples approaching
retirement or anyone else interested in owning their home free and clear as
quickly as possible.
The 30-year fixed mortgage remains the
standard mortgage with an array of valuable benefits designed especially for
buyers who expect to stay in their home for a long time. Because the
borrower pays more interest than principal for the first 23 years, the tax
deduction is substantial. And as inflation causes income and living expenses
to increase, your unchanging monthly mortgage payments account for a
relatively smaller portion of income as the years go by.
Do Adjustable Rate Mortgages offer any
protection against rising rates?
Yes, ARMs and other variable rate or
payment plans offer lower-than-market interest rates initially, but because
they are tied to the interest rates of U.S. Treasury Bills or other indexes,
interest rates may rise later in the loan term. However, many such loans
offer built-in safeguards designed to minimize the effect of any rapid
escalation in interest rates.
One such safeguard is the rate cap. Many
ARMs include provisions for the maximum amount your rate can rise, both
annually and over the life of the loan. For example, if your initial rate is
8%, the loan may include 1% annual and 5% lifetime caps . . . which means
that even if rates rise dramatically, you’ll pay no more than 9% next year,
10% the following year, and so on until a maximum rate of 13% is reached.
ARMs may also allow your rate to decrease when the index to which it is tied
goes down. As you might expect, decreases are usually capped as well.
A second protective device included in
some ARMs is the payment cap. Under this provision, your monthly payments
may rise by only a set dollar amount. The potential disadvantage of this
type of cap is that it can slow or even reverse your equity build-up. If
rates rise dramatically, you could actually wind up owing more principal at
the end of the year than you did at the beginning.
Of course, ARM holders can also consider
refinancing to a fixed rate loan after a few years. Some ARMs even include a
provision for converting to a fixed rate after a set period of time.
How can I find out what my property tax
bill will be?
Usually the total amount of the previous
year’s property taxes is included on the listing information sheet for the
home you’re interested in. Remember, tax rates change from year to year, so
the previous year’s bill should be considered simply as a ballpark figure of
what you would pay.
What can I do if I have a fixed rate
loan, and interest rates go down?
When interest rates drop significantly,
the homeowner should investigate the financial advantages of refinancing.
Essentially, this means taking out a new loan to pay off your existing loan.
Refinancing may require paying many of
the same fees paid at the original closing, plus origination fees. Most
mortgage experts agree that if you can get a rate 2% less than your existing
loan and you plan staying in your home for at least 18 months, refinancing
is a good investment.
What is the difference between
pre-qualifying and pre-approval?
Pre-qualifying for a mortgage up to a
certain amount is an increasingly popular practice among buyers who don’t
want to worry about going through the approval process after they’ve found
the home they want. It is a verbal exchange in which the lender tells you in
advance approximately how much money the buyer is able to borrow, based upon
the information you provide the lender on your debt and income.
Pre-approval goes a step further than
pre-qualifying. It is an actual commitment to lend, provided that, when the
borrower is ready to buy, he or she still meets all the qualifying
conditions that were met at the time of conditional approval. We strongly
recommend it!
Can I pay off my loan early?
If you can afford it and are interested
in the considerable advantages of having more equity and/or owning your home
free and clear at the earliest possible date, the answer in most cases is
yes. If you’re unsure about the rules governing prepayment, review your
mortgage agreement, as some do have pre-payment penalty clauses.
WANT TO PAY OFF YOUR LOAN EARLY?
Save extra every month.
With the interest you earn on your
savings, you may be able to make an extra payment at the end of the year.
Pay an extra twelfth of your TI payment monthly and your 30 year mortgage
will pay off in 22 years.
Whichever method you choose, be sure to
clearly indicate that the excess payment is to be applied to the principal. |
