Mortgages/Foreclosures
Mortgages
101
A home will
most likely be your biggest financial investment. The majority
of people will not be able to buy their home for cash. A mortgage
is a loan that will finance your home. You have possession of
your home, but the lender may use it as collateral if you do
not make your payments.
Generally
payments include principal, interest, taxes and insurance. Principal
refers to the amount of money that you borrowed to buy your
home. Interest is the money you are charged for borrowing money.
Taxes are usually escrowed into an account. Your community uses
them for different things. Taxes may be used to build a new
school or park. Taxes must be paid even after you have paid
off your mortgage. Mortgages are usually paid in terms that
range from 15 to 30 years.
There are
all different types of mortgages. However the most common mortgages
are fixed or ARM. A fixed mortgage comes in different terms.
The most common terms for fixed mortgages are 15 year or 30
year. A fixed rate mortgage is guaranteeing you that the interest
rate will never change throughout your term regardless of the
market. An ARM, which stands for adjustable rate mortgage, fluctuates
with the market. The interest rate will vary depending on the
current market. There are advantages and disadvantages to each
of these different options of mortgages.
| Adjustable
Rate Mortgage Pros |
Adjustable
Rate Mortgage Cons |
| Lower
payments in the beginning. You will be able to afford a
bigger house. |
Rates adjust with market therefore you can end up with a
very high interest rate. |
| Will
be able to take advantage of lower rates without having
to refinance. |
ARMS
tend to be very complicated and difficult to understand.
You could end up getting trapped into something you were
not aware of. |
| Since
payments are lower you will have extra money to invest or
save |
The
initial fixed rate is so low that often the rate after will
be increasingly high. |
| A
good idea for people who intend on only owning home for
short period of time |
In
some cases buyers can actually end up owing more money than
they did at closing. |
Fixed
Rate Mortgage Pros |
Fixed
Rate Mortgage Cons |
| Your
payment and rate will remain the same regardless of the
market |
If rates drop lower than your mortgage you will need to
refinance in order to take advantage of fallen rates. |
| Budgeting
is easier due to the fact that your payments remain the
same every month. |
Monthly
payments cost more than other mortgages. |
| Very
simple and easy to understand. |
Cannot
be customized from lender to lender. |
| There
is an end in sight. You will know when your loan will be
paid in full |
Not a good idea if you plan to move soon. |
Questions
and Answers
What
is PITI?
PITI is
principal, interest, taxes and insurance.
What
is a balloon mortgage?
A balloon
mortgage allows you to put down five percent or less. It also
has a payment that is lower than a conventional mortgage. On
the due date of this loan, which may only be a couple of years,
the balance is due or the loan may be renegotiated.
What
is a mortgage loan?
A legal
document giving the lender the right to take legal action against
you should you default on the terms of the loan. The mortgage
allows you to have possession of the property, but the lender
has legal rights until the mortgage is fully paid.
What
is a mortgage term and amount?
A mortgage
term is the number of years that you plan to pay back your debt.
The amount is the money you borrowed from the lender to pay
for your home.
What
is a fixed interest rate?
A fixed
rate is when you have the same annual percentage rate throughout
the life of your loan.
What
is an ARM?
An ARM is
an adjustable rate mortgage. This means that your rate will
vary according to the market.
What
is a down payment?
A down payment
is the money that you put down in cash. In other words you do
not finance this amount through your bank.
What
are the advantages and disadvantages of putting down money on
a home?
There are
many advantages to putting money down on your home. First being
that you do not need to finance it, so you will not pay interest
on that money. Also sellers usually consider people putting
money down more secure buyers. The more money you put down,
the less your monthly mortgage payment will be.
There are
also disadvantages to putting down money. The number one disadvantage
is tying up your cash. Many people like to have a comfortable
savings account when buying a home, therefore they do not want
to use all their cash as a down payment.
What
are closing costs and how much do they usually cost?
Closing
costs vary from state to state. Generally though, they include
taxes, title insurance, legal fees, and other fees that may
apply.
The closing
costs range between three and six percent of the sale price
of your home.
What
are discount points?
An optional
fee that you pay to your lender to reduce your interest rate
on your mortgage. A point is equal to one percent of your loan
amount.
What
is the difference between a conforming and nonconforming loan?
A conforming
loan goes by the guidelines set by Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac are two mortgage companies that buy
mortgages from lenders. They will only take loans up to a certain
limit. The current limit is $252,700. A nonconforming loan does
not abide by the guidelines set by Fannie Mae and Freddie Mac.
More
Mortgage Options
| Jumbo
Mortgage |
A
Jumbo Mortgage is a nonconforming loan. You can borrow
more money but you pay a higher interest rate. |
| Balloon
Mortgage |
Low rates for a specific amount of time but then you need
to pay off loan or refinance. |
| Assumable
Mortgage |
You
can give your loan to the new buyer of your home. These
loans are very rare. |
| Construction
Mortgage |
This
loan is used for people building homes. They pay higher
interest rates while home is being built and then it is
usually turned into a fixed rate structure. |
| Seller
Financing |
An
agreement where the seller finances the home for the buyer.
The buyer makes monthly payments to the seller versus a
lender. |
Which
lender is your choice?
Mortgage
Banks: A direct lender. Your mortgage bank is regulated by state
and federal agencies. You will deal directly with the source
of your loan, which in turn may save you money throughout the
process. Your loan will most likely get processed quicker when
dealing with a mortgage bank. The disadvantage is they will
only offer their own programs. You will want to compare rates
and programs before choosing to go through them.
Mortgage
Brokers: Acts as a middleman. A mortgage broker will try to
get you the best loan for your specific needs. A broker will
be able to get you in the right direction depending on your
personal financial situation. You will also save time shopping
for loans and will get a competitive rate. The disadvantages
are hidden costs. You must be very careful that you are not
getting charged too much for a service since they are not always
regulated by the state and federal agencies.
List
of items you will need to submit when applying for a mortgage
1. Social
Security Card
2. Most recent pay stub that shows year to date earnings
3. W-2 Tax Forms (original copies sent to you by the IRS)
4. Employer Information
5. Account information, which includes account numbers and balances
of all accounts.
6. Current Assets, which may include retirement funds, 401K,
CD, bonds, etc.
7. The value of personal property, which includes life insurance,
cars, etc.
8. Liabilities which is another way of saying debt.
9. Current and previous addresses
Steps
to Apply for A Mortgage
1. First
you want to look at your finances and specific situation. You
need to decide what a comfortable monthly payment for your mortgage
will be. You must remember to add in taxes, homeowner’s
association fees, insurance and other unexpected costs that
may arise.
2. Next you want to shop for a loan. You want to decide if you
want to go through a mortgage broker or direct lender. Also
you want to compare rates and what each lender offers. It is
a good idea to get a GFE, which is a good faith estimate. All
lenders will fax or mail this to you with no charge. It is basically
a breakdown of their fees and your closing costs.
3. Finally you want to apply for the loan. The lender will give
you paperwork to fill out and you will need to supply the lender
with some paperwork. Some things they may ask for are pay stubs,
tax returns and other personal articles. The lender will then
pull your credit score to find out your credit history and any
outstanding debt. The lender usually hires an appraiser to value
your future purchase.
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