FAQs
I really want to own my own home, but I'm not sure I can afford it.
Where do I start?
Lots of people don't even consider buying a home because they're afraid they can't afford it. But for most people, home ownership is within reach - especially with some of the special programs for first-time home buyers. In fact, for many, home ownership is as affordable as renting - in some cases even more affordable.
How do I know how much house I can afford?
Before you start looking at homes, you need to have some idea of what you can afford. As a general guide, you can purchase a home with a value of two or three times your annual household income, depending on your savings and debts. However, you may be able to take advantage of special loan programs for first time buyers to purchase a home with a higher value.
If you'd like to know exactly how much you can afford, talk to a mortgage lender. If you're working with a Realtor, he or she can help you with this, too.
When should I talk to a mortgage lender?
The short answer: when you start thinking about buying a home. It's true you can't actually apply for a mortgage until you've chosen your home and signed a contract to buy it. But you shouldn't wait until then to start talking with a mortgage lender.
Any reputable mortgage lender will be happy to help you as you look for a home. The lender will work with you to determine how much house you can afford, help steer you to special mortgages for first time home buyers, and perhaps make suggestions that could make it easier to get the best mortgage for you.
Another advantage: you'll already have a good relationship with a lender when it comes time to apply for your mortgage.
How do I choose a mortgage lender?
When most people think about choosing a mortgage lender, they think about finding the lowest rate. Period.
Of course, financial considerations are important to every home buyer, and you certainly should consider the different rates lenders in your area offer on comparable loans. But you also want a lender you can trust, and someone you can work with effectively. So don't let rates be your only criterion. Here's the process we recommend:
* Build a list of lenders. Talk to people you know who have bought or refinanced a home recently. If you are working with a realtor, ask your realtor to refer you to a trusted lender. Or just look in the yellow pages under "Mortgages."
* Talk to a Mortgage Consultant. Call or visit the lenders on your list. Get a feel for what it will be like to work with them, and how they approach your needs. If you're still uncertain, ask for references -- recent home buyers like yourself -- and talk to them.
* Compare rates for similar loans. Among the things you'll want to discuss with prospective lenders are the rates they offer on mortgages. But when comparing rates between lenders, be sure the rates are for comparable loans -- and remember to include fees and other costs so you're really comparing apples to apples.
Aren't there really just two kinds of mortgages: fixed & adjustable rate?
You could say that, because all mortgages fall into one of these two categories -- that is, the interest rate you pay is either the same (fixed) for the life of the mortgage, or it can change (adjust) over the life of the mortgage.
Fixed-Rate Mortgages
With this type of mortgage your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.
Fixed-rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also "bi-weekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)
Adjustable-Rate Mortgages (ARMS)
These loans generally have an initial interest rate that is lower than a comparable fixed rate mortgage, and could allow you to buy a more expensive home.
However, the interest rate changes at specified intervals ( for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.
There are also mortgages that combine aspects of fixed and adjustable rate mortgages - starting at a low fixed-rate for seven to ten years, for example, then adjusting to market conditions. Ask your mortgage lender about these and other special kinds of mortgages that fit your specific financial situation.
How do I know which type of mortgage is best for me?
There isn't a single, simple answer to this question. The right type of mortgage for you depends on many different factors:
Your current financial picture;
How you expect your finances to change;
How long you intend to keep your house;
And how comfortable you are with your mortgage payment changing from time to time.
For example, a 15-year fixed-rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. And an adjustable rate mortgage may get you started with a lower monthly payment than a fixed-rate mortgage -- but your payments could get higher when the interest rate changes.
The best way to find the "right" answer is to discuss your finances, your plans and financial prospects, and your preferences frankly with a mortgage lender.
Do they really need to know everything about me for the application?
It may seem that way -- but actually all your mortgage lender needs to know about you is your employment and finances, and information about the home you are buying.
However, you will need to provide quite a few details about these topics, and your application process will go much more smoothly if you're prepared. Be sure to ask your mortgage lender what information you'll need to complete your application.
How much will my credit history affect my ability to get a mortgage?
Many home buyers are very worried about this issue. We've even heard one story that an applicant was denied a mortgage because he had returned a rented videotape late!
Of course, that could never happen. And most people don't need to worry about the effects of their credit history. However, you can be better prepared if you get a copy of your credit report to review before you apply for your mortgage. You can obtain
a free copy of your credit report once a year from the following website: www.annualcreditreport.com . This free report does not include credit scores, however they can be requested for an additional charge. That way, if there are any errors you can take steps to correct them before you make your application.
If you have had credit problems, be prepared to discuss them honestly with your mortgage lender -- and come to your application meeting with a written explanation. Responsible mortgage lenders know there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. If you had a problem that's been corrected, and your payments have been on time for a year or more, your credit will probably be considered satisfactory.
How much will I need for the down payment?
It's probably less than you think. Many first-time buyers are surprised to learn there's no set answer to this question. Generally, though, your down payment can be anywhere from three to twenty percent of the home's value. Down payments can be lower for some special, first-time buyer loans, and veterans or those on active military service can obtain loans with no down payment at all.
What does my mortgage payment include?
For most homeowners, the monthly mortgage payments include three separate parts: a payment on the principal of the loan (that is, the amount borrowed); a payment on the interest; and payments into a special account (called an escrow account) that your lender maintains to pay for things like hazard insurance and property taxes. These elements are called P.I.T.I. (Principal-Interest-Taxes-Insurance).
What happens after I've applied - and how long will it take?
Your lender will begin the work of verifying all the information you've provided. This process can take anywhere from one to four weeks, depending on the type of mortgage your choose, whether you're buying a home outside your local community, and other factors.
Within three business days after your application, the lender must give you an estimate of your closing costs. (The closing is the actual settlement of your loan.) You'll also get a statement that shows your estimated monthly payment, the cost of your finance charges, and other facts about your mortgage.
For many home buyers, this waiting period can be nerve-wracking. So stay in touch with your mortgage lender, be prepared to answer any questions that might come up -- and remember that mortgage lenders are in the business of making loans, not denying them.
Some homebuyers find the closing process to be one of the most intimidating aspects of buying a home because it's so unfamiliar. Ask your mortgage lender what to expect at your closing.
Should I refinance?
Whether or not it is worthwhile to refinance depends on many variables. The questions you need to ask yourself are, first, how long will you be in your home, second, how does the interest rate you're paying today compare with market rates and third, do you want to use the equity in your home to consolidate debt and reduce monthly payments?
The most common reason for refinancing is to save money. Saving money through refinancing can be achieved in two ways:
1. By obtaining a lower interest rate that causes one's monthly mortgage payment to be reduced.
2. By reducing the term of the loan, thus saving money over the life of the loan. For example, refinancing from a 30-year loan to a 15-year loan might result in higher monthly payments, but the total of the payments made during the life of the loan can be reduced significantly.
People also refinance to convert their adjustable loan to a fixed loan. The main reason behind this type of refinance is to obtain the stability and the security of a fixed loan. Fixed loans are very popular when interest rates are low, whereas adjustable loans tend to be more popular when rates are higher. When rates are low, homeowners refinance to lock in low rates. When rates are high, homeowners prefer adjustable loans to obtain lower payments.
What is PMI?
Private mortgage insurance, or PMI, insures the lender against a default. It is required when the borrower is making a cash down payment of less than 20 percent of the purchase price.
PMI costs vary from one mortgage insurance firm to another, but premiums usually run about 0.50 percent of the loan amount for the first year of the loan. Most PMI premiums are a bit lower for subsequent years. The first year's mortgage insurance premium is usually paid in advance at the close of escrow, and there is usually a separate PMI approval process.
What documents are required to process my loan?
o Year-to-date pay stub
o Most recent W-2
o Most recent months statements for all bank or brokerage accounts
o Addresses of employers
o Name and address of previous landlords (2 year period)
o Divorce decree or separation agreement, if applicable
o Sales contract
o Note: Other items may be required based on your loan program
Required documents will vary based on the loan program. Below are some of the documents that may be required:
What is a FICO score?
A FICO score is a credit score developed by Fair Isaac & Co. Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance.
Can I make extra principal payments so I can pay off the loan more quickly?
Depending on the loan, and what your state permits, it is feasible for you to make extra payments on the loan. Extra payments will have an effect on the amortization schedule over the remaining term of your loan.
Do I get a tax advantage from having a mortgage?
You should consult a tax attorney or accountant for specific details, but interest on a mortgage is usually tax deductible. Interest on credit cards or automobile loans is not normally tax deductible.
How do I know how much equity I have in my property?
Equity is the value of a homeowner's interest in real estate. Equity is computed by subtracting the total of the unpaid mortgage balance and any outstanding liens or other debts against the property from the property's fair market value. A homeowner's equity increases as he or she pays off his or her mortgage or as the property appreciates in value. When a mortgage and all other debts against the property are paid in full, the homeowner has 100% equity in his or her property.
How do I know what my loan rate will be?
Rates vary primarily based on the type and purpose of the loan, your credit history and income, loan amount, value of the property, and the number of points you are willing to pay.
What are points and how many do I have to pay?
Generally speaking, points are fees added on to loans. One point is equal to 1% of your loan amount. Points are paid when the loan closes, not at the time you apply for the loan.
What is the difference between an Equity Line of Credit and another type of second mortgage?
An Equity Line of Credit is money in an account that can be used as you need it. You can use any portion of it at any time and pay it back at any time. The interest rate is usually variable and is tied to the prime rate. Other types of second mortgages, such as the Home Equity Loan are simple interest products. You borrow a lump sum and pay it back over a period of years with interest. The interest rate for these products is fixed.
When would an "interest only" loan make sense for me?
A standard mortgage payment is designed to pay the interest accrued & to pay down the loan balance/principal. Because an interest only loan payment only includes the interest accrued - it provides families with a lower monthly mortgage payment, subsequently increasing their monthly cash flow. The lower monthly payment also allows a family to purchase more house on their maximum monthly mortgage budget. |
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