You have finally decided on where to buy, when to buy, and that you are READY. Now is the time to secure your mortgage. Mortgages are probably the most crucial piece to buying, selling, or just plain OWNING a home.
And, honestly, they are not as hard to understand as you might think. With a little homework, you can make the best financial decisions.
Definition of Mortgage: A mortgage is a loan, with your house and land used as security; if you don’t pay back the loan, the lender forecloses on your home. The loan is secured by a lien (the “mortgage”) against the property: your buildings (improvements) and land. The lender doesn’t own the house, you do. They just have the lien with your house as their collateral (i.e., the security). The bank (and I can give you a good idea of this figure) will help you figure out what you can actually afford and what you can borrow. The lender (the bank) is not going to look at how much your discretionary spending is a month or what amount you’ll be comfortable in spending a month. Most lending institutions are very willing to loan you MUCH more than you think you can spend, on your mortgage. Only you know how much flexibility your lifestyle or spending has. The lender looks at 1) your income 2) your debt 3) your savings and 4) your credit history. These things tell the lender your RISK potential (how likely you are to stop paying, pay late, etc). After assessing the risk, the lender then looks at the value of the property you are looking to buy and then assigns an interest rate depending on 1) your risk 2) how much you are putting down (your down payment) and 3) value of the property.
So many kinds of mortgages; why? Don’t get confused. Ask yourself: Is this your forever home? Will you trade up in 5 years? Then, you can narrow your mortgage choices.
Why does how long I will live there matter? Because once you narrow your choices of mortgage types, it will help you decide if you want to pay down points (interest points), upfront – this can lower your monthly cost, but it will increase the money that you have to bring to the table (the closing table) and it won’t be part of the down payment.
So, for instance:
- If you are going to stay in your house and pay off your mortgage over its lifetime, get a fixed-rate loan (payments will not change)
- If you won’t be in the house that long, you could consider an Adjustable Rate Mortgage, as those usually start at a much lower rate.
- If you think your income potential will go up, there is an option of a hybrid ARM that is fixed for, say, five years, and then adjusts annually.
Points Demystified. The lender may charge points (each point is equal to 1% of your home loan amount), and required third parties charge for their services, which increases the cost of the loan. If you sell your home in a few years and have paid points to get a better interest rate, you may not recoup the cost of those fees. And your equity in the house will be minimal, but you are betting the home will appreciate enough to cover the fees, or that the money you save in interest will balance out the additional cost of the loan. If you stay in the house longer than you expect, you take the risk that you can’t afford the higher payments as the interest rates adjust, or you risk not being able to refinance. It is EITHER higher rates with lower points or lower rates with higher points. The key is to compare different types of loans to see what works for your needs. NOTE: Never pay more than 1 to 1-1/2 points to a lender (unless you have bad credit or you are buying a great interest rate.)
Find today’s rates by checking Zillow Mortgage Marketplace, which offers rate quotes for free, and anonymously. And, you may not qualify for some of the “teaser rates” that you’ll see advertised, online.
Talk to at least two different lenders to see who has the better loan program for you and who listens to your needs. If you do not understand something, ask your loan officer to explain it to you. Then, keep asking until understand it. When the lenders quote you rates, it will be for interest only, so ask to see the Annual Percentage Rate (APR) as rates are shown as a percentage and an APR adds up the interest, points and fees in an effective annual rate. Then, compare the APR on two identical loans and choose the one with the lesser rate.
Definition of Amortization: Amortization is a true measure of what you are paying per year against your loan. A loan has a life of 15 or 30 years and you pay in installments. The principal (the loan amount) decreases, each month, until the loan is paid off at the 30th year. Each payment is even and spread over the 30 years, with the interest payment of each payment being much higher than the principal (at the beginning) and the principal making up the majority, by the end of the term. The Amortization Schedule shows the payments for the life of the loan, including interest. NOTE: If you pay your house payment every two weeks, instead of monthly, it results in 26 payments per year, one more payment annually than if you just paid monthly. The re-amortized loan will eventually result in more of the payment paid on principal and less on interest. The extra payments go to pay down the principal on the loan.
With all these tips, you have to now ask about Prepayment Penalties, because I hope you are able to pay off the loan before maturity and save interest payments. Some lenders charge a penalty if you pay off early, which could be as high as six months of interest! Why would you consider a loan with a prepayment penalty? Because some lenders will offer you a much lower interest rate if they know you’ll be sticking around for a full 30 years. And, there are situations where accepting a prepayment penalty on a loan can save you thousands of dollars in interest.
Finally, what is mortgage insurance? and do you need it? If you are making a 20% down payment, you’ll have to have Private Mortgage Insurance (or PMI), which ensures that the lender is guaranteed, by the mortgage insurer, 80 percent of the loan if you default. NOTE: If you are getting an FHA or VA loan, those are backed by the government and you may not pay monthly mortgage insurance on them.
In the end, getting the mortgage paperwork out of the way, a little earlier (before shopping for a home) can make life easier for everyone. Once you find your home, you can close faster because you are already conditionally approved and have been through underwriting. This makes you stand out in a highly competitive market. It also helps me narrow down the choices of what to show you and what to be searching for. Let’s start working together, soon. Contact me, today, and let’s find you your home!
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Rolf Kramer, REALTOR®, ABR, SRES, e-PRO 757-564-4455 Licensed in Virginia with Liz Moore and Associates, 5350 Discovery Park Blvd, Williamsburg, VA 23188 Williamsburg has become a Mecca for retirees over the past dozen years because of its history, charm, vacation amenities, proximity to major cities and airports, and affordable cost of living. Check out www.retiringinwilliamsburg.com for information about the Williamsburg community, lifestyles available, and search for homes for sale.