Understanding Mortgages

INTRODUCTION
Of the many services I provide my home buyer clients, one of the most important is that I can help them to shop around for the best mortgage. I understand that when you decide that it’s time to buy you might be comfortable arranging financing through the institution you’ve always used.

However, over the years I’ve developed some very solid contacts in this area, and believe me, having good friends in the mortgage business can really pay off. I only work with a select few lending partners and we do a lot of business together and treat each others clients as VIP. They offer personalized service and do in depth consultations to find the perfect loan for you and your goals. They will also let you in on all the little money-saving “secrets” that most people don’t know to ask for. So when you decide to make your move, please call or email me, because what you don’t know could cost you. Not only that, but keep in mind that my work finding you the right home and mortgage — as well as all my other services –won’t cost you anything because they are paid for by the home seller! Thanks again. Mike
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BACKGROUND ON FINANCING
Probably one of the reasons that buying a home is such an emotional experience is because of the fact that not only do you have the actual house buying to deal with, but for most home buyers you also have the mortgage process to encounter. This can be a smooth and almost uneventful process, or an unnerving one. A great deal depends on the preparation of the buyer as well as the selection of an efficient mortgage company.

GENERAL MORTGAGE INFORMATION

What a Mortgage Payment Consists of (P.I.T.I.)

• Principal: The repayment of the original amount borrowed on a monthly basis.
• Interest: The cost of borrowing the principal amount, repaid on a monthly basis.
• Taxes: Real Estate taxes paid to a local government agency.
• Insurance: Homeowners insurance on the home. Also any mortgage insurance, which is paid to protect the mortgage company.

NOTE: The total of these items is known as the PITI (Principal/Interest/Taxes/Insurance) payment.

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TYPES OF MORTGAGES

Fixed: A fixed term (for example, 15 or 30 years) as well as a fixed interest rate. The interest rate and term are fixed at the start of the mortgage. The monthly amount for the payment of the principal and interest will not change during the term of the mortgage.

Advantages:

• Since you know what your payment will be for the life of the loan, you can budget more easily.
• No possibility of an interest rate change making your mortgage payment suddenly unaffordable.
• No anxiety over interest rate fluctuations.

Disadvantages:

• More income needed to qualify because of higher initial mortgage rate.
• If interest rates decrease appreciably, you will most likely want to refinance to get a lower payment which costs $ and can eat into your equity to cover closing costs.

Adjustable: Often referred to as an ARM (Adjustable Rate Mortgage). The interest rate on your mortgage will be adjusted up or down according to current interest rate levels. The monthly amount for your principal and interest payment will go up or down with these rate changes.

Advantages:

• Lower initial interest rate and therefore lower monthly payment.
• If interest rate declines, your payment will also decline.
• Easier to qualify for due to lower initial interest rate and payment amount.

Disadvantages

• If interest rate increases, your payment will also increase.
• A large increase in interest rates–and payment–could make your house unaffordable.

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DIFFERENT TYPES OF LOANS

Conventional: A “traditional” mortgage, not directly insured by the Federal Government. Most conventional loans under $275,000 are administered through Fannie Mae or Freddie Mac (private corporations but regulated by the government). Those loans over that amount are designated “jumbo loans” and are funded by the private investment market.

FHA: Insured by (but not funded by) the Federal Housing Administration (FHA) a division of the U.S. Department of Housing and Urban Development (HUD), and designed for, in general, low- and middle-income borrowers and many firsttime buyers. There are, however, limits (which vary from county to county) to the maximum loan amount. Click here to see Guidelines for HUD loan amounts by county . FHA loans have somewhat more relaxed qualifying standards and ratios than conventional loans.

VA: For those qualified by military service, the Veterans Administration (VA) insures (but does not fund) 15 and 30 year fixed as well as 1 year adjustable mortgages with lower down payment requirements (as low as 0 down) and somewhat more lenient qualifying ratios.

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HOW MUCH DOWN PAYMENT: One of the first questions that home buyers ask is “how much down payment are we going to need?” Unfortunately, there is
no standard answer. Down payments will vary from 0% (with a VA–Veteran’s Administration loan) to upwards of 25% (with certain “non-conforming” loans). As an average, most home buyers make down payments in the 5%-15% range, although your own personal situation may dictate more or less down payment. When you are factoring money for a downpayment, don’t forget about closing costs, which will total in the 2-5% range, payable in cash at the time of closing.

PREQUALIFICATION – WHAT IS IT?
Prequalification is the initial step in securing a mortgage. A lender will analyze your current income, debt and basic credit history situation in order to qualify you for a maximum loan amount. This gives you a clear picture of your financial parameters and a maximum housing price (the mortgage amount plus your down payment). With pre-approval, the lender verifies your income, debt and financial picture, approving the loan subject to a favorable appraisal of the
property you select.

WHY SHOULD I GET PREQUALIFIED

3 People Benefit from your pre-approval

• You: The only sure way to know “how much house you can afford” is through prequalification. It is a simple but important step., and gives you a clear sense of the direction you should be headed.
• Your Agent: Second, by knowing what your financial parameters are, your Agent can spend more time looking for houses that “fit” and less time pursuing dead ends. No matter how much you might want a 4000 square foot home for $275,000, if your qualifications say $125,000, your qualifications say $125,000.
• The Seller: Lastly, if you want to strengthen your bargaining position and make your offer stand out in case of multiple offers….get pre-qualified! If you were the seller and had 2 offers on the table for your house, one from a fully prequalified buyer and the other from an “I’ll get around to that soon” buyer–to which offer would you devote the most attention to? Exactly!

I hope this was helpful and please email, chat with the button on the top right of this page, or call me with any questions you may have or if you want to get started in having me help you find your dream home!
– Mike -