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Simply put, a mortgage
is a loan that a homebuyer obtains directly from a lender
to purchase real
estate. The mortgage is a lien on the property
that secures a promissory note (promise to repay the
debt) that states the terms of the loan, including the
interest
rate and the number of payments.
The most popular mortgages available to home buyers
today can be divided into two general categories: those
that offer fixed interest rates and monthly payments,
and those in which one or both of those factors are
adjustable.
Fixed-rate/fixed-payment loans are more traditional
and remain the most popular home financing method, currently
accounting for about two-thirds of all residential mortgages.
Their advantages are well-known: you always know what
your monthly principal
and interest payment will be, so your basic housing
cost will remain unaffected by interest-rate changes
until the mortgage is paid off.
Mortgages that entail flexible rates and/or payments
have grown in popularity in recent years, primarily
during periods of high interest rates and/or rapidly
rising home prices. Many, including the popular ARMs
(Adjustable
Rate Mortgages), offer lower-than-market
initial interest rates that allow buyers a measure of
affordability unavailable in fixed-rate loans. The tradeoff
may be higher interest rates and higher monthly payments
later on.
The "Mortgages at a Glance"
table provides a brief synopsis of some of today's most
popular mortgages, their benefits and drawbacks. To
find out about any one of them, talk to your ERA® real
estate professional. He or she can put you in touch
with a representative from ERA Mortgage, the preferred
lender for ERA nationwide.
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What
are the different types of lenders, and how do I choose
the right one for me?
Before someone lends you the money to purchase your
home, they'll want to know a lot about you. And you're
entitled to know as much as you can about them too.
It's important because getting a mortgage
is not just a one-time signing of documents, a handshake
and a check. You will be depending on your lender to
fund the loan as promised, on time, and over the life
of the loan; to keep good payment records, pay your
taxes and insurance (if included in your monthly payment);
and to perform many other continuing services. As the
preferred lender for ERA Real Estate, ERA Mortgage provides
all such services.
Talk to your ERA® real estate professional about the
lenders you have in mind. Experienced sales professionals
are quite familiar with mortgage lenders and can give
you sound advice about a lender's reputation, its qualifying
procedures, and the unique programs and benefits it
offers home buyers.
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Are
there any mortgages especially designed for 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 feature an interest
rate that is below market for the first year and may
only rise gradually after that.
VA- and FHA-insured
loans call for extremely low down payments (zero to
five percent of the purchase price) and often offer
a below-market interest rate. Similarly favorable terms
can be arranged with the help of private mortgage insurance
or PMI.
Finally, first-timers who can find a cooperative seller
or third-party investor can look into such non-traditional
financing methods as a lease/buy arrangement. Check
the "Mortgages at a Glance"
table for the unique benefits and requirements of several
major mortgage alternatives.
FINANCING
TIP
Anyone can apply for an FHA mortgage provided
the loan amount doesn't exceed the maximum allowed
by law. |
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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 five percent
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 either active military
personnel or veterans, or spouses of veterans who died
of service-related injuries.
If there is a downside to these loans, it's the qualifying
process. Though you apply for government-insured financing
through a lending institution, the Federal Housing Administration
or the Department of Veterans Affairs must insure or
guarantee the loan and may require specific documentation
or procedures not necessarily required for conventional
financing. That may take more time than is generally
required for conventional
mortgage approval. Additionally, FHA-required
insurance must be added to your payment.
As the preferred lender for ERA Real Estate, ERA Mortgage
has been delegated authority by each of these agencies
to ensure a quicker loan process.
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DOWN
PAYMENTS & AFFORDABILITY
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The amount of money that a buyer must put down at closing
depends on the loan-to-value ratio — the percentage
of the property's appraised value or sales price (whichever
is less) that a lender is willing to loan.
For example, if a property is appraised at $100,000
and the loan-to-value ratio is 90 percent, the lender
would be willing to loan $90,000. The buyer's down payment
is the remaining $10,000. Because the loan-to-value
is a percentage, the higher the sales price of a house,
the higher the down payment.
A down payment of 20 percent has been the benchmark
for conventional financing, but today, many options
are available, some requiring as little as five percent
down. A representative from ERA Mortgage can help you
determine which down payment option is right for you
and your budget. Contact ERA Mortgage for more information
about their services.
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How
does a lender determine the maximum mortgage I can afford?
The three primary areas lenders examine in determining
the size of mortgage you can handle include your monthly
income; non-housing expenses; and cash available for
down
payment, moving expenses and closing
costs.
The most common way lenders interpret these variables
to estimate your mortgage capacity is the Percentage
Method. Most lenders feel a family should spend no more
than 28 percent of its income on housing costs, including
the mortgage, insurance, and real estate taxes. In addition,
these housing costs plus your long-term debts (car loans,
child support, minimum credit card payments, student
loans, etc.) shouldn't exceed 36 percent of your income.
Some mortgage companies, including ERA Mortgage, have
relaxed ratios to help you purchase the home of your
dreams.
Although it is not a standardized method, you can also
use the Multiplier Method formula as a general rule
of thumb to determine how much home you can afford.
Most lenders' guidelines allow a family to carry a mortgage
that is two to three times its gross annual income (income
before taxes and expenses are taken out). The amount
of down payment and the type of mortgage (fixed or variable
rate) will determine the precise ratio used by the lender.
To get an idea of how much home you can afford, use
the Sample Housing Cost Worksheet,
or contact ERA Mortgage to receive a free pre-qualification
in minutes.
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THE
LOAN PROCESS
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What
are the steps involved in the loan process?
When you apply for a mortgage, you will need to furnish
information regarding your income, expenses and obligations.
It will be very helpful, and save time, if you have
the following items available:
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Two most recent pay stubs from your employer
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W-2s for the last two years
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Last two months' bank statements
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Long-term debt information (credit cards, child
support, auto loans, installment debt, etc.)
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CAN'T
AFFORD A 20 PERCENT DOWN PAYMENT? ASK YOUR REAL
ESTATE PROFESSIONAL ABOUT PRIVATE MORTGAGE INSURANCE
(PMI). |
For buyers who qualify
for conventional financing, but can't handle the high
down payment requirements, ERA Mortgage may still offer
this financing with PMI,
or 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 percent. By using PMI, you may be able to get a fixed-rate
or adjustable-rate mortgage by putting as little as
five percent down.
As with an FHA-insured
loan, you must pay premiums for PMI coverage, the amount
being determined by the type and amount of your loan.
But unlike FHA financing, the maximum loan amount is
determined by the lender. Moreover, PMI premiums are
often lower than FHA insurance, and may be paid as part
of your monthly mortgage payment, in annual installments,
or in a lump sum at the time you obtain the loan.
If you'd like to find out more about the unique advantages
of PMI, ask your ERA real estate professional to put
you in touch with ERA Mortgage.
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CLOSING
COSTS
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You can expect to pay the following closing costs at
the time of settlement:
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Appraisal fee — covers the cost of a professional
written estimate of the property's value.
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Attorney's or escrow
fees — your own and the lender's if they have one.
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Credit report fee.
- Points.
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Documentation preparation — covers the cost of preparing
the deed
and other paperwork.
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First year's premium on fire and hazard insurance.
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Impounds (also known as "escrow
account") — sufficient to cover real estate
taxes on the purchased property for the current
tax period to date. The lender then pays these bills
when they come due.
- Interest
— paid from the date of closing until 30 days before
your first monthly payment.
- Title
insurance.
- Mortgage
insurance if required.
- Origination
fee — covers the lender's administrative
costs.
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Recording fees.
- FHA
mortgage insurance (FHA loans only).
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VA guarantee fees (VA
loans only).
REFINANCING
TIP
Consider refinancing when rates fall two percent
below your current rate and you plan on staying
in your home at least 18 months more. |
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POINTS
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What
are points, and what's the point in paying them?
In real estate, the term "point" refers to one percent
of the total mortgage
loan amount. Buyers often pay lenders a 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 eight percent with no
points, and the second at 7.5 percent 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 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.
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GOVERNMENT
REGULATIONS
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Is
the lending process regulated by the government?
Most definitely. There are many laws and government
regulations that all lenders must follow to ensure that
all applicants are given fair and equal treatment. For
example, in 1968, Congress passed the Truth in Lending
Law, which requires that lenders provide borrowers with
information about a loan's true interest
rate. By law, lenders must reveal a loan's annual
percentage rate (APR).
The law also stipulates that for refinancing and second
mortgage loans, the borrower has up to three days after
closing
to change his or her mind and call the deal off. The
lender may not disburse money until after this three-day
"recession period" has passed.
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MORTGAGE
PAYMENTS
What
is APR and how is it calculated?
The annual
percentage rate (APR) 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.
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 will be expected to pay closing
costs.
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What
does my monthly mortgage payment include?
The bulk of your monthly mortgage payment goes toward
paying off the principal and interest of your loan.
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 amount is placed
in an escrow account, from which your lender then pays
your tax and insurance bills as they come due.
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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. Earlier
in this section, "How to Pay
off a 30-Year Mortgage in 15 Years Without Really Feeling
It" — outlines a popular formula for pre-payment.
The FHA,
VA, and even some states do not allow lenders to charge
penalties for paying mortgages early or refinancing.
In fact, many lenders now include space on monthly statements
for borrowers to itemize an additional principal
payment they wish to include with their regular payment.
If you're unsure about the rules governing pre-payment,
review your loan agreement.
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What
are the respective advantages of 15-year and 30-year
loans?
The 30-year fixed-rate mortgage
remains the standard mortgage, with an array of valuable
benefits designed especially for buyers who expect to
stay in their homes 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 both living
expenses and income to increase, your unchanging monthly
mortgage payments account for a relatively smaller portion
of income as the years go by.
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 may think. At the same rate
of interest, payments on the 15-year mortgage are roughly
20-25 percent higher than a loan that takes twice as
long to pay off. And 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
is 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.
MORTGAGE
POINTS
Consider paying 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. |
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Do
adjustable-rate mortgages offer any protection against
rising rates?
Yes. ARMs and other variable-rate-of-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 later in the loan term may rise. 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 6.5 percent, the loan may include one-percent annual
and five-percent lifetime caps...which means even if
rates rise dramatically, you'll pay no more than 7.5
percent next year, 8.5 percent the following year and
so on, until a maximum rate of 11.5 percent is reached.
An ARM may also allow your rate to decrease when the
index it is tied to 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 loan
after a set period of time.
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What
can I do if I have a fixed-rate loan and interest rates
go down?
When interest
rates drop significantly as they have in recent times,
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 two percent less than your existing loan,
and you plan on staying in your home for at least 18
months more, refinancing is a good investment.
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What
is the difference between pre-qualifying and pre-approval?
A pre-qualification
consists of a discussion between you and a loan officer.
The loan officer will collect information regarding
your income, monthly debts, credit history and assets,
and based on this information calculate an estimated
mortgage amount for which you qualify.
The pre-qualification is not a mortgage approval, but
more an estimate on what you can afford.
A pre-approval, on the other hand, is a more comprehensive
approach giving an actual decision on a home loan. With
ERA Mortgage, a credit report is ordered electronically
and is received within 30-60 seconds. This is an actual
credit approval and it carries with it some considerable
benefits. From this information, a loan approval is
given agreeing to finance a home and specifying the
total mortgage amount available to you.
What could be more comforting than the peace of mind
that goes with knowing that your mortgage is fully approved?
You will have a greatly improved negotiating position
when you are pre-approved for a mortgage. Sellers are
more apt to negotiate with someone who already has a
mortgage approval in hand. The pre-approval letter lets
the seller know they are working with a serious cash
buyer. A pre-approved buyer can also close on a property
more quickly — another major consideration for a motivated
seller. We strongly recommend it.
WANT
TO PAY OFF YOUR LOAN EARLY? THERE ARE SEVERAL WAYS...
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Save some extra money every month. With the interest
you earn on savings you may be able to make an extra
payment at the end of the year.
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Pay an extra twelfth of your principal
and interest payment every month.
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Send whatever extra you can every month.
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Whichever method you choose, be sure to clearly
indicate that the excess payment is to be applied
to principal.
