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ADDIE MAE THE MORTGAGE SOLUTION PEOPLE Home Financing Primer |
Mortgage Information
| facts | for Consumers |
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If you are thinking about buying a house, especially your first
one, you may have some basic questions about the home-financing process. The following
answers may help.
How large a mortgage will you be able to get?
A general rule is that you usually can qualify for a mortgage loan of two to two and
one-half times your household's income. For example, if your family has an income of
$30,000 a year, you can usually qualify for a mortgage of $60,000 to $75,000.
Lenders use many other factors to determine how large a mortgage they will give you. For
example, lenders generally prefer that your housing expenses (including mortgage payments,
insurance, taxes, and special assessments) not exceed 25 to 28 percent of your gross
monthly income. Other long-term debt (monthly payments extending more than 10 months)
added to your housing expenses should not exceed 33 to 36 percent of your gross monthly
income. Federal Housing Administration (FHA) and Department of Veteran Affairs (VA)
mortgage loan percentages may vary. ADDIE
MAE Provides loans to borrowers with ratios as high as 60%.
In addition, lenders want to know about your employment and credit history. This includes
finding out about your job and income and how well you handled and repaid loans in the
past.
Legal safeguards exist to ensure this information is used fairly. For example, the Fair
Credit Reporting Act states that lenders must certify to the credit bureau the purpose for
which this information is sought and that it will be used for no other purpose. The Equal
Credit Opportunity Act prohibits discrimination in lending based on sex, marital status,
race, national origin, religion, age, or because someone receives public assistance.
How much money will you need for a down payment and closing costs?
Lenders usually expect you to be able to make a downpayment of between 10 and 20
percent of the house's price and to pay closing costs, often three to six percent of the
loan amount. If you make a downpayment of as little as five percent but less than 20
percent, the lender will require you to pay for private mortgage insurance. (Requirements
for VA or FHA loans may differ.) Under the federal Real Estate Settlement Procedures Act,
the lender must provide you with information on known and estimated closing costs.
ADDIE MAE provides loans with no
downpayment, although most of our clients usually put down at least 5%.
How do you shop for mortgage loans?
Mortgage packages vary widely, and it is important to investigate several options to find the one for you.
You could:
- Check real estate or business newspaper sections, which may include brief tables on mortgage availability.
- Look in the Yellow Pages under "Mortgages" for a list of mortgage lenders in your area.
- Call several lenders in your area to apply for the type of mortgage you want.
However this is a time and money consuming process, most lenders require you to pay a fee when you file your loan application. The amount of this fee varies, but it can be $100 to $300. Many lenders do not refund this fee if you are not approved for the loan, or if you decide not to accept the loan terms offered. You also are not able to shop you loan with lenders located outside your local area and your local lenders may not have the program you need, especially if you have had credit problems in the past.
At ADDIE MAE, we use a "computerized mortgage shopping service," In addition to our own underwriters. Our list of lenders does not represent every lender in the nation, but it does offer you the ability to easily shop your loan to over 100 lenders in and outside your area with a single application! That is more than you would probably have the time, money or patience to pursue on your own.
What kind of mortgage should you select?
There are two major types of mortgage loans -- those with fixed interest rates and
monthly payments and those with changing rates and payments. However, there are many
variations of these plans on the market, and you should shop carefully for the mortgage
that best suits your needs.
Common fixed-rate mortgages include 30-year and 15-year mortgages. The 30-year
mortgage usually offers the lowest monthly payments of fixed-rate loans, with a fixed
monthly payment schedule.
The 15-year fixed-rate mortgage enables you to own your home in half the time and for less
than half the total interest costs of a 30-year loan. These loans, however, often require
higher monthly payments.
Mortgages with changing interest rates and/or monthly payments exist in many forms. The
adjustable rate mortgage (ARM) is probably the most common, and there are many types of
ARM loans available. The ARM usually offers interest rates and monthly payments that are
initially lower than fixed-rate mortgages. But these rates and payments can fluctuate,
often annually, according to changes in a pre-determined "index" -- commonly the
rate of return on U.S. Government Treasury bills.
Some adjustable loans, for a fee, contain a provision permitting you to convert later to a
fixed-rate loan. Another type of mortgage loan carries a fixed-interest rate for a number
of years, for example 2 or 3 years, before adjusting to a new interest rate for the remainder of the
loan.
A "buydown" or "discounted mortgage" is another type of loan
with an initially reduced interest rate which increases to a higher fixed rate or to an
adjustable rate usually within one to three years. For example, in a "lender
buydown," the lender offers lower monthly payments during the first few years of the
loan.
Many of our clients are in a credit rebuilding situation and select a 2 or 3
year ARM to give them the benefit of a lower monthly payment and the time to
rebuild their credit rating so that they can refinance the loan at a lower rate
during the 2 0r 3 year lock period.
What features should you compare with different mortgage loan packages?
Probably the single most important factor to look for when shopping for a home mortgage
is the annual percentage rate, or the "APR." The APR includes all the costs of
credit, including such items as interest, "points" (fees often charged when a
mortgage is closed), and mortgage insurance (when included in the loan). Lenders must
disclose the APR under the Truth in Lending Act. The lower the APR, generally the lower
the cost of your loan. Advertisements that state other rates such as "simple"
interest rates, do not include all the costs of the loan. ADDIE
MAE does not charge mortgage insurance on most of its loans.
If you shop for a mortgage loan with interest rates or payments that change, be sure to
compare:
* initial interest rates;
* the "cap" -- or how much the interest rate can increase/decrease over the life
of the loan, and how much the rate can change at each adjustment;
* how often the interest rate can change;
* how much and how often the monthly payments and term of the loan can change;
* what index is used to determine the rate changes;
* what "margin" is used -- or how much additional a lender can add to the
adjusted interest rate;
* the limits, if any, on "negative amortization" -- the loss of equity in your
home when low monthly payments do not cover fully the interest rate charges agreed upon in
the mortgage contract; and
* any "balloon" payments -- a large payment at the end of your loan term, often
after a series of low monthly payments.
* the prepayment penalty -- the industry standard is moving to 3, 4, and 5
years. Generally a longer prepayment period will lower your interest rate.
Where can you go for more information?
its@addie-mae.com
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