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How do I know how much house I can afford? |
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Generally speaking, you can purchase a home with a value of two or three times your annual household income. However, the amount that you can borrow will also depend upon your employment history, credit history, current savings and debts, and the amount of down payment you are willing to make. You may also be able to take advantage of special loan programs for first time buyers to purchase a home with a higher value. Give us a call, and we can help you determine exactly how much you can afford. |
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How much cash will I need to purchase a home? |
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The amount of cash that is necessary depends on a number of items. Generally speaking, though, you will need to supply:
Earnest Money: The deposit that is supplied when you make an offer on the house
Down Payment: A percentage of the cost of the home that is due at settlement
Closing Costs: Costs associated with processing paperwork to purchase or refinance a house |
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What is the best mortgage program? |
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The best loan program truly depends on your personal situation. Your decision depends on your individual needs and various factors such as: your current financial situation, how your finances may change in the future, how long you intend to live in your house, and how comfortable you are with your mortgage payment changing.
The best way to find the 'right' answer is to discuss your finances and your preferences with a mortgage professional.
ARM (Adjustable Rate Mortgage)
Adjustable Rate Mortgage loans usually begin with an interest rate that is 2 to 3 percent below a similar fixed rate mortgage. (FIXED RATE SECTION) The interest rates are adjusted, typically every year, depending on the market conditions. An ARM will allow you to qualify for more money or buy a more expensive home. These loans are also beneficial if you are planning to move in a few years.
There are four standard ARM programs:
6-Month Certificate of Deposit (CD) ARM
A maximum interest rate adjustment of 1% every six months. The 6-month Certificate of Deposit (CD) index typically reacts quickly to changes in the market.
1-Year Treasury Spot ARM
A maximum interest rate adjustment of 2% every 12 months. The 1-Year Treasury Spot index usually reacts slower than the CD index, but quicker than the Treasury Average index.
6-Month Treasury Average ARM
A maximum interest rate adjustment of 1% every six months. The Treasury Average index generally reacts more slowly in fluctuating markets.
12-Month Treasury Average ARM
A maximum interest rate adjustment of 2% every 12 months. The Treasury Average index normally reacts more slowly in fluctuating markets.
There are also mortgages that combine certain features of fixed and adjustable rate mortgages called hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM). These loans can offer both lower interest rates and a fixed payment for a longer period of time (3 years, five years, and seven years, respectively) than most adjustable rate loans. |
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Why would I want an ARM vs. a Fixed Rate? |
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An ARM allows you to receive more money at a lower interest rate than a fixed rate loan. If you are planning to move within a few years, you can save money and avoid rising payments.
Fixed Rate
A fixed rate mortgage is when the interest rate remains constant throughout the life of the loan. The most common fixed rate mortgages are repaid over a period of 30 years or 15 years.
Thirty-Year Fixed Rate Mortgage
The traditional 30-year, fixed-rate mortgage has a constant interest rate and monthly payments that never change. If you intend to stay in your home for seven years or longer, this may be a good option for you. However, if you plan to move within seven years, an adjustable rate loan may be less expensive. Fixed rate loans are particularly beneficial when interest rates are low because you can lock in the low rate for the duration of your loan.
Fifteen-Year Fixed Rate Mortgage
This loan is paid over a 15-year period and has a constant interest rate and monthly payments that never change. The advantages of a 15-year, fixed rate is that it offers a lower interest rate, and you'll own your home twice as fast. However, the disadvantage is that you commit to higher monthly payments. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years. This approach is often safer than committing to a higher monthly payment, since the difference in interest rates isn't that significant. |
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What does my mortgage payment include? |
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For most homeowners, the monthly mortgage payments include three separate parts:
Principal: Repayment on the amount borrowed
Interest: Payment to the lender for the amount borrowed
Taxes & Insurance: Monthly payments are normally made into a special escrow account for items like hazard insurance and property taxes. This feature is sometimes optional, in which case the fees will be paid by you directly to the County Tax Assessor and property insurance company. |
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How is an index and margin used in an ARM? |
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An index is an economic indicator that lenders use to set the interest rate for an ARM. Generally the interest rate that you pay is a combination of the index rate and a pre-specified margin. Three commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th District Federal Home Loan Bank (COFI), and the London InterBank Offering Rate (LIBOR). |
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What are points and how do they work? |
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Points are fees paid to the lender at closing. One “point” is equal to 1% of the total loan amount. For instance, for a $200,000 loan, one point would equal $2,000. Most lenders charge between 1 and 2 points.
If you want to lower your interest rate, you can pay more points up front. This is an effective way to save money by lowering your interest rate over the life of your loan. However, if you do not have money to pay upfront, opt for fewer points. |
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What makes a loan non-conventional? |
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There are several factors that determine whether a loan is non-conventional. For instance, if you have low credit scores and only 5% down, you would be considered a non-conventional borrower. Also, borrowers who want to purchase or refinance a home at a high loan-to-value (LTV), i.e., 95% or 100%, fall under a non-conventional loan. In addition, if a borrower is unable to verify their income, they are considered to be non-conventional. For instance, self-employed borrowers who do not want to disclose income simply state how much they make on their 1003 application. Stated income loans at high LTV's are non-conventional as well. |
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What are credit scores? |
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A credit score analyzes your credit history by considering the following factors: late payments, the amount of credit established, the length of time at your present residence, employment history, collections, and bankruptcies. A lender will take into account your credit score when qualifying you for a loan.
Credit reporting agencies are not in the business to grant or deny credit. Their job is to collect information about you and your credit history from public records, creditors and other reliable sources. These agencies then make your credit history available to current creditors, prospective lenders and employers (as allowed by law).
The credit reporting agencies are:
Equifax
PO Box 105873
Atlanta, GA 30348
800-685-1111
Experian
PO Box 2002
Allen, TX 75013
Consumer Credit Questions
888-EXPERIAN (888-397-3742)
TransUnion
PO Box 2000
Chester, PA 19022
(800) 888-4213 |
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How can I improve my credit rating? |
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There is no guaranteed cure for a poor credit score; however, the best and most efficient way to improve your credit report is to make your payments on time. In addition, do not apply for credit frequently, because a large number of inquiries on your credit report can negatively affect your rating. Try to reduce your credit card balances as well. |
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What do I do if I have credit problems, or no credit history? |
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Credit problems do not necessarily prohibit buyers from purchasing a home. There are programs designed for buyers with credit problems. These programs allow buyers to purchase a home, receive tax deductions and rebuild their credit. |
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What is the difference between pre-approval and pre-qualification? |
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The pre-approval process is much more complete than pre-qualification. For pre-qualification, the loan officer asks you a few questions and provides you with a pre-qualification letter. Pre-approval includes all the steps of a full approval, except for the appraisal and title search. Pre-approval can put you in a better negotiating position, much like a cash buyer. |
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What's the difference between pre-approved and approved? |
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Pre-approved means that the buyer has been submitted to an automated underwriting system such as Freddie Mac or Fannie Mae and has received an accept rating. Approved means that a deal has been submitted to a specific lender and all of the terms have been met. The loan is then ready for closing. |
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What is a rate lock? |
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A rate lock is a contractual agreement between the lender and buyer. There are four components to a rate lock: loan program, interest rate, points, and the length of the lock. |
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