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Prequalify
Pre-qualification occurs before the loan process actually begins,
and is usually the first step after initial contact is made.
The lender gathers information about the income and debts of
the borrower and makes a financial determination about how much
house the borrower may be able to afford. Different loan programs
may lead to different values, depending on whether you are qualified
for them, so be sure to get a pre-qualification for each type
of program you are suited for.
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Popular Mortgages
Fixed Rates
A conventional fixed-rate mortgage offers you a set rate and
payments that do not change throughout the life or "term",
of the loan. A conventional loan is fully paid off over a given
number of years, usually 15, 20 or 30.
A portion of each monthly payment goes towards paying back the
money you borrowed, the "principal", and the rest is
"interest". Any money paid into the value of the house,
including your down payment, is known as "equity" in
the home. For instance, if your house is worth $100,000 and you
owe $65,000 on your mortgage, then you are said to have 35% equity
in your house.
Temporary Buy-Downs
"Buydowns" usually refer to a borrower "buying
down" the interest rate on a loan. This is the same concept
as paying "points" on a loan, except that points buydown
(or up) the rate of a loan over the entire term while a buydown
is usually only a temporary reduction.
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Credit Repair
Dealing with Credit Bureaus
It is essential to understand that Credit Bureaus are nothing
more than record keepers.
Simply put, they keep a record of who has given you credit, when
they gave you credit, how much credit you are given and whether
or not you paid it back on time. When you want to obtain credit
cards, loans, financing for a car or home, leases, apartments
and sometimes even employment, the lender or bank will check your
credit to see your financial history.
Credit Bureaus are paid by the people who request your credit
file. Credit Bureaus have no legal power over you. Banks, police
or the government does not run them; so don't be intimidated by
them. They are the Credit Bureaus because they own large computer
systems capable of storing credit information on everyone in the
United States. However, because of the tremendous amounts of information
on their computers, their method of storing information is very
basic and ridden with many errors. Since the bureaus have made
so many errors in the past, all Federal Laws regarding credit
information are very much in your favor.
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Popular Mortgages
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Rates
A conventional fixed-rate mortgage offers you a set rate
and payments that do not change throughout the life or "term",
of the loan. A conventional loan is fully paid off over a given number of
years, usually 15, 20 or 30.
A portion of each monthly payment goes towards paying back the money you
borrowed, the "principal", and the rest is "interest".
Any money paid into the value of the house, including your down payment,
is known as "equity" in the home. For instance, if your house is
worth $100,000 and you owe $65,000 on your mortgage, then you are said to
have 35% equity in your house.
Temporary Buy-Downs
"Buydowns" usually refer to a borrower
"buying down" the interest rate on a loan. This is the same
concept as paying "points" on a loan, except that points buydown
(or up) the rate of a loan over the entire term while a buydown is usually
only a temporary reduction.
A temporary buydown on a loan is achieved by lowering the rate for the
first few years, starting out at a lesser amount and gradually rising to
the original loan rate. Of course, because the loan rate is lower for the
initial few years, so are the payments. To make up this loss of funds to
the lender, the buydown usually consists of extra monies paid up front to
the lender when the loan closes. In return, the lender will let the
borrower "qualify", or meet the criteria for the loan, at the
new, reduced rate.
An example of a temporary buydown on a loan is a 2/1 Buydown. Assume we
have a 30-year conventional loan with an interest rate of 9%. A 2/1
buydown would make the interest rate for the first year of the loan equal
to 7%, the second year 8% and 9% from then on. The borrower could qualify
for the loan (under some loan programs) as if it were a 7% loan.
Balloon Loans
This is a special type of conventional, fixed-rate
mortgage with a much shorter term. In a balloon mortgage, the terms and
payments are usually the same as their conventional loan counterpart, but
the balance is due in full on the loan at the end of a specified, much
shorter term.
For example, a seven-year balloon mortgage would be calculated to have the
same payments as a 30-year loan, with the borrower paying the same amount
in interest and principal each month. However, at the end of seven years
whatever balance is left on the loan is due. At this point, the borrower
may either pay out the loan in full or refinance with a new loan.
Balloons are often priced better than conventional, fixed-rate mortgages
because of the certainty to the lender of the mortgage term.
Adjustable Rate Loans (ARM's)
An "ARM", or "Adjustable Rate
Mortgage" has a fluctuating interest rate and the potential for
changing payment amounts. In most ARM mortgages, the interest rate on a
loan is fixed for a certain number of years and then allowed to fluctuate
in sync with current economic factors.
An ARM is of value to the lender because the risks of lending money in a
changing economy are passed on to the borrower. In exchange, most lenders
are able to offer a lower initial interest rate to the borrower in
exchange for their assumption of this risk.
Adjustment Period
This is the predetermined period for which
the rate of an ARM is adjusted. For instance, a 3/1 ARM has a fixed rate
for the first three years of the loan and is then adjusted once every year
through the term of the loan to reflect the current economic conditions.
Caps
This is a limit specified in the ARM loan
for individual and cumulative interest rate adjustments. An example of
this is a 2/6 cap, which allows the interest rate on your ARM loan to go
up or down by no more than two percent every adjustment
period, and has a total limit of six percent for cumulative changes.
Therefore a 2/6 cap on a 5% ARM will allow a maximum rate of no more than
11%.
Index
The measurement, or basis, that lenders
use to adjust the interest rate on an ARM. ARMs are usually quoted with a
"teaser", or first-year rate, and then expressed as an index
plus a margin. For instance, a 5/1 ARM may be advertised at 5% with a 2.5%
margin over the U.S. 30-year bond index. This means that your first year's
rate would be 5%. The second year, the rate would be 2.5% plus whatever
the 30-year bond rate was, such as 6%, making your rate through year five
equal to 8.5%. In year five, your rate is adjusted again, this time to
2.5% plus the current 30-year bond rate, now 7%, making your new rate
equal to 9.5%.
Negative Amortization
This occurs when the combination of
interest rates adjustments and payment caps result in a monthly payment
that does not cover the interest portion of your loan. In this case, the
difference would be added back to the total amount you owed on the loan,
thus making a "negative amortization" to the mortgage.
Convertible Adjustable Loans
Convertible ARMs offer the borrower the
option to convert the loan from an adjustable-rate to a fixed-rate at
specified times during the term of the mortgage. This option is attractive
to many buyers who may wish to take advantage of current low interest
rates, but want the security of a fixed-rate loan in the future. Be aware
of any costs associated with the conversion of the loan.
Questions to Ask When Considering an Adjustable
1. What would the interest rate be today
if the rate were fully adjusted, based on the current value of the index?
2. Is there a prepayment penalty?
3. How long before the interest rate can adjust?
4. By what amount can the rate adjust at that time? At the next adjustment
period? Over the life of the loan?
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Should I Refinance?
If you are a homeowner who was lucky enough to buy
when mortgage rates were low, you may have no interest
in refinancing your present loan. But perhaps you
bought your home when rates were higher. Or perhaps
you have an adjustable rate loan and would like to
obtain different terms.
Should you refinance? This refinancing tip will answer
some questions that may help you decide. If you do
refinance, the process will remind you of what you
went through in obtaining the original mortgage. That's
because, in reality, refinancing a mortgage is simply
taking out a new mortgage. You will encounter many
of the same procedures-and the same types of costs-the
second time around.
Would Refinancing Be Worth It?
Refinancing can be worthwhile, but it does not make
good financial sense for everyone. A general rule
is that refinancing becomes worth your while if the
current interest rate on your mortgage is at least
two percentage points higher than the prevailing market
rate. This figure is generally accepted as the safe
margin when balancing the costs of refinancing a mortgage
against the savings.
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Rent vs. Own
If you're thinking about buying a home, you
probably have a mental list of the benefits
owning a home would bring to your life. You
imagine waking up and falling asleep in your
own home, decorating as you please, or maybe
even getting away from the loud neighbor you
hear every evening through the paper thin walls
of your apartment complex. You are ready to
invest your monthly housing expense, instead
of giving it all to your landlord every month.
The desire to own a home has been felt by nearly
all Americans. Owning a home is the American
dream. So what's stopping you? That's a good
question, one that should be carefully answered.
It's important that before you buy a home, you
understand the potential impact it will have
on your finances and lifestyle.
Listed below are some of the new responsibilities
and added benefits of owning your own home.
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Avoid Foreclosure
How to Avoid Foreclosure
When you miss your mortgage payments, foreclosure
may occur. This is the legal means that your
mortgage company can use to repossess (take
over) your home. When this happens, you must
move out of your house. If your property is
worth less than the total amount you owe on
your mortgage loan, your mortgage company or
HUD could seek a deficiency judgment. If that
happens, you not only lose your home, you also
would owe your Mortgage Company or HUD an additional
debt. Foreclosure or a deficiency judgment could
seriously affect your ability to qualify for
credit in the future. So you should avoid it
if all possible!
Don't ignore letters from your mortgage company!
If you are having problems making your payments,
contact your mortgage company immediately. Explain
your situation. Be prepared to provide them
with financial information, such as your monthly
income and expenses. Without this information,
they may not be able to help. Stay in your home
for now. You may not qualify for assistance
if you abandon your property.
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