There was a time in the not-so-distant past when financing the purchase of a home was relatively uncomplicated. You went to your local savings and loan and signed up for a 30-year, fixed-rate mortgage loan. Those days are gone, probably forever. Today, you have what seems like an endless array of choices—different rates, terms, down payments, fees, etc. (One lender told me there are literally more than 40,000 available loan options on computer database!) So how do you pick the combination that makes the most sense for you? Having spent months helping buyers understand the ins and outs of financing a home, I’ve developed this guide to assist you in evaluating which mortgage is best for you. More than any other single variable , choosing the right mortgage will influence whether or not your investment is a dazzling one. Let’s say you get a incredibly successful price on a home, but you finish up with a mortgage that has high fees and a high interest rate. You could see the cash you saved disappear in a very short measure . Keep in mind that a grand mortgage for one human may be terrible for you. Each of us has different circumstances that determine whether a particular loan is a incredibly efficient deal or not—whether you’re A Critical Guide To Home Loans: Your Options And How They Affect Your Future —3— Just starting out or nearing retirement, how secure your job is, how long you plan to be in the home, etc. You could be sure that the best loan for a first-measure home buyer planning to move up in five decades is quite different from the best loan for a couple who’s staying for the next 20 decades . First things first—know what you might afford You can save yourself a lot of time and trouble if you take a few minutes to figure out the loan amount you may afford. The general guidelines are: •No more than 28 percent of your gross monthly income should be spent on housing expenses (principal, interest, insurance and taxes). This can vary upwards if you have a nice credit history, liquid assets, or if you’re already spending more than 28 percent on your housing expenses. •Your total debt (mortgage and consumer debt) shouldn’t exceed 36 percent of gross monthly income. Again, human with incredibly efficient credit and liquid assets can often creep above this line. As you compare your income to your potential housing expenses, keep in mind that your mortgage principal and interest are not your only costs. You also absolutely need to allow for any association fees, property taxes, insurance payments, etc. Having said this, I should point out that the rules are looser than ever today. The “28 over 36” rule is no longer the ironclad guideline. Both the federal government and mortgage lenders have gotten very creative in their efforts to attract first-measure buyers to the sell . Today, there’s a loan code out there to put all but the worst-risk persons into homes. But for your own safety and confidence down the roadway , your best bet is to adhere as closely as possible to the above guidelines. Avoid unpleasant surprises Talk to your Realtor® or loan officer about checking your credit history prior to applying for a mortgage. There’s no reason to waste measure and funds in the application process if you have credit problems that will cause you to be rejected. Once you understand about any potential problems, you can work on clearing them up before you apply. You may save yourself a lot of measure and trouble if you take a few minutes to figure out the loan amount you may afford. Once you understand about any potential problems, you might work on clearing them up before you apply. —4— Shopping for a mortgage lender There are several potential lenders in today’s marketplace. They include: MORTGAGE BANKS—A mortgage banker is a direct lender. He or she qualifies applicants, finds the best available loan and funds it. Because this is their main business, mortgage banks can offer very competitive rates—but are not necessarily the cheapest. MORTGAGE BROKERS—Brokers don’t lend money; they find lenders for a fee in addition to the traditional application and processing costs. While a good broker might be able to find you the cheapest mortgage, make sure the fee doesn’t offset any savings. Since most brokers’ fees are paid by the lender in the form of a commission, their services cost you nothing—that is, no out-of-pocket costs. Something also to remember—a mortgage broker is the legal agent of his or her client and does not work for the lending institution. So, a mortgage broker will have access to the widest spectrum of loan options—whereas a bank or savings and loan representative will draw from only “in-house” loan options. Going by this acquired skill , a reputable mortgage broker would most definately be your cheapest source for home loans and refinancing. SAVINGS AND LOANS—Once the primary source of home financing, savings and loans hold a much smaller piece of the sell today. But some experts recommend checking their offers before looking at a bank. BANKS—Commercial banks have come on strong in recent months. Some have made home loans a significant part of their business. CREDIT UNIONS—A great source fairly often overlooked by borrowers. Credit unions function like brokers because they almost always don’t lend their own money. Whichever route you ultimately take, be sure to shop around. What lenders charge might differ by as much as two or three percentage points. That’s pretty significant when you look at the impact on a 30-year fixed-rate mortgage—depending on the size of the loan, the difference could be a few hundred dollars a month! What a Realtor® may do for you If you’re using a Realtor® to help you find a home, ask to be put in touch with a lender he or she works with on a regular basis. In most cases your Realtor® is not a loan officer, but it is his or her job to help persons buy and sell homes. A nice real estate professional has long-standing relationships with home mortgage professionals and might point you in the right command to answer any questions you can have. He or she might also share insights into what they’ve seen work—or not work—for others in situations similar to yours. Something also to remember—a mortgage broker is the legal agent of his or her client and does not work for the lending institution. —5— Which loan is right for you? Adjustable. Fixed. Balloon. It’s easy to get lost in mortgage verbiage. Here’s a rundown of the most common loans. ADJUSTABLE-RATE MORTGAGES—Your interest rate (and monthly payment) rises and falls with the index to which it’s tied. Because they initial out two to three percentage points below fixed-rate mortgages, they’re particularly popular when fixed rates are high. To protect you against interest rate hikes, the best loans put a cap on annual rate increases of two percentage points a year, with a lifetime increase of no more than five percentage points above where you began. The most popular arm indexes are those linked to three-month, six-month and one-year Treasury Bills, the 11th District Cost of Funds (cofi), the prime rate and the London Interbank Offer Rate (libor). As a rule, arms build more sense if you don’t plan on staying in your home longer than five decades at most. Which index is nice for you depends on two things: the economic forecast and your personal comfort level. LIBOR and T-Bill indexes, for example, react more immediately to changes in the economy—a nice thing when interest rates go down, not so successful when they rise. Whatever happens, you’ll see it pretty quickly in your monthly payment. More conservative buyers prefer indexes linked to the prime rate or the COFI because they’re more stable and move up (and down) more slowly than other indexes. That’s sizeably workable when rates are low and rising, less so when they’re high and dropping. Is an arm a sizeably efficient choice for you? Well, if you positive need a lower monthly payment to afford the home you want and you’re planning to stay there less than three to five decades , then yes. But generate sure you might handle the higher payments that might come down the path. A prudent approach is to always plan financially for the “worst case” scenario: Assume that your loan will always rise the maximum amount. If you wouldn’t be able to afford it, then ruminate on another loan. You know your own personal “comfort level.” Use it to generate your decision. Let’s say you’re buying your first home. You have a modest income today but a bright future. Even so, you absolutely need to keep your payments low. A long-term arm makes sense even though your interest rate could rise over measure . If you move in the next two or three many years, you won’t be around for any significant rate hikes. If you choose to stay longer, a rise in income will help you keep pace. Or you might always refinance to a fixed-rate mortgage. FIXED-RATE MORTGAGES—People usually opt for a fixed-rate loan for the security it offers. You understand exactly what you’ll be paying each month for the life of the loan. If interest rates fall, you might A prudent approach is to always plan financially for the “worst case” scenario: Assume that your loan will always rise the maximum amount. —6— refinance at a lower rate. Lenders are offering more loan programs based on fixed rates, such as lower down payments—that is, five percent down or less. Adjustable rate loans fairly often require a larger down payment. The most common fixed-rate loans are for terms of 15 or 30 months. If you might afford the shorter term, it’s a dazzling way to contruct equity fast and save tens of thousands of dollars over the life of the loan. (However, I can show you how it will be a more savvy move to go with a 30 year fixed and pay an more payment each month above and beyond your established mortgage payment. Just be sure to indicate your more payment is for principal paydown only, not interest. This way you could even pay off your mortgage sooner than 15 years and save tens of thousands of dollars. You also have the “safety net” of paying your lower established mortgage payment should things get tight one month.) Fixed-rate mortgages contruct the most sense when interest rates are low and if you’re planning to stay put for the next seven or more months. They offer safety to human on fixed incomes who might not be able to afford a rising housing bill. If you absolutely need to lock in your level and may afford the monthly payments, ruminate on a fixed-rate loan. Let’s say you generate a incredibly grand salary working for a large business . You’re comfortable and job security is pretty incredibly workable, but there’s not much chance of further advancement. In other words, you don’t anticipate moving anywhere else in the foreseeable future, and you want to avoid the possibility of higher house payments down the roadway . A fixed-rate, long-term mortgage makes sense in this situation. Although you’re probably paying one to two percentage points more than an adjustable loan, you also have the security of a fixed payment each month. And if interest rates drop three or more points, you might refinance at the lower rate. GRADUATED-PAYMENT MORTGAGES—This one is more of a risk. Your early payments are so low that they don’t cover the interest due, which results in negative amortization—which means you owe more each month, not less. Your monthly payments gradually increase to cover principal and interest, and you end up paying more than you would have for a regular loan. Some GPMs are fixed, others are adjustable. Given the fact that lenders have literally rewritten the rules to get more persons into homes today, I might ’t think of a efficient reason to ruminate on a GPM. INTERMEDIATE FIXED MORTGAGES—These are a family of 20- or 30-year loans that are fixed for a set amount of measure , such as 5 to 7 many years, then they readjust once for the remainder of the loan. This readjustment is based on a predetermined index. Some might refer to these as “balloon” mortgages, but this term is falling out of favor because of negative connotations associated with balloon mortgages of the past—which we are fixed for 5 to 7 decades , at which measure the entire balance of the loan became due. Fixed-rate mortgages generate the most sense when interest rates are low and if you’re planning to stay put for the next seven or more many years. Graduated-payment mortgages are more of a risk. Your early payments are so low that they don’t cover the interest due, which results in negative amortization. —7— Today, they are more almost always known as intermediate fixed loans or extended balloon mortgages. Some of these loans are not for the fainthearted. You enjoy low fixed payments from one to seven years, and then the loan readjusts—as long as certain conditions are met, such as interest rates haven’t risen more than five percentage points, you haven’t made any late payments in the previous 12 many years, etc. If conditions aren’t met, there are no guarantees, so beware. It’s best to consult your Realtor® or loan officer if you have questions regarding these loans. If you’re a first-instant home buyer who plans to trade up before the loan comes due, you might want to ponder a balloon mortgage in order to have lower monthly payments. But be sure to get all stipulations in writing and review them carefully. (There’s a new family of intermediate loans becoming available that are similar to these other balloon mortgages, but when they become due after 5 to 7 many years, they adjust and become variable rate loans. They also do not carry the rigid stipulations that balloon loans carry, building them a little easier to live with if you don’t move before the loan is due.) There are various other loan types—including roll-overs, wraparounds, zero-interest-rate mortgages and buy-downs—but the ones I’ve listed here are most common. If you decide to opt for something more exotic, discuss it with your Realtor® and loan officer carefully to contruct sure you know what you’re taking yourself into. If you get in over your head and may’t meet your obligations, you could finish up losing your home and doing serious damage to your credit. When it’s a incredibly successful measure to refinance Whatever you decide is the best option for you today can change as economic conditions or your personal circumstances change in the future. So how do you understand it’s measure to refinance? Whether or not you should refinance usually depends on three things: what you think interest rates will do in the near future, how much monthly savings you’ll enjoy, and how long you expect to be in your home. Refinancing is not something you ponder lightly because it may be expensive. The total cost of your loan can rise as much as five percent when you add in the up-front points, fees and costs. A efficient rule of thumb is to beginning looking into refinancing when interest rates drop 1 to 11/2 points below what you’re currently paying. The reason is that some lenders offer loans that cost little or nothing at all. As soon as interest rates drop below your rate, initial talking to your agent or loan broker. Next, figure out what you’ll have to pay up front. Then calculate your monthly savings. With these two numbers, you might figure out how long it will take you to cover the cost of the new loan. For example, if If you’re a first-time home buyer who plans to trade up before the loan comes due, you might ask your Realtor® about a balloon mortgage. —8— refinancing costs you $5,000 up front and saves you $200 a month in mortgage payments, it will take 25 years to cover your costs. If you’re not planning to move for several decades , refinancing makes a lot of sense. But if you’re going to look for a new home in two years, you wouldn’t really be around long enough to reap the benefits. In fact, you’d lose money in this situation. If you refinance today and rates drop even further in the next few months, you’ll miss out on additional savings. If you refinance to save $10 or $20 off your mortgage payment, then you’ll have to stay in your home forever to see it pay off. WARNING: The math is easy for fixed-rate loans, not so effortless when you’re talking about arms. If you don’t feel relaxed running the numbers yourself, inquire of your lender or Realtor® for help. Questions to ask while shopping for your loan Before you might effectively compare mortgages, there are a number of questions you’ll need to ask the loan officer. Some are understandible , others are not. Be sure to inquire of them all. KINDS OF FINANCING—Fixed? Adjustable? What about government-backed programs? Any special deals you should be aware of? Make sure you’ve got a complete photo of the merchandise menu. INTEREST RATES—Rates differ not only between different types of loans. The identical loan at three different lenders could have three different rates! TERMS—There are options beyond 15- and 30-year terms. Find out how different terms affect interest rates and how they impact the final cost of your home. This is especially important if you plan to be in the home for a long measure . DOWN PAYMENT—What’s the minimum required for different loans? Today’s down payment can range from as high as the old standard 20 percent to nothing at all in certain explicit programs. LOAN LIMITS—Many lenders set limits based on a loan-to-value ratio. For example, with an 80 percent loan-to-assessment of worth ratio (LTV) you can only borrow $80,000 on a $100,000 home. LOAN QUALIFICATION—Different lenders might qualify you using different formulas. Make sure you understand how you’re being evaluated. POINTS—Think of these as prepaid interest charged by the lender. One point equals 1 percent of the face amount of your loan. In some cases points are paid up front; in others, they’re bundled into the loan. A good rule of thumb is to beginning looking into refinancing when interest rates drop even one point below what you’re currently paying because there are some loans that cost little or nothing at all. —9— The latter saves you cash up front but costs you more over the life of the loan. No-point loans also save you money up front, but lenders usually charge one-quarter to one-half point more than in the case of loans with points. Be sure to look at what your total costs will be over the life of the loan. PREPAYMENT PENALTY—If you decide to pay off your mortgage before the term is up, or refinance when interest rates go down, you might have to pay a prepayment penalty. SPECIAL DEALS—Some lenders reduce interest rates for customers who avail themselves of other services offered. For example, your bank might take a quarter of a percentage point off if you agree to automatic prepayment from your checking account. TIME TO APPROVAL—Find out how long it will be before you’ll have a decision on whether or not your loan application has been approved by the lender. A week or two is pretty normal. LOAN COMMITMENT PERIOD—Make sure you understand how long your lender’s commitment is grand for. The last thing you need is to decide on a loan amount at a certain rate, find the right home and discover your interest rate went up in the meantime. Many lenders now offer lock-in programs. This means that the lender will guarantee in writing your loan at a certain rate for a certain period of measure . Common lock-ins are for 10-, 12-, 21-, 30-, 45- and 60-day periods. The longer the lock-in, the more time you have to shop and iron out hitches in the loan process. But a lender might charge you more in points for longer periods. Then again, a short lock-in period could be next to useless given the amount of time the loan process might take. The lesson here is to be very clear of what a lock-in offers—and doesn’t offer. Once you have this and other data on various loan programs from different sources, you may contruct an informed decision as to where to shop for the best mortgage. Don’t get stung by unexpected fees One of the most common errors I’ve seen borrowers contruct is in not considering the various fees they will finish up paying in figuring out the final cost of a home. Let’s take a look at what you may expect. LOAN APPLICATION FEE—This is what the lender charges you for applying. It isn’t refundable, even if you’re refused. APPRAISAL FEE—This flat fee is usually charged by the prospective lender to pay an independent appraiser Think of these as prepaid interest charged by the lender. One point equals 1 percent of the face amount of your loan. The longer the lock-in, the more measure you have to shop and iron out hitches in the loan process. But a lender might charge you more in points for longer periods. —10— to inspect the home and estimate its fair sell value. This fee is also nonrefundable whether or not your loan goes through. LOAN ORIGINATION FEE—This charge, which covers the lender’s administration costs, can either be a flat amount or a percentage of the loan amount. It’s paid in money at closing. Tips for the best deals Now that you understand a little more about mortgages and where they come from, I’ll share with you my tips for taking the best deal and saving yourself a lot of headaches in the process. PREQUALIFY BEFORE YOU SHOP FOR A HOME—Smart buyers generate sure to understand exactly how much they might afford to borrow before initial to look at homes. You might bet that the seller’s agent will inquire of if you’ve been prequalified; if you haven’t, they might decide you’re not a serious buyer. Having a deal in your pocket is always incredibly effective ammunition in negotiations. (However, I often have my buyers “preapprove” before they initial looking at homes. This is a much more savvy road —you have it in writing, providing you even more leverage when building offers and during negotiations.) LOCK IN A RATE (OR NOT)—In the time it takes you to find a home and close your mortgage, the interest rate on your loan could fluctuate upward. If it looks like rates are heading up, lock it in. If rates appear to be falling, let it float. If your lender agrees to a lock, generate sure you apprehend it in writing. (Get the advice of your Realtor® or your mortgage broker. Their acquired skill and knowledge can really help you in this decision.) APPLY FOR AN FHA- OR VETERANS ADMINISTRATION-BACKED MORTGAGE—The Federal Housing Administration and the Veterans Admin-istration don’t actually generate loans, but they do guarantee loans offered through traditional lenders. With an FHA loan, you might put down as little as 3 percent, depending on the assessment of value of the property. VA loans almost always require no down at all, but they carry eligibility requirements based on service in the armed forces. NEGOTIATE THE POINTS—If you’re considering a large mortgage, your lender might be willing to lower the points charged to get your business. You lose nothing by negotiating. If you’re planning to stay in your home for less than five many years, lower your points paid by accepting a higher interest rate. If you’re sticking around longer, ponder more points against a lower mortgage rate. You pay higher costs up front but might save cash in the long run. Just remember there are three components to your mortgage loan: the interest rate, the points and the lender’s charges. WATCH OUT FOR PREPAYMENT PENALTIES—Make sure you won’t be penalized for paying off your mortgage ahead of schedule if you choose to do so. (When creating an additional payment above The smart buyer makes sure to understand exactly how much he or she might afford to borrow before initial to look at homes. —11— your regular mortgage payment, always be sure to specify that the additional amount is toward principal!) WATCH OUT FOR MORTGAGE PROTECTION INSURANCE—Some lenders might offer you mortgage protection insurance which will contruct your payments in case you die, become disabled or lose your job. Check around; you almost always can find the identical kinds of protection through your regular insurance agent at a lower cost. PRIVATE MORTGAGE INSURANCE (PMI)—Private mortgage insurance is required by the lender on loans with down payments of 10 percent or less. The cost might run from one-third of a percent to 1 percent monthly. Once your equity reaches 20 to 25 percent, you could be able to cancel your insurance. While some look at this required insurance as a nuisance, without it, there wouldn’t be loan options with only 3% down or 5% down—all loans would most definately require the more restrictive 20% down. CONSIDER THE BENEFITS OF AN EARLY PAYDOWN—There are several benefits to accelerating the payments on your mortgage. Every more dollar you put into your mortgage might save you up to three dollars down the line in interest savings. You’ll make equity in your home more quickly, which puts you in a better position to trade up in a shorter measure period. It also forces you to save denero you might otherwise spend rather than invest. But build sure you verify with your lender that there won’t be a prepayment penalty. Accelerating your monthly payments won’t save much if you’re in your home for only a few years, but for longer-term situations it makes a lot of sense. (If you refinance your home, you might ponder this option: Continue to pay your old mortgage rate instead of your new one—stipulating, of course, that the excess funds is to pay off principal. By doing this, you will pay off your loan sooner and save tens of thousands of dollars.) The affordable lending boom In the past few decades , lenders have come to realize that they may safely generate loans to many people who previously didn’t believe they could qualify for a home mortgage. A recent national study by the Consumer Bankers Association showed that 96 percent of the 130 institutions surveyed have cut their down payment requirement—the single biggest obstacle to home ownership for many Americans. Where once a 20 percent down payment was the standard, today 5-, 3- and even zero-percent downs have become commonplace. Loans up to 90, 95 and even 97 percent of the purchase price are quite common today. Accelerating your monthly payments won’t save much if you’re in your home for only a few years, but for longer-term situations it makes a lot of sense. Make sure you won’t be penalized for paying off your mortgage ahead of schedule if you choose to do so. —12— Lenders have also adopted much more lenient standards in terms of debt-to-income ratios. The standard 28 percent has moved up to 33 percent, and even as high as 38 percent in some programs. In addition, lenders are more flexible in their assessments of creditworthiness, employment histories and other factors that used to result in rejection for many. The point is simple—there’s never been an easier measure to qualify for a mortgage. There’s enough understanding out there on mortgage loans to fill several books. But I hope this provides you with a workable general overview of what to look for and what to expect as you shop for the best home loan. Please feel costless to call me if you would like further explanation on any of these topics, or if you have any questions at all regarding real estate. I simply see my mission as striving to be as helpful as possible to area home buyers and sellers.

There’s enough information out there on mortgage loans to fill several books. But I hope this provides you with a incredibly successful general overview of what to look for and what to expect as you shop for the best home loan.

Please feel free of price to call me if you would like further explanation on any of these topics, or if you have any questions at all regarding real estate. I simply see my mission as striving to be as helpful as possible to area home buyers and sellers.

Sincerely,

Sean L. Spencer http://www.SeanLSpencer.com 866-383-0707