Mortgages

Shopping for a mortgage Types of Mortgage Loans Fixed rate loans (click Here) Adjustable rate loans (click Here) Mortgages that combines fixed and adjustable rates (click Here) Seller assisted loans (click Here) Your rights as a borrower Mortgage Terminology

SHOPPING FOR A MORTGAGE LOAN

How large a mortgage do you qualify for?

That depends upon your income and the cost of your new house. Lenders use certain guidelines to determine the mortgage amount that they will lend any one homebuyer. The two guidelines used are housing expenses and long term debt. Lenders generally say that housing expenses (including mortgage payments, insurance, taxes and special assessments) should not exceed 25 percent to 28 percent of the homeowner's gross monthly

Conventional Loans

• Housing Expenses = 25% - 28% of gross monthly income
• Housing Expenses Plus Long-Term Debt = 33% - 36% of gross monthly income

Lenders usually define long-term debt as monthly expenses extending more than 10 months into the future. These expenses should not exceed 33 percent to 36 percent of the homeowner's gross monthly income. VA and FHA mortgage lenders define long-term debt as monthly income. Your lender will work out these figures for you when discussing the mortgage you want.

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What types of loans are available?
Although you may see many different types advertised, they all belong to just two families: mortgages that carry fixed interest rates (see separate entry), mortgages which carry rates that change during the course of the loan on a periodic schedule mutually agreed you and your lender (see separate entry). There is a now a third type, combining both adjustable and fixed rates: "Mortgages that change".
How Do You Shop Most Effectively For A Mortgage?
There are several ways:

1. First, ask me. Lenders regularly email me with rates and financing packages.
2. Look for rate surveys published by your local newspaper. Many American papers now include brief tables on interest rates and mortgage availability in their real estate or business section. They can help guide you to sources you have not thought about.
3. Search on the Net
4. Search the Yellow Pages under "Mortgages," and shop for quotes by telephone. Call five to 10 different lenders for rates and terms on fixed and adjustable loans.

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How to evaluate different loans
One important method is by bearing in mind that mortgage packages consist of more than interest rates. They consist of a quoted rate, plus discount points (pre-paid interest assessed by the lender at settlement, or the meeting when the property legally changes hands) and other fees, plus a full range of terms including adjustable versus fixed-rates, low down payment versus high down payment, the presence or absence of prepayment penalties, and many other features noted earlier in this guide.

One way to evaluate rates, however, is by examining the Annual Percentage Rate (APR). The APR can help you compare different types of mortgages. It indicates the "effective rate of interest" paid per year. The figure includes discount points and other charges and spreads them out over the life of the loan. While the APR provides you with a common point for comparison, look at the whole product before deciding which mortgage to get. Pick the one with the rate, payment schedule and other terms that suit your situation best.

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Types of Mortgage Loans

Fixed rate loans   |   Adjustable rate loans
Combines fixed and adjustable rates   |   Seller assisted loans

Fixed rate loans

FIXED RATE MORTGAGES

You are probably familiar with a fixed-rate mortgage. Your parents more than likely had one, as did their parents before them. The major advantage of fixed rate mortgages is that they present predictable housing costs for the life of the loan. Some fixed-rate mortgages you will probably hear about are:

• 30-year fixed-rate mortgages
• 15-year fixed-rate mortgages
• Bi-weekly mortgages
• "Convertible" mortgages

30-year mortgage
When people thought of a mortgage 10 to 50 years ago, they thought of a 30-year fixed-rate mortgage. This traditional favorite is not the only choice nowadays because volatile financial times created a whole new range of selections. However, the 30-year fixed-rate mortgage may still be the best mortgage for your circumstances. It offers the lowest monthly payments of fixed-rate loans, while providing for a never-changing monthly payment schedule. Some lenders offers 25, 20, and even 40-year term mortgages as well. But remember, the longer the term of the loan, the more total interest you will pay.

15-year mortgage
The 15-year fixed-rate mortgage allows homeowners to own their homes free and clear in half the time and for less than half the total interest costs of the traditional 30-year loan. The loan's term is shortened by the 10 percent to 15 percent higher monthly payments. Some homebuyers prefer this mortgage because it allows them to own their home before their children start college. Others prefer it because they will own their home free and clear before retirement and probable declines in income.
The major disadvantages or the 15-year fixed-rate mortgage are the sometimes higher monthly payments. But if saving on total interest costs and cutting to the free and clear ownership are important to you, the 15-year fixed-rate mortgage is a good option.

Bi-weekly mortgage
The bi-weekly mortgage shortens the loan term to 18 to 19 years by requiring a payment for half the monthly amount every two weeks. The bi-weekly payments increase the annual amount paid by about 8 percent and in effect pay 13 monthly payments (26 bi-weekly payments) per year. The shortened loan term decreases the total interest costs substantially. The interest costs for the bi-weekly mortgage are decreased even further, however, by the application of each payment to the principal upon which the interest is calculated every 14 days. By nibbling away at the principal faster, the homeowner saves additional interest. Remember, however, that you trade lower total interest costs for fewer mortgage interest deductions on your federal income tax. Your ability to qualify for this type of loan is based on a 30-year term, and most lenders who offer this mortgage will allow the homebuyer to convert to a more traditional 30-year loan without penalty. Availability is limited on this mortgage, but it can be worth looking for.

Balloon mortgages
Balloons, as they are known, are usually offered as short-term fixed-rate loans. The balloon payment mortgage gets its name from the payment schedule, which involves smaller payments for a certain period of time and one large payment for the entire amount of the outstanding principal. They have terms of 3, 5, and sometimes 15 years, though payments are usually calculated as though it were a 30 year loan. Sometimes a balloon will be offered as a second mortgage where you also assume the homeowner's first mortgage.

The major disadvantage with a balloon payment loan is that it may be difficult to save up the money to make the final large payment (often the entire amount of the principal) while paying interest on the loan. Some lenders guarantee refinancing, though the interest rate is usually adjusted when the principal comes due.
If you cannot refinance, you may have to sell the property if you cannot meet the large payment. Balloons are an advantage if you plan on living in an appreciating house for a short period of time and want to pay less while you live there.

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Adjustable rate loans

ADJUSTABLE RATE MORTGAGES

Adjustable Rate Mortgages (ARMs) have become one of the most popular and effective tools for helping some prospective homebuyers achieve their dream of homeownership. Developed during a time of high interest rates that kept many people out of the housing market, the ARM offers lower initial rates by sharing the future risk of higher rates between borrower and lender.

ARMs can be an excellent choice of financing under certain conditions, such as rising income expectations, high interest rates, and short-term homeownership. But because payments and interest rates can increase, either steadily or irregularly, homebuyers considering this kind of mortgage need to have the income to keep up with all possible rate and/or payment changes. Each ARM has four basic components

• Initial interest rate, which is typically one to three percentage points lower than that of most fixed-rate mortgages. Lower interest rates also make ARMs somewhat easier to qualify for. The initial interest rate is tied to certain economic indicators that dictate in part what the monthly payments will be.
  
• Adjustment interval, at the time between changes in the interest rate and/or monthly payment will be.
  
• Index, against which lenders measure the difference between what they are making on their investment in the mortgage and what they could be making on other types of investments. The most popular index is based on the rate of return on a one- year Treasury bill (also called T-bill).
  
• Margin, or the additional amount the lender adds to the index to establish the adjusted interest rate on an ARM. The margin is usually 1.5 percent to 2.5 percent.
  

In addition to the four basic components, an ARM usually contains certain consumer safeguards such as interest rate caps, which limit the amount that the interest rate applied to the payments may move. This prevents the amount of interest the consumer pays from rising higher than perhaps the homeowner can afford. For instance, a typical ARM would have a two percentage point cap over the life of the loan. That means that a loan with an initial interest rate of 9.75 percent would be able to go no higher than 14.75 percent over the life of the loan, and it would be able to move no more than two percentage points per year.

Another safeguard found on some ARMs are monthly payment caps that limit the amount homeowners need to increase their payments at adjustment time. Monthly payment caps can, however, sometimes prevent the monthly payments from increasing enough to keep up with the rise in the interest rate, causing negative amortization-resulting in higher or more payments for the homeowner later on.
Other options you should ask about when shopping for an ARM are:

• Assumability, or whether you may transfer the mortgage to a new homebuyer, usually with the same terms if the new homebuyer qualifies for the loan. ARMs are almost always assumable.
  
• Convertibility allows the borrower to change an ARM to a fixed-rate mortgage, usually at the end of some predetermined period, locking in a lower interest rate.
  

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Combines fixed and adjustable rates

MORTGAGES THAT CHANGE

2-step mortgage
Some newer mortgages afford homebuyers some the best qualities of the fixed-rate and adjustable rate mortgages. One new type of loan, often called a Two-Step, Super Seven, or Premier Mortgage, gives homeowners the predictability of a fixed- rate and adjustable rate mortgage for a certain time, most often seven or 10 years, and then the interest rate is adjusted to fit market conditions at that time.
The main advantage associated with this type of loan is that homebuyers often get a slightly lower than market rate to begin with. The main disadvantage is that they may see their interest rate go up by as much as six percentage points at the end of the seven-year period. The lender may also reserve the option to call the loan due with 30 days notice at that time, making this loan similar to a balloon mortgage in some cases.

Lenders offer this type of loan in part because research indicates that many homebuyers remain in the home for seven to 10 years before moving. For this type of homebuyer, the Two-Step or Super Seven loan present an excellent way of getting a fixed-rate loan at a better than market price for a fixed-rate loan at a better than market price for a fixed period of time.

Lender Buydown
Another type of mortgage that is becoming popular is called a Lender Buydown, where the homebuyer gets an initially discounted rate and gradually increases to an agreed-upon fixed rate over a matter of three years. For example: When the market rate is 10 percent, the fixed rate for the mortgage is set at about 10.5 percent, but the homebuyer makes monthly payments based on a first year rate of 8.5 percent. The second year the rate goes up to 9.5 percent, and for the third year through the remaining life of the loan, the rate is calculated at 10.5 percent. A second type of lender buy-down, called a Compressed Buydown, works the same way, but with the interest rate changing every six months instead of on a yearly basis.
The Lender Buydown gives consumers the advantage of lower initial monthly payments for the first two years of the loan when extra money may be needed for furnishings and, secondly, the advantage of knowing that, although the interest rate does change during the first three years of the loan, the interest is fixed from the third year on.

Convertible mortgages
These mortgages offer today's homebuyer the option to change the loan's interest rate after some period of time or some specified movement in interest rates.
Convertible fixed-rate mortgages are often referred to as the Reduction Option Loan (ROL) or, in some locations, the Reducing Interest Loan (RIL), or Reducing Interest Mortgage (RIM). This new type of loan offers homeowners the option of getting a loan that, under the right conditions, can be adjusted to a lower interest rate with a payment of $100 or $200 or so and a small loan amount-based fee, sometimes as little as one-fourth of a percentage point. These conditions usually are a prescribed movement in rates-typically two percent below the initial-during a set time limit-between months 13 and 59, for example.

On a 30-year fixed-rate mortgage with a reduction option, the homebuyer pays an extra 1/4 to 3/8 of a percentage point in the interest rate on the mortgage plus a 1/4 to 3/8 of 1% of the loan amount (points) at the time of closing. This allows the homeowners to adjust the interest rate on the loan without having to go through a refinancing, which could cost up to 5 percent or 6 percent of the loan amount, if the rates are right during the prescribed time limit.

Some homeowners may find the ROL a good "insurance policy" against the high costs of refinancing. Others may want the flexibility that refinancing offers - namely the ability to draw on built-up equity- that is not available with ROLs. The decision is up to you.

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Seller assisted loans

SELLER ASSISTED MORTGAGES

This type of financing, also called "creative financing" became popular when interest rates went to very high levels in the early 1980s. Seller-assisted creative financing usually means the seller of the home helps with the financing by underwriting all or part of the loan.

The advantage of this type of arrangement is that the mortgage usually carries a lower interest rate with lower monthly payments. The disadvantage is that the previous homeowner, not an institution, may hold the deed of trust. If the loan terms call for certain payment schedules, the buyer may have to seek new financing. Many homebuyers in recent years have found "creative financing" deals to be fraught with problems and useful only as short-term alternatives to mortgages from traditional lenders.

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YOUR RIGHTS AS A BORROWER

Throughout most of history, the concept of home-ownership has been one of great importance, shared by nearly all the people of the world. Because of the value that individuals, like you, place on home-ownership, there are many federal and state laws existing to support this concept.
Laws and regulations were created to protect your rights as a borrower in your quest for home ownership. Your loan officers will be more than happy to answer any questions and explain them in greater detail.

EQUAL CREDIT OPPORTUNITY ACT.
This regulation was created so that all creditworthy applicants would have credit available to them without regard to race, color, religion, national origin, sex, martial status, or age; whether an applicant's income, either all or part, is derived from public assistance; or whether an applicant has exercised any rift in good faith under the Consumer Credit Protection Act. The regulation prohibits any acts by creditors that would discriminate on the basis of any of these factors. This regulation also establishes your right to be notified by the creditor of any actions taken on your application.

HOME MORTGAGE DISCLOSURE ACT.
(HMDA) Regulation is intended to provide the public with information on lending practices which can be used to help determine whether financial institutions are meeting the housing needs of their communities to attract private investments where needed; and to discourage unsound and discriminatory lending practices.

FAIR CREDIT REPORTING ACT.
The purpose of this act is to ensure that credit reporting agencies use fair, accurate, and confidential reporting methods. This protects consumers against unfair and inaccurate credit status, the credit reporting methods. This protects consumers against unfair and inaccurate credit billing. If your loan is denied due to your credit status, the credit reporting agency must supply you upon your request, with the information upon which the denial was based.

REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA).
This act is intended to ensure that consumers throughout the country are provided with greater and more timely information on the nature of the costs associated with getting a mortgage loan. As a result of the act, federal regulations require that, within three days of your initial loan application, you will receive a disclosure of estimated settlement cost on what is known as a "Good Faith Estimate". RESPA was also created to eliminate kickbacks and referral fees that might increase settlement costs to the borrowers due to unnecessary settlement services. In addition, it is intended to regulate the amount of money borrowers are required to place in escrows for taxes and insurance.

TRUTH IN LENDING ACT-REGULATION Z.
This act requires creditors to disclose information to consumers about the conditions, terms, and cost of a loan. The regulation also ensures the right of a consumer to cancel some credit transactions involving a lien on the consumer's principal residence. The intent of this act is to help you better understand loan transactions, and to assist you in comparing loans offered by different lending institutions through use of common terminology such as "annual percentage rate" (APR), and "finance charge", to name a few.

STATE LAWS
In addition to the rights provided to you under federal law, each state has its own laws which protect consumers. These laws vary from state to state. You can ask your loan officer about any state-specific laws and the rights that are guaranteed by those laws

Christine Sutherland, Realtor®

BETTER SERVICE - LESS STRESS

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