MORTGAGES

Few people can buy a home for cash. This means virtually all buyers finance their home purchase. The idea behind financing your new home should be to get the loan that is right for you. You should get the loan that comes with the best terms for your personal situation. A home is one the single largest purchases you will make in your lifetime. Careful preparation will make a significant difference in your finances and give you an enjoyable home buying experience.

Today, you have a wide assortment of mortgage options to choose from. Paying attention to even the smallest factors in the way you structure your loan can save you literally thousands of dollars.

Mortgage payments are made up of a principal (the amount borrowed) and interest (the cost of borrowing the money). During the lifetime of a mortgage, you pay literally thousands of dollars in interest. Typically over 30 years you pay back double what you borrow.

There are several ways to minimize the amount of interest you pay:

• Larger Down Payment: There will be less interest because you borrow less.


• Shorter Loan Period: Although the payment will be higher you will pay less interest the shorter the loan period


• Use points to buy lower rates: Points represent 1% of how much you borrow. You can give a lender 1% of the loan amount to save around .25% to .375% in interest rate. The small up front fee will save thousands more than the cost over the life of the loan


• Accelerated Payment Schedule: If you make bi-weekly payments you will make 1 extra payment per year. This usually reduces the loan term from 30 years to 22.5 years.


• Additional Lump Sum Payments

Different Kinds of Mortgages

There are four types of conventional mortgages. Fixed Rate, Short Term Fixed, Adjustable and the Flex Pay Adjustable.

Fixed Rate Mortgages

Loans that have interest rates and payment that remains the same for the life of the loan. This offers you the security of knowing your mortgage payment will never change. However, typically the lender sets the interest rate on a fixed rate mortgage higher than that on an adjustable rate mortgage (ARM). Therefore, you may not qualify for as high of a loan amount as you would under an ARM. Fix Rate Mortgages are usually 30 or 15 year terms.

Short Term Fixed Mortgages

Loans that have a fixed rate and payment for a certain period and then become adjustable. These fixed rate periods usually range from 3 to 10 years.

Adjustable

Whit this type of mortgage, the interest rate on your loan will adjust according to the index. Adjustments in the interest rate will occur at regular intervals, ranging from monthly to once a year. ARMs may have an annual payment cap, as well as an adjustment and maximum interest rate cap.

ARMs can allow you to afford a bigger mortgage. If you know your income will be rising or know you will be selling the house in less than five years, ARMs may be a good option for you. Also, if rates begin to fall, you do not need to refinance in order to see your payments go down; they will automatically be recalculated at the new, lower rates.

However, with an ARM, your payment and interest rate can go up significantly during the life of the loan, even with caps in place. The initial rates are usually lower than market rates, so when you receive your first adjustment, it can be quite a change, especially since the caps don't always apply to the first adjustment.

Flex Pay (Option ARM) Adjustable

Loans that have interest rates and payments that change based on an index. They also have multiple payment options based on certain loan features. These loans have a potential for negative amortization in which one of the payment options allows for a payment less than the interest due, therefore increasing the amount of the principal balance owed.

Pre-Approval for a Mortgage

Before discussing mortgage options with your lender, you should also assess what monthly dollar amount fits your budget comfortably. By working with your mortgage officer you can determine the price range of homes you want to investigate based on a realistic monthly payment.

Get Pre-Approval for a Mortgage Before You Go Looking for a New Home.

A pre-Approval carries much more weight when looking for a new home. With a Pre-Approval, the lender approves the amount of your mortgage and gives you written confirmation or a certificate for a fixed time while you are looking for your new home. When you are Pre-Approved the lender has verified everything you have told them. The Pre-Approval is usually valid for up to 90 days.

It is strongly advised that you start the mortgage process well before bidding on a home. You will find the programs that will best meet your needs and how much you can really afford. It also prevents rushing into a financing or purchasing decision that isn't in line with your wish list.

A Pre-Approval letter demonstrates your financial strength and shows your ability to complete the purchase. Owners rarely accept offers that do not come with a Pre-Approval since they don't want an offer that is likely to fail because financing cannot be obtained.

** There is generally NO FEE for a Pre-Approval**

When applying for a Pre-Approval you will have to provide information such as:

• Employment information
• Income
• Assets
• Liabilities

When you are in the home buying process you will be asked to verify all the information you provided for the Pre-Approval with documentation such as:

• Paycheck stubs
• Tax Returns
• W2’s
• Bank account statements
• Divorce decree
• Proof of insurance
• Other documentation