Broker CA DRE No. 01481919
Agent CA DRE No. 01822319
Time spent shopping for a mortgage is time well spent. Before you rule out one loan or another, give some thought to your particular needs and wishes. Prequalifying before house hunting puts you ahead of the game. You already know the standard of mortgages for which you qualify. The message is simple: Shop for a loan, not a lender. Hunt for the best loan – interest rate, points, processing costs, etc. Don’t pay much attention to who’s originating the loan or where it is.
First, you should review the major kinds of mortgages you may encounter. This list doesn’t explain them all, but it does contain those you will most likely see.
Fixed-Rate Mortgage (FRM)
This is the standard mortgage model. It is the oldest and most easily understood type of mortgage. Its primary attraction is that the interest rate and the amount of payment remain fixed for the life of the loan, typically either 15 or 30 years. However, if rates fall, the holder cannot benefit from the new, lower rate except by refinancing.
Adjustable-Rate Mortgage (ARM)
With this kind of mortgage, the interest rate you pay rises and falls along with other rates charged throughout the economy. Therefore, you, the borrower, assume the risk of rising rates, and you stand to benefit should rates fall.
An essential question to ask about an ARM is whether there are limits on how much your rate can be raised, both at each review and over the whole term of the loanOnce a contract becomes binding, you probably will have to arrange for financing. Depending on the terms of the contract, the purchase of the home may be contingent on your being able to get financing at certain terms by a certain date.
Lenders
The Real Estate Professional might provide you a list of lenders. Most home buyers get loans through savings institutions and mortgage bankers and, to a lessor extent, from commercial banks, credit unions, or other private sources. In some cases, the seller may be willing to offer financing. Sellers often can offer a loan to a buyer at a competitive interest rate and attractive terms. Check on specifics.
Types of loans
In general, three broad categories of loans are available:
If you consider an adjustable rate mortgage, ask the lender to explain the terms fully. Ask about the interest rate cap; the maximum rate you will be charged no matter how high rates go in the market. Don’t confuse rate cap with payment cap. When the payment is not enough to cover interest, the excess interest is added to your principal balance, so your debt increases instead of decreases. Also ask about the index that will be used to calculate future interest rates and how index charges will affect your mortgage.
The true price of financing
When shopping for a loan, don’t judge the loan by the interest rate alone. Compare several items in the entire loan package, including:
Loan approval process
When you apply for a loan, the lender will ask about your finances. You will already have most of the facts and figures in the financial information you compiled earlier. The process can take several weeks.
From the lender’s viewpoint, approving the loan is only part of the risk; the other part is the property itself. The lender may require an appraisal to verify that the home is worth the loan as well as a physical survey to discover any encroachments on the property. Repairs may be required. Insurance must be purchased. Verifications of employment, deposits, and other matters must be obtained. Loan documentation and conveyances instruments must be drawn and approved. In addition, the title company must research the title and arrange for paying off any liens, taxes, and other costs. All these conditions and other conditions must be satisfied before a transaction can close.
Hazard insurance
As another protection, the lender may require insurance protecting the home against hazards such as fire and storms. (Flood insurance will most likely be required if the house is in the flood plain and would be a separate policy.) Hazard insurance may be included in a homeowner’s policy that covers other risks such as theft and liability. Even if not required by a lender, it is probably a good idea for you to seriously consider all types of insurance. Discuss these issues with your insurance agent. Without limits, known as “caps,” you’ll have no way to predict how much your rate (and thus your monthly payments) might change.
Convertible Option
FRM and ARM represent the primary options available to home buyers today. The convertible mortgage represents something of a compromise between the two. It is designed for those who want the advantages of the ARM, but also want to limit the risk of rising rates. Under this arrangement, the buyer starts out with an ARM, but has the option of converting to a FRM at specified points during the loan term. You may want to ask the lender these questions: When can you convert? How often can you consider the option? Are there any up-front fees involved? Will you have to pay more for an ARM with the conversion feature than for an ARM without it? Are there additional fees due if and when you decide to convert? Find out the lender’s conversion rate.
Graduated Payment Mortgage (GPM)
A fixed-rate GPM starts out with low payments, usually below that of a fixed-rate and possibly that of an ARM, but rise gradually (usually over five to ten years), then level off for the remaining years of the loan.
Growing-Equity Mortgage (GEM)
This option is designed for borrowers who want to pay off their mortgage as soon as possible. Therefore, the interest rate remains fixed, but the amount of the monthly payment increases according to a prearranged schedule, with the higher payments going to reduce the principal balance. This mortgage can be appealing to someone who is expecting regular income growth and wants to build equity quickly.
Fifteen-Year Mortgage
Like the GEM, the fifteen-year mortgage enables borrowers to repay their loan more quickly, which means they build equity faster and pay less interest over the life of the mortgage.
Biweekly Mortgage
Another option for people who want to repay their loans sooner is the biweekly mortgage. Instead of making a single mortgage payment each month, borrowers who choose this option make two equal payments monthly.
Federal Housing Administration Insured Loans (FHA)
Should one fail to pay, FHA insures mortgage loans made by approved lending institutions. The FHA insures a variety of mortgages, including FRMs, ARMs, GEMs and GPMs. Down payments are low – 5 percent or less. The FHA doesn’t set the interest rate on loans it insures, so you’ll need to shop around for the best rate.
The FHA limits the amount it will insure to whichever is less: 95 percent of the local average home price or 75 percent of the loan limit set by the Federal Home Loan Mortgage Corporation, a large buyer and reseller of mortgages.
Veterans Administration Guaranteed Loans (VA)
VA loans have most of the advantages of FHA loans, and then some, but they also have eligibility restrictions. They are available only to veterans of the armed services, those currently in the service and their spouses. VA loans are typically half a percent or more below market rates, and they can be obtained with no money down.
I welcome your questions and feedback. Please use the form below to correspond via email. For a more immediate/personal response, please feel free to reach me via phone or text at (619) 504-1857.
Coldwell Banker West
4538 Bonita Road
Bonita, CA 91902
Phone: 619-504-1857
Fax: 619-270-9874
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Coldwell Banker West
4538 Bonita Road
Bonita, CA 91902
Phone: 619-504-1857
Fax: 619-270-9874
Broker CA DRE No. 01481919
Agent CA DRE No. 01822319
REALTOR®
A Registered collective membership mark that identifies a real estate professional who is a member of the National Association of REALTORS® and subscribes to its strict Code of Ethics.
© 2016 Sarah Heck Homes. All Rights Reserved.
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