Top 10 Mortgage Tips

1. What factors will the lender consider when I apply for a mortgage?

While lenders may consider many different factors, a few are among the most important. The first of these is your income and expenses. Lenders need to know how much money you have available, and what other expenses your income must cover, in order to decide how much you can afford to pay for your monthly mortgage. Secondly, your credit will be a factor. While having late payments in your credit history will not necessarily disqualify you from securing a mortgage, they may decrease the options you will be able to choose from among available plans. The lender is interested in this information in order to determine how likely you are to repay your mortgage obligation. Thirdly, the property you are considering will be an important factor in securing your mortgage, because the property itself will serve as physical collateral for your mortgage in case you fail to repay it. And lastly, you will need to consider whether you have the current available assets needed to cover the expenses involved in buying a home.
 

2.  Will I be able to buy a home if I have a bad credit history?

Your credit history is an important factor under consideration when you apply for a loan, but it isn't the only factor. Many mortgage lenders have special programs available for people who have had credit problems in the past. While those who have always paid debts on time will probably be able to get better rates and more options than someone with less-perfect credit history, it is often possible for those with problems in their credit history to secure home loans as well.

3. What kind of down payment will I have to come up with?

With today's wide range of financing options available, there is not really a set amount required when buying a home. Sometimes it is possible to buy a home with little or even no down payment. If you are unable to make a substantial down payment when buying a home, you will want to consider this factor and the options available from the lender you are considering when choosing a mortgage lender. However, be aware that a lower down payment can add up to sizeable increased costs for you, in the form of considerably higher interest costs in the long term, higher insurance costs, etc.

4. How much will my closing costs be?

Closing costs include a number of items, some of which may be possible to negotiate with the seller as part of the contract to be paid, in full or part, by the seller. However, certain costs relating to the loan itself are more likely to be your own responsibility. Some of the fees will probably include such items as

a) expenses paid to the loan company as part of the lending process, such as a fee to check your credit report, appraisal of the property, and any "points" (see below for explanation of these)

b) expenses paid for services outside of your mortgage company, such as title insurance and possibly attorney's fees

c) prepaid expenses, such as insurance premiums for the property, pre-paid interest (if any), and escrow required

5.  What are discount points, and should I pay them?

Discount points are an amount paid to the lender at closing which lower your interest rate. Each "point" is 1% of the total loan amount, and your interest rate will decrease based on the number of points you pay.

Should you pay for discount points? That depends. You need to know how long you plan to keep your mortgage. First, find out how much your monthly payments will decrease if you decide to pay the points. Then, divide the amount you have to prepay by the monthly savings in order to calculate how many months it will take to break even. If you will save the amount of the points in 60 months and you plan to keep the mortgage for much longer than that, then paying for the discount points may be a wise decision.

6. Is a fixed-rate or an adjustable-rate loan a better choice for me?

Again, the answer depends. If you choose a fixed-rate mortgage, your interest rate will always be the same and your payments will remain close to the same amount through the entire term of your loan. If yours is an adjustable-rate mortgage (ARM), your interest rate will be recalculated regularly (generally once a year) and will fluctuate depending on the market. Usually, the ARM has an initial period during which the rate will remain fixed (this initial term can vary anywhere between a few months to as many as ten or more years) and after that the rate will begin the cycle of regular adjustment.

If you are planning to keep your mortgage for a long time and rates are relatively low when you buy your home, a fixed rate will probably be the best option for you.

If you are planning to sell your home (or refinance your mortgage) before the rate adjustments of an ARM begin, or if the rates are relatively high and likely to drop considerably in the future, you may want to consider an ARM instead.

7. What about locking the rate?

When you "lock" the interest rate, this means that you can choose to have the current rate guaranteed as your interest rate even if you are not ready to close your loan. Usually the loan can be locked for at least 30 days before closing, sometimes 60 days, and often there is an option to extend that time if necessary with payment of a fee. The problem is that if you lock the rate, and the rates fall, your rate will be higher. However, if you can lock at a lower rate before rates rise, you could have an advantage. Knowing when/whether to lock is impossible to predict perfectly. You can talk to a financial advisor about current predictions, or keep up with announcements made by the Federal Reserve Board, whose policies affect mortgage and other interest rates.

8. What will be included in my mortgage payments?

Generally, your monthly mortgage payment will be divided among these item:

a) Interest - the cost paid to the lender for the borrowing of the money (in the beginning of your mortgage, most of the payments will be applied to interest, which will gradually decline until it is a much smaller percentage of the total in the last few years)

b) Principal - which will be applied to the balance of the loan and go towards paying off your debt (in the beginning, this amount will be very small, but will gradually increase to a much higher percentage  in the later years and give you much more equity later)

c) Insurance - which is generally required by the lender and protects their interest in the home as well as the homeowner in case of loss, and must be prepaid

d) Property taxes (and sometimes other local taxes) to be paid to the local government. These can often be decreased by applying for available exemptions.

9. What is pre-approval?

Pre-approval involves applying for a loan and being approved by the lender before you choose a home. This is the same as a typical mortgage application process, except that the property itself is not considered. It will probably be dependent on certain qualifications of the home itself (such as appraisal value, and whether it lies in a flood zone) before closing. The advantage is that sellers know that you are serious about your inquiry and able to purchase the home, which may make them more willing to offer a better price or conditions of sale.  You also know ahead of time exactly how much you are able to spend and won't waste your time looking at homes that you will not be approved for in the end.

10. What is Private Mortgage Insurance?

Private Mortgage Insurance (PMI) is often required if the amount of the mortgage will be more than 80% of the home's appraisal value. The lender needs to make sure they will be able to recover their investment if anything happens that makes you unable to repay the loan. Some mortgage companies offer programs which combine your mortgage with equity financing in order to bypass the need for PMI.