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Let’s begin with the key players
in the financing game.
YOU
All lenders look at your income, your income potential (as evidenced by your
tax returns for the previous two years), your credit history and your assets.
Once they go over your financial picture and generate what’s known
as a credit score (800 is perfect: anything over 680 is good), they’ll
pre-qualify you for a loan amount and specify the mortgage and interest rate.
None of this information is disclosed to me, except your letter of pre-approval
from the lender.
LENDERS OR MORTGAGE BROKERS
All lenders are in the business to make money. That’s why they offer
a million kinds of mortgages, with all kinds of points, fees, penalties and
closing costs. The difference between a mortgage broker and a primary lender
is simply that the mortgage broker is an independent agent that you hire to
obtain the loan for you. They also have access to many more kinds of loans
(nationwide) than a primary lender.
Mortgage brokers make their money, just like primary lenders, by taking a percentage
(or points) of your loan. Sometimes, these points are tax deductible, but not
always. You should check with your accountant.
The key to selecting a mortgage broker or a primary lender is to pick one that
sees you as a Person---not just a collection of forms and numbers. You want
to find a lender or a mortgage broker who will find you the best, and most
appropriate, loan based on your situation. Ask around, shop in person, check
references, ask us and don’t lose your head over teaser rates, discounts
or other promotions.
There are essentially three types of
mortgages. What’s important is to select a mortgage
that fits your long-term goals. Will you move in less than
five years? Will you stay in your home for 15 or 20 years?
Is your income going up, or down? Can you make a big down
payment?
FIXED RATE
A fixed rate mortgage has one interest rate that never changes. The monthly
payment is always the same.
GOOD: Predictable monthly
payments. Extra payments significantly reduce the cost of
the loan.
BAD: Harder to qualify
for. Higher interest rate. May not be the best choice for
frequent movers.
VARIABLE RATE (ARM)
Different interest rates are used throughout the loan to calculate the monthly
payment. Rates are tied to an index of the cost of money in finance markets.
Your interest rate is the total of the index plus the lender’s profit
margin.
Good: Lenders often
have a “teaser rate” that reduces the initial
cost of the loan to you, but increase the rate later. Look
for a low margin ARM. Can be good for short-term owners.
BAD: Unpredictable payments.
Negative amortization (meaning additional interest above
your capped monthly payment is added to the loan balance
and you could end up further in debt).
MIXTURE OF BOTH
Mortgages begin as a fixed rate and change into an ARM after a specified period;
or a fixed rate mortgage that sets out two interest rates for successive
periods.
Good: Interest rates
fall between ARMs and fixed-rate mortgages; can be easier
to obtain.
Bad: Balloon payments
can be awe-inspiring. Make sure the terms fit your long-term
plans.
DOWN PAYMENTS
It’s not easy to come up with 20 percent down on a $650,000 house. That’s
$130,000 cash, plus closing costs and points – and that can easily stack
up to $150,000.
That’s why many people consider
the following schemes:
90 – 10 DEALS
You put down 10 percent plus the closing costs. The lender finances the other
90 percent. You’re subject to the dreaded PMI (private mortgage insurance),
which varies according to the type and amount of loan you get. It runs 0.5-0.75%
of the loan amount for the first year of the loan. PMI doesn’t go away
until your equity increases to at least 20 percent.
80 – 10 – 10 DEALS
Another means of putting down a smaller down payment is to do an 80-10-10 deal.
Simply put, you obtain a traditional, 80 percent first mortgage, plus an
additional home equity loan (also known as a second mortgage) for 10 percent.
This second mortgage allows you to avoid PMI, but rates are a little higher
(between 9-11 percent). This way, you only need to come up with just 10 percent
of the purchase price plus closing costs.
We have long-standing relationships with
several loan representatives, please contact
us and we will be happy to refer you to someone trusted
to help you secure a loan that suits your needs.
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