Mortgages
Probably one of the reasons that buying a home is such an emotional experience is because of the fact that not only do you have the actual house buying to deal with, but for most home buyers you also have the mortgage process to encounter. This can be a smooth and almost uneventful process, or an unnerving one. A great deal depends on the preparation of the buyer as well as the selection of an efficient mortgage company.
Need more information? Read on...
What is Prequalification? Does it mean that the loan is approved?
Prequalification is the initial step in securing a mortgage. A lender will analyze your current income, debt and basic credit history situation in order to qualify you for a maximum loan amount. This gives you a clear picture of your financial parameters and a maximum housing price (the mortgage amount plus your down payment). See the discussion on mortgage prequalification for more information. A certificate of prequalification does not mean that the mortgage loan is approved (that cannot occur without verifications of all information relating to income and debt, an appraisal of the property and a title search).
How much down payment?
One of the first questions that home buyers ask is "how much down payment are we going to need?" Unfortunately, there is no standard answer. Down payments will vary from 0% (with a VA--Veteran's Administration loan) to upwards of 25% (with certain "non-conforming" loans). As an average, most home buyers make down payments in the 5%-15% range, although your own personal situation may dictate more or less down payment.
What a Mortgage Payment Consists of
1) Principal: The repayment of the original amount borrowed on a monthly basis.
2) Interest: The cost of borrowing the principal amount, repaid on a monthly basis.
3) Taxes: Real Estate taxes paid to a local government agency.
4) Insurance: Homeowners insurance on the home. Also any mortgage insurance, which is paid to protect the mortgage company.
The total of these items is known as the PITI (Principal/Interest/Taxes/Insurance) payment.
Types of Mortgages
Fixed: A fixed term (for example, 15 or 30 years) as well as a fixed interest rate. The interest rate and term are fixed at the start of the mortgage. The monthly amount for the payment of principal and interest will not change during the term of the mortgage.
Adjustable: Often referred to as an ARM (Adjustable Rate Mortgage). The interest rate on your mortgage will be adjusted up or down according to current interest rate levels. The monthly amount for your principal and interest payment will go up or down with these rate changes.
ADVANTAGES AND DISADVANTAGES OF FIXED and ARM MORTGAGES
| Advantages Fixed |
Advantages ARM |
| Since you know what your payment will be for the life of the loan, you can budget more easily. |
Lower initial interest rate and therefore lower monthly payment. |
| No possibility of an interest rate change making your mortgage payment suddenly unaffordable. |
If interest rate declines, your payment will also decline.
|
| No anxiety over interest rate fluctuations. |
Easier to qualify for due to lower interest rate and payment amount. |
| Disadvantages Fixed |
Disadvantages ARM |
| More income needed to qualify because of higher initial mortgage rate. |
If interest rate increases, your payment will also increase. |
| If interest rates decrease appreciably, it will be necessary to refinance to get a lower payment. |
A large increase in interest rates--and payment--could make your house unaffordale. |
Comparing Terms
Always make a comparison between a 15 year term payment and a 30 year term payment. The difference is often suprisingly smaller than anticipated. The savings over the term of the loan, however, can be substantial. For example, comparing a 15 year term to a 30 year term, $100,000 mortgage at an 8 1/2% fixed rate yields the following results.
| |
15 year |
30 year |
| Principal and Interest Payment (per month) |
$985 |
$769 |
| Total paid over term in P&I |
$177,300 |
$276,840 |
| Total interest over term |
$77,300 |
$176,840 |
15 Year 30 Year
Total paid over term in P&I $276,840
Total interest over term
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