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Info on mortgage rates - Mortgage Basics (FAQ)
found Tuesday, 08 April 2008 at
macedoniaonline.eu
Financing the American Dream
Buying a home is the biggest financial investment most of us will ever make. As
with any large project or goal, it requires dealing with a variety of complex
issues. The best approach is to divide the process into manageable tasks. The
following deals with the first steps of gathering your records, determining what
you can afford, and understanding mortgage options.
2 Put Your Own Financial House in Order
Before you go looking for a home, you should determine how much home you can
afford. Most lenders will prequalify you to borrow up to a certain amount.
Prequalification allows you to focus in on a realistic price range and makes you
a more attractive buyer. Whether or not you want to prequalify, eventually
you'll need to complete a loan application and it may take some time to gather
and assemble the required information.
It's also a good idea to review your credit report. Contact local lenders to
determine which credit bureaus they use. Then contact the credit bureaus and
request a copy of your credit report (in most states, credit bureaus are
required to provide individuals with a free copy of their report). Review your
report to ensure that all information is correct. If you have past credit
problems, don't lose hope. Be prepared to present a rationale for each slipup,
and demonstrate an improvement in your ability to pay bills on time.
3 How Much Mortgage Can You Afford? Get info on rates
The Federal National Mortgage Association (Fannie Mae) is a government-sponsored
organization that purchases mortgages from lenders and sells them to investors.
Two income-to-debt ratios established by Fannie Mae are standard requirements
for conventional mortgages. The first requirement is that monthly mortgage
principal and interest payments (P&I), plus insurance and property taxes,
cannot exceed 28% of the buyer's gross monthly income (some exceptions may apply
to increase this limit to 33%). The second requirement limits total monthly debt
payments (housing, credit cards, car payments, etc.) to 36% of gross monthly
income. In addition to these requirements, you may have to pay 10% to 20% down
on the total purchase price to qualify for a conventional mortgage.
| Mortgage Rates and Minimum Incomes Needed to
Qualify |
| Interest Rate |
Monthly Payment |
Minimum Annual Income |
| 4% |
$454 |
$21,770 |
| 5% |
$510 |
$24,479 |
| 6% |
$570 |
$27,340 |
| 7% |
$632 |
$30,338 |
| 8% |
$697 |
$33,460 |
| 9% |
$764 |
$36,691 |
| 10% |
$834 |
$40,017 |
| 11% |
$905 |
$43,426 |
| 12% |
$977 |
$46,905 |
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Mortgage companies use ratios to analyze your mortgage payment. The above
example shows the monthly payments of principal and interest, and income needed
to qualify for a $95,000 mortgage at various interest rates, amortized on a
30-year schedule, assuming a payment ratio of 25%.
Source: National Association of Home Builders, Economics Division.
4 Types of Mortgages
How much house you can buy also depends on your mortgage's term and interest
rate. The term is the length of time (usually 15 or 30 years) over which
payments will be paid. The rate can be fixed (meaning it doesn't change over the
loan's term) or adjustable (it fluctuates with market conditions). Thirty-year
fixed-rate mortgages remain the most popular. The longer term lowers the monthly
payment, while the fixed rate provides stability over the life of the loan.
Given relatively low interest rates, these mortgages are attractive to buyers
planning to stay at least six or seven years in their new home. The drawbacks
are low principal payments in the early years, and the risk that market rates
will decline over the term. However, if your credit history is sound and you
have sufficient income, you can usually refinance your mortgage when rates
decline.
A 15-year term lowers the interest rate, reduces total interest payments, and
increases principal payments. But it also increases monthly payments. If you
can't afford the higher payments now, you might opt for a 30-year mortgage. If
there are no prepayment penalties, you can make additional principal payments as
your income increases. Making just one extra monthly payment a year will pay off
a 30-year mortgage in less than 22 years and can save tens of thousands of
dollars in interest costs. If you plan to stay in a home no more than three
years, you might want an adjustable-rate mortgage (ARM). ARMs offer initial
rates that are lower than fixed mortgages. At some point, usually after the
first year, rates are tied to market conditions and are subject to potential
rate increases. Most ARMs include a cap on rate increases in any given year, as
well as over the life of the loan. Some ARMs offer initial rates at least 2%
below fixed rates and limit increases to 1% annually and 5% to 6% over the life
of the loan. Many home buyers are attracted by the affordability of an ARM
during the initial period. However, you should be confident that your future
income will be sufficient if both interest rates and your monthly payments
increase.
Another popular mortgage involves a balloon payment. A balloon is a lump-sum
payment that pays off the loan in full after a fixed period of time. Generally
the rates on balloon mortgages are 1/4% to 3/4% less than on 30-year fixed
mortgages, but during an initial period of between 3 and 15 years, payments are
similar. After this period, the remaining outstanding principal balance is
either due in full or subject to refinancing. This is a good option for home
buyers who plan to sell before the final payment is due. But because property
values fluctuate, you may not be able to sell when you want. You may also face
higher payments if you are forced to refinance at a higher rate, and there is
also a risk that you may not be in a position to refinance when the balloon
becomes due.
Three Steps to Finding the Right Mortgage
1. Estimate how long you expect to live in the house. If the answer is less than
three to five years, consider an Adjustable Rate Mortgage (ARM), which typically
starts out with a lower rate. If you plan to live in your new home longer than
five years, a fixed-rate mortgage offers protection against rising interest
rates.
2. Shop around for mortgage rates. Banks, credit unions, and mortgage companies
all offer mortgages. Compare at least six lenders in your area.
3. Add up all the costs for each lender. Include fees, points, closing costs,
etc., to arrive at the total mortgage cost for each lender.
5 Interest Rate Points
Points are interest paid in advance to reduce the rate on a loan. One point is
equal to 1% of the mortgage amount. The general rule is that 1 point is worth
1/8 of 1% off the loan rate. The decision to pay points for a lower rate is
based on how much the seller is willing to contribute to points, how long you
plan to stay in the house, and how important lower payments are compared to
higher closing costs. You will need to calculate the long-term value of points
based on these factors, keeping in mind that points are generally tax deductible
in the year paid.
6 Other Alternatives
If you cannot afford a conventional mortgage, there are a variety of
alternatives. An anxious seller will sometimes offer owner financing. Federal
Housing Administration (FHA) loans offer down payments as low as 3%, but may
require the buyer to purchase mortgage insurance. (The FHA is a government
agency responsible for insuring affordable housing mortgages.) The Veterans
Administration (VA) offers no-money-down mortgages to qualified veterans of the
U.S. military. Finally, there are local affordable housing advocates that offer
low-cost, low down-payment loan alternatives. For further information, contact
the FHA, VA, Fannie Mae, or your local mortgage lender or real estate broker.
Summary
* The first step in acquiring a home mortgage is to gather the information
you'll need to include in a mortgage application.
* Review your credit report by ordering a copy from the credit bureaus
used by local mortgage lenders.
* Prequalifying for a mortgage lets you know how much you can afford and
makes you a more attractive buyer.
* Conventional mortgages limit housing costs to 28% of gross income and
total debt payments to 36% of gross income.
* Mortgage terms are usually 15 or 30 years. The longer the term, the
lower your monthly payment, but the higher your overall interest costs.
* Thirty-year loans often permit additional principal payments. One
additional monthly payment per year will reduce a 30-year loan to 22 years.
* Interest rates are fixed or variable over the term of the loan.
Variable rates may be best for buyers who plan to sell within three years.
* Generally speaking, one point is worth 1/8 of 1% off the loan rate.
* A balloon payment is a lump sum payable at the end of a specified term.
* Points and interest on mortgages or home equity debt are usually tax
deductible.
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Rates are at historic lows!
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