Choosing a Mortgage:
Choosing among the many houses that may be available is hard enough--then you need to make a choice
from the myriad of mortgages that are offered in today's market. So many decisions! Take heart, though,
since although there are literally hundreds of different mortgages available, they all fall into only a few basic
varieties. Some may fit perfectly into your situation, others may be unwise or unattainable. By narrowing your
choices, the process of picking the right mortgage becomes much easier.
Fixed Rate or Adjustable
One of your first decisions should be between a fixed rate (the interest rate remains constant through the life
of the mortgage) or an adjustable (the interest rate is adjusted--either up or down--at specified times during
the mortgage term). Adjustable Rate Mortgages (ARMs) will have an initial interest rate lower than fixed rates
but will adjust upward (unless rates really fall!) usually after the first year. They may be a good choice if you
are sure that you will not be owning the home for an extended period (more than 5-7 years) of time.
Choosing among the many houses that may be available is hard enough--then you need to make a choice
from the myriad of mortgages that are offered in today's market. So many decisions! Take heart, though,
since although there are literally hundreds of different mortgages available, they all fall into only a few basic
varieties. Some may fit perfectly into your situation, others may be unwise or unattainable. By narrowing your
choices, the process of picking the right mortgage becomes much easier.
Fixed Rate or Adjustable
One of your first decisions should be between a fixed rate (the interest rate remains constant through the life
of the mortgage) or an adjustable (the interest rate is adjusted--either up or down--at specified times during
the mortgage term). Adjustable Rate Mortgages (ARMs) will have an initial interest rate lower than fixed rates
but will adjust upward (unless rates really fall!) usually after the first year. They may be a good choice if you
are sure that you will not be owning the home for an extended period (more than 5-7 years) of time.
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Terms: 15, 20 or 30 years
You will probably want to shoot for the shortest term that is comfortable (and for which you will qualify). The
interest savings are enormous as the term decreases. Always make a comparison between a 15 year term
payment and a 30 year term payment. The difference is often surprisingly 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.
You will probably want to shoot for the shortest term that is comfortable (and for which you will qualify). The
interest savings are enormous as the term decreases. Always make a comparison between a 15 year term
payment and a 30 year term payment. The difference is often surprisingly 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.
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HINT: If you can't qualify for a shorter term try to add at least the amount of 1 additional payment per
year--this will knock nearly 10 years off a 30 year loan.
Common Loan Types: Conventional, FHA, VA and "No-Document"
Conventional: A "traditional" mortgage, not directly insured by the Federal Government. Most conventional
loans under $275,000 are administered through Fannie Mae or Freddie Mac (private corporations but
regulated by the government). Those loans over that amount are designated "jumbo loans" and are funded
by the private investment market.
FHA: Insured by (but not funded by) the Federal Housing Administration (FHA) a division of the U.S.
Department of Housing and Urban Development (HUD), and designed for, in general, low- and
middle-income borrowers and many first-time buyers. There are, however, limits (which vary from county to
county) to the maximum loan amount. On January 1, 2000 HUD began insuring home mortgage loans of up
to $121,296 in communities where housing costs are relatively low, and loans ranging up to $219,849 in
communities where housing costs are relatively high. FHA loans have somewhat more relaxed qualifying
standards and ratios than conventional loans and have the availability of both 15 and 30 year fixed as well
as 1 year adjustable mortgages.
VA: For those qualified by military service, the Veterans Administration (VA) insures (but does not fund) 15
and 30 year fixed as well as 1 year adjustable mortgages with lower down payment requirements (as low as 0
down) and somewhat more lenient qualifying ratios.
No-Document ("No-doc) Loans: No-doc mortgages are generally a wise choice for self-employed people,
those who do not wish to verify their income, and those with a brief or blemished credit history, or no credit.
The benefits of a no-doc mortgage include a shorter application process since you are not required to provide
income, employment or asset documentation, as well as a streamlined approval process because there is
little subsequent verification. However, no doc mortgages generally will be at slightly higher interest rates and
are offered by fewer lenders.
Points or No Points
A large component of your mortgage decision has to do with one of the first charges associated with your
loan--even before you make your first payment--the "points" attached to the mortgage. A point is 1% of the
loan amount, paid to the lender or the mortgage broker at closing (in cash). For more information on paying
(or not paying) points, see the article "Should I Pay Points?" written by Randy Johnson, author of the
best-selling book on mortgages How to Save Thousands of Dollars on Your Home Mortgage.
Mortgage Comparisons
Once you have a general idea of the type of mortgage that best suits your situation, the next step is to
begin to make comparisons among the lenders that are available. Weekend newspapers will often have the
rates of individual local lenders posted in their Real Estate section. To get the specifics of each lender's rate
and term, you can contact the bank or mortgage company directly. Another source is a mortgage broker in
your area, who will often represent a number of sources of mortgage funds and can assist you in your choice.
A third source, and the most recent, is an online source such as Quicken Loans, where you can submit a
single, quick online loan request form and get up to 4 loan offers tailored to your needs.
year--this will knock nearly 10 years off a 30 year loan.
Common Loan Types: Conventional, FHA, VA and "No-Document"
Conventional: A "traditional" mortgage, not directly insured by the Federal Government. Most conventional
loans under $275,000 are administered through Fannie Mae or Freddie Mac (private corporations but
regulated by the government). Those loans over that amount are designated "jumbo loans" and are funded
by the private investment market.
FHA: Insured by (but not funded by) the Federal Housing Administration (FHA) a division of the U.S.
Department of Housing and Urban Development (HUD), and designed for, in general, low- and
middle-income borrowers and many first-time buyers. There are, however, limits (which vary from county to
county) to the maximum loan amount. On January 1, 2000 HUD began insuring home mortgage loans of up
to $121,296 in communities where housing costs are relatively low, and loans ranging up to $219,849 in
communities where housing costs are relatively high. FHA loans have somewhat more relaxed qualifying
standards and ratios than conventional loans and have the availability of both 15 and 30 year fixed as well
as 1 year adjustable mortgages.
VA: For those qualified by military service, the Veterans Administration (VA) insures (but does not fund) 15
and 30 year fixed as well as 1 year adjustable mortgages with lower down payment requirements (as low as 0
down) and somewhat more lenient qualifying ratios.
No-Document ("No-doc) Loans: No-doc mortgages are generally a wise choice for self-employed people,
those who do not wish to verify their income, and those with a brief or blemished credit history, or no credit.
The benefits of a no-doc mortgage include a shorter application process since you are not required to provide
income, employment or asset documentation, as well as a streamlined approval process because there is
little subsequent verification. However, no doc mortgages generally will be at slightly higher interest rates and
are offered by fewer lenders.
Points or No Points
A large component of your mortgage decision has to do with one of the first charges associated with your
loan--even before you make your first payment--the "points" attached to the mortgage. A point is 1% of the
loan amount, paid to the lender or the mortgage broker at closing (in cash). For more information on paying
(or not paying) points, see the article "Should I Pay Points?" written by Randy Johnson, author of the
best-selling book on mortgages How to Save Thousands of Dollars on Your Home Mortgage.
Mortgage Comparisons
Once you have a general idea of the type of mortgage that best suits your situation, the next step is to
begin to make comparisons among the lenders that are available. Weekend newspapers will often have the
rates of individual local lenders posted in their Real Estate section. To get the specifics of each lender's rate
and term, you can contact the bank or mortgage company directly. Another source is a mortgage broker in
your area, who will often represent a number of sources of mortgage funds and can assist you in your choice.
A third source, and the most recent, is an online source such as Quicken Loans, where you can submit a
single, quick online loan request form and get up to 4 loan offers tailored to your needs.
| "Helping hundreds of people find the home of their dreams." Contact me today! |
Emilie Romero,
Certified Realtor
Certified Realtor
