Fixed Rate Mortgages

Fixed rate mortgages have a set interest rate and monthly payment amount which will not change for the entire duration of the loan.  Fixed rate mortgages are amortized, meaning that each payment goes towards interest and principal so that, over the course of payments, your debt shrinks until the loan is completely paid off. The duration of the fixed rate mortgage will affect the interest rate.  The shorter the period (such as 5 or 10 years), the lower the interest rate will be.

Fixed rate mortgages are ideal for buyers who plan on staying in the same property for a long period of time.  They are also ideal for people who prefer the security of set interest and payments, especially if they think interest rates will increase.

Adjustable Rate Mortgages (ARMs)

Adjustable rate mortgages have an interest rate which will periodically change according to the Federal Reserve’s rates.  Usually, the changes occur every 3 to 5 years. When the interest rates change, so will the monthly payment amount.  ARM mortgages usually have lower APRs than fixed rate mortgages.  If the interest rates do not increase much or go down, then they can be much more cost effective than a fixed-rate mortgage.  However, there is always the risk of the interest rate increasingly significantly.

ARM mortgages are ideal for buyers who plan on spending just a short period of time in their home, such as fewer than 5 years. ARM mortgages are also ideal if the buyer has good reason to believe that interest rates will fall and are willing to take the risk in order to get the better APR.

Hybrid Mortgages

A hybrid mortgage combines a fixed-rate and an adjustable-rate mortgage.  For an initial period, the mortgage will be at a fixed rate.  When that period is up, it will be converted to an ARM.  You will usually see hybrid mortgages listed as ratios like 3/1.  The first number is the length of time in years for which the mortgage rate will be fixed.  The second number is how often the interest rate will be adjusted once the fixed-rate period is up.  Hybrid mortgages usually have much better rates than fixed rate mortgages and are just a bit more than what an ARM would offer.

A hybrid mortgage is ideal if you are going to be in your home for a medium period of time, such as 5-10 years, and want the security of a fixed rate while still taking advantage of the lower ARPs associated with ARMs.

Find Out Your FICO Score

If you are considering a mortgage, then you must know your credit rating, also called FICO score.  If you have a good FICO score (over 670), then you are much more likely to be accepted and get better rates.  If your FICO score is low (especially if it is below 584), then you should get your credit in shape before you apply.  If you have any recent delinquent payments, then you should wait about 6 months before applying for the mortgage loan and be sure to make all payments on time. In the event that your credit score is low because of some mistake, dispute the mistake with the credit bureau so it is changed before you apply for the mortgage.

Only Make Serious Applications, and Make them Several Days Apart!

If you make several mortgage applications within a 14 day period, it could harm your credit rating. Two or three mortgage applications probably aren’t going to make a big difference.  However, if you make over 10 applications in a few days, you could get denied or have your interest rates increased drastically.

Find Out the Costs of Your Mortgage

Before you apply for a mortgage, make sure you understand all of the terminology and what it means to how much you will pay for your loan.  Spend some time imputing the various APRs and loan durations into mortgage calculators.  Then, compare the overall, long-term costs of the mortgage loan.  This way, you will really be able to fathom the difference between a 10-year mortgage at 6% versus a 15-year mortgage at 5%.

Determine How Much Debt You Can Afford

There are many mortgage calculators which will compute how much debt you can afford.  These calculators will help you determine the amount of your monthly payments based on interest rates and loan durations.  There are some things that these mortgage calculators can’t account for though, like future expenses (such as a new baby), job stability, or unexpected medical bills. Be realistic when figuring out how much debt you can afford and always make sure you are comfortable with the amount.

Mortgages are Ongoing Processes

After you apply for a mortgage, you need to be careful about all your financial activities.  The mortgage process is ongoing from the point of application to the closing. If you incur any new debts or have late payments during this time, it can affect your interest rates or other aspects of the mortgage.  Do not take out any payment plans (like those “no interest for 12 months on a new dining set!” deals), cease payments for other loans, or file for bankruptcy.

You Don’t Have Enough to Cover the Closing Costs

Your mortgage lender is required to give you an estimate of all the costs associated with closing your loan.  Generally, the closing costs don’t go much over the Good Faith Estimate given by the lender but there are some reasons that it may be more than you anticipated.  If the closing costs are much higher than the estimate, carefully compare the actual costs with those listed in the estimate and inquire about the discrepancies.

Closing costs must be paid with guaranteed funds.  That means you should go to the bank before the closing and get a cashier’s or certified check.  Also, make sure you have your personal checking book on hand in case there are any additional closing costs such as prepayment of a tax.  You must also make sure to have a valid ID on hand for the notary who will oversee the closing signing.

You Discover a Problem during the Final Inspection

About a day before closing, you will get a chance to take a final walk through of the property to make sure that all contingencies have been met.  Buyers often get confronted with a major problem during this final inspection – like finding a heap of trash in the basement or a big stain on the hardwood floors.  It isn’t uncommon for sellers to hide home problems, like by putting a carpet over a stain.

A thorough home inspection is crucial for avoiding these surprising problems before closing.  Make sure that you are actually accompanying your inspector and having a detailed discussion about the condition of the property.  If a problem occurs which couldn’t have been picked up in the inspection – such as that heap of trash – you typically can require the seller to fix the problem or give you money for having it fixed yourself.

Tenants Still Occupy the Property

If the property you are buying was being rented out by the seller, make sure you see a copy of the tenants’ lease.  Otherwise, you might be surprised to find out that they are still living in the property when you come to your new home!  You can put a clause in your contract that the seller will bear any costs that occur if the house is not vacant after closing.

What do Home Appraisers Look At?

Home appraisers are specifically trained to assess the value of a property based on numerous factors, such as:

• Building structure, such as the foundation, siding, and roof.  The appraiser will want to see the condition of the structure as well as the quality of materials
• Interior elements of the home, such as the flooring, windows, doors, appliances, lighting, plumbing, and so forth.  Again, the appraiser is looking at the quality and condition of the elements.  The appraiser is also considering what is and isn’t included. For example, the addition of expensive hard-wood molding can add value to the home.
• Amenities, such as air conditioning, security systems, pools, and verandas can add value to the home.
• Built-in appliances, such as sinks, bathtubs, and lighting fixtures will be assessed.  Any receipts or documentation about amenities and home remodeling should be given to the appraiser.
• Land, such as the front and back yard, will be assessed by the appraiser.  In general, the larger the land, the more the property will be valued.
• Real estate value in the area

Who is the Home Appraiser?

Appraisers are state licensed and must uphold strict standards regarding ethics of determining home value.  They are required to be completely neutral and not let their personal opinion or the opinions of others influence their appraisal.  In most cases, the appraiser is picked by the mortgage lender.  Borrowers may be able to choose their own appraiser but the appraiser’s assessment will likely need to be reviewed before it is accepted.

Who Pays for the Home Appraisal?

The borrower is generally responsible for paying for the home appraisal.  The costs are usually included during the loan application.

What is the Difference between CMA and Appraisal?

CMA stands for Competitive Market Analysis.  It is used by real estate agents to set the asking price of a property.  An experienced real estate agent will usually be able to come close to the appraisal amount.  However, a CMA cannot be used in place of an appraisal. An appraisal considers much more than the CMA when determining the property value.  A lender will not accept a CMA over an appraisal to approve a loan. Generally, a property’s asking price is set at about 5-10% more than the CMA in order to allow leeway for negotiation.  An appraisal can greatly affect the negotiation process or even cause a reduction in asking price.

FHA insured loans first started in 1934 and were popular for many decades.  Then, in the 1990s, FHA insured loans began to lose popularity because home values rose.  Since the FHA only insures home loans to a certain value, these loans were not practical for many people looking for their dream home.  In the past few years though, FHA insured loans have had a resurgence.

Benefits of FHA Insured Loans

There are numerous benefits of an FHA insured loan, particularly if you have less-than-perfect credit or are financially strapped.  With an FHA loan, the down payment requirements are only 3.5% of the mortgage amount.  The rates of an FHA loan can be much lower than what you would get with an uninsured loan.  The costs associated with the mortgage, such as closing costs, are also much lower than with an uninsured mortgage loan. The mortgage insurance costs of an FHA loan are added into the loan instead of being paid out of pocket.  This means one less cost that has to be paid up front.

It is much easier to qualify for an FHA insured loan than a standard loan, which means many people who have had credit problems in the past will be able to reach their dream of owning a home.

Another benefit of HA insured loans is that they are more flexible when it comes to avoiding foreclosure.  The Federal Housing Administration is willing to work with borrowers to avoid foreclosure in event that you have any financial difficulties.

If you want to buy a fixer-upper home, then an FHA loan can be beneficial.  Under the terms of the loan, you are allowed to add repair costs to the mortgage amount.

Qualifications or FHA Insured Loans

As of 2009, the mortgage limit for FHA loans was 115% of the median price of that area and no more than $625,500.  Depending on where you live, the FHA loan limits vary greatly.  Also, the loan limit is affected by whether it is a one-family or multi-family home.  For example, the maximum FHA loan amount for a one-family home in Alabama is about $270,000.  In parts of Alaska, the maximum FHA loan amount for a one-family home is about $347,000.

To qualify for an FHA insured loan, you must meet these basic requirements:

• Two years of steady employment, ideally at the same place of employment
• Income has stayed the same or increased over the past 2 years
• Credit score should usually be at least 620 or no credit score; should not have more than one 30-day late payments in the past 2 years
• If bankruptcy has been filed, it must be at least 2 years ago and have had perfect credit since then
• Any foreclosures must be older than 3 years and perfect credit since then
• Mortgage amount should not exceed 30% of gross income