What Kind of Mortgage Loan Do I Need?

That is a good question and my answer is: It depends. First we need to explore the different types of mortgage loans there are currently. I will only discuss the major types of mortgages because every day someone comes up with a new idea for a different mortgage.

First there are two general types of loans which are either conventional or FHA and VA loans. The conventional loans are a little harder to qualify for, but the closing costs are usually a little lower and they require less paperwork. The FHA and VA loans are loans that are insured by the U.S. government. The government insures these loans to promote home purchases especially to those individuals that would not qualify for a conventional loan. Most new home purchasers use these loans because the down payment requirements are minimal and they can qualify for a larger loan.

Mortgage loans generally fall into classifications based upon the interest rate. There are generally 3 classifications, which are:

Fixed Rate Mortgages – The rate stays constant over the entire life of the loan, so your payments will remain the same except for changes in insurance or personal property taxes.

Adjustable Rate Mortgages (ARM) – The rate on these types of loans fluctuate. The rates could go up or down depending on the economy. Usually the rates on these loans are tied to an index and have caps on the amount of increase or decrease of the payments. Also, there is usually a ceiling that states what the highest the rate can go or the lowest. This helps to protect borrowers from huge increases in their mortgage payments. These loans are usually used if the interest rates are high or if the borrower does not intend to keep the loan for a long period of time.

Hybrid Loans – These loans combine the adjustable rate mortgages and the fixed rate mortgages features. The loans start with a fixed rate then switch to an adjustable rate. These loans are attractive to short term borrowers. Also, some hybrids require a balloon payment at a certain date. This means that the loan could require the balance to be paid after 5 years or 10 years depending on the loan agreement. This would require the borrower to either sell their house or refinance the loan.

Your real estate agent can suggest to you a good loan officer to work with in determining which type of loan is best for you. Don’t get depressed, just make sure that when you compare different loans you include all of the costs of the loan. The fees for the different services like appraisal fees, loan application fees, and loan origination fees should all get added in the equation to compare the costs of the different loans. Remember if you are confused even after talking to the loan officers, then talk to a trusted friend who understands financial agreements or to your accountant.

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What Term Should I Have For My Mortgage?

Many, many years ago it was very difficult to obtain a mortgage and when you did it was only for 5 or 10 years at the most. You can see why many people could not get a mortgage, because they could not afford the high monthly payments. Then financial institutions started the 25-year mortgages and now today we have 30-year and sometimes 40-year mortgages.

Why Have A Shorter-Term Mortgage?

We also have shorter-term mortgages like 15-year and 20-year loans for those who want to pay their loans off quicker. The shorter-term mortgages result in higher monthly payments, but the amount paid for the loan over the years is less because the higher payments pay off the loan faster, which results in less interest.

Why would you want a 30-year loan?

In order to afford a better house, you could have lower payments by spreading the amount over more years. Also, if you want to pay off the loan earlier then you can. Many people just add an additional amount each month to their payment. This requires a lot of discipline, but it is worth it in the end because you pay less interest and build equity faster. Another good idea is to use your income tax refund to apply to your mortgage to reduce the balance faster. Of course this doesn’t work if you have to pay on April 15^th.

Read The Loan Documents

You should get a loan without prepayment penalties, but you must read the documents to make sure that is the case. If you try to make extra payments, or an additional amount each month and you have a prepayment penalty it will not benefit you as much as it would if you didn’t have the clause. Also, the sooner you make the additional payments the less amount of interest you will have to pay because interest is calculated on the principal balance, which is reduced by additional payments. Early in the loan is usually more difficult to pay additional payments, but as your income increases through raises you should try to increase the amount you pay on your mortgage. Then when it comes time to buy another house you will have more equity in your current house to use as a down payment for the new house.

In Summary

You will want the term that best fits your lifestyle at the time of the loan. Younger couples usually need longer-term loans and older couples want to get their loans paid off faster so they usually get the shorter-term loans. Just keep in mind that the earlier you pay off the principal the less interest you pay. This could save you thousands of dollars.

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Paying Points – Should You or Shouldn’t You?

First we need to define what a point is. A point is equal to 1% of the loan amount, not the purchase price of the house. Financial institutions will charge you a point to lower the interest rate. Therefore if you are getting a loan for $100,000, one point would equal $1,000.

Most people like the idea of a lower interest rate, and it can be beneficial depending upon the length of time that you have the loan. So, if you are planning on moving within a few years or you will be refinancing then paying points will cost you more in the long run. Let’s look at an example:

The Cleavers want to purchase a home that would require a $150,000 loan. The going rate without points is 7.5% and with each point the rate is lowered by .25%. Therefore in order to get a 7% loan the Cleavers would need to pay $3,000 (1% X 2(points)) X $150,000).

Now you need to analyze if that is a good deal. The first thing to take into consideration is that you would need $3,000 up front. Next take the payment amount without points and subtract the payment amount with points to get the savings per month. For example: The house payment at 7.5% without points for 30 years is $1,049 and the payment at 7 % with 2 points for 30 years is $998. The savings is $51 per month, but remember you had to pay $3,000 up front to get the savings.

If you take the amount paid for points and divide it by the amount of savings per month ( $3,000/$51 = 59) you will get the number of months it takes to break even. This does not take into consideration the time value of money, but it is a good measuring stick when you are estimating and trying to determine the best interest rate.

In this scenario the Cleavers would benefit by paying the points if they live in the house for 60 months or more.

You can deduct the points you pay on a mortgage loan in the year that you pay if the loan is for the purchase of a home and not for a refinance loan. Therefore the date is important when you close on your home, because you want to take the full effect of these deductions. Talk to your CPA regarding these tax issues before you sign your contract to purchase.

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Did You Know That Not Borrowing Money Could Hurt Your Credit Record?

Most people know that if they make late payments, their credit record will be affected negatively. However many people do not realize that having no credit record because you always pay cash can hurt your chances of getting a loan. Financial institutions want to see that you have a history of borrowing and paying back money so they will feel comfortable loaning money to you. So get a credit card, just remember to pay it off every month because the interest is usually exorbitant.

Slow Payer

Are you a slow payer when it comes to paying your bills? This could cost you because slow payers are bigger risks so they get charged a larger interest rate. Now wouldn’t it be better if you just paid your bills on time or a few days before they are due?

Look At Your Credit Report Now!!

Don’t wait until you have applied for a loan to look at your credit report, it may be too late. You need to review your credit report to make sure it is accurate and to see if you have some problems that could be corrected. If the report is incorrect, then contact the credit-reporting agency in writing and also contact the creditor who gave the credit reporting agency incorrect information. You will need to take care of this before you apply for your loan and it takes time to straighten out problems

Bankruptcies – Will I Ever Get A Loan Again?

That depends on you. If you have a bankruptcy in your past and continue to have poor credit because you are a slow payer or non-payer, then you probably won’t be getting that loan. However, if you explain to the loan officer the circumstances surrounding the bankruptcy and if you have reestablished good credit then you have a good chance of getting a loan. The loan may have a higher interest rate due to the higher risk.

Disputed Balances

If you have a creditor attempting to collect a balance due that you believe is incorrect, the best thing to do is to write a letter to the creditor explaining why you believe the balance is wrong and that you are disputing balance due. The creditor is required to post to the credit agencies that you are in dispute of the account. Remember to keep a copy of the letter in case your loan officer wants to review it.

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