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Guide To Mortgages

Step 1: Check your credit
(Wed, 18 Oct 2006 10:30:16 EST)

Deciding to buy a home is a major financial decision. For most people, buying a home cannot be done without a mortgage, so it is important that you know where you stand financially before making a large financial commitment. One important measure of your financial fitness is your credit report and score. The information in your credit report is critical to your financial life, and it plays a large part in determining the interest rate you are offered on a loan. This is why it important to check your credit before getting preapproved for a mortgage.

You are entitled for a free credit report once a year for free from each of the three credit bureaus (Equifax, Experian and TransUnion). These companies gather information about your payment and borrowing habits and form your credit report from the information they collect.

The information on your credit report determines your credit score, which is a number between 300 and 850. The higher your credit score, the better your chances of getting the best interest rates and a larger loan amount. If your credit score is low, it may reflect that you don't pay your bills on time or that your outstanding debts are close to your credit limit. Lenders offset the risk of lending to people with low credit scores by increasing interest rates and lowering the limit that you can borrow.

When you receive your report, look it over for mistakes. Mistakes do happen, including mix-ups with similar names and Social Security Numbers. So if you have incorrect information on your credit report, you run the risk of having a lower credit score than you actually deserve, which can affect your mortgage rate. If you find incorrect information on your credit score, contact the credit agency to have them correct or remove the error. This may take a while, so do this as early as possible in the mortgage process.

Next step: Determine what price home you can afford.

Step 2: How much can you afford?
(Sat, 9 Sep 2006 03:16:00 EST)

Before you start looking at homes, it's important to start off with a budget so you know how much you can afford. Knowing how much you can handle will also help you narrow the field so you don't waste time looking at homes that out of your reach.

Debt-to-income ratio
The key to figuring how much home you can afford is your debt-to-income ratio. This is the figure lenders use to determine how much mortgage debt you can handle, and thus the maximum loan amount you will be offered. The ratio is based on how much personal debt you are carrying in relation to how much you earn, and it's expressed as a percentage.

Mortgage lenders generally use a ratio of 36 percent as the guideline for how high your debt-to-income ratio should be. A ratio above 36 percent is seen as risky, and the lender will likely either deny the loan or charge a higher interest rate. Another good guideline is that no more than 28 percent of your gross monthly income goes to housing expenses.

Doing the math
First, figure out how much total debt you (and your spouse, if applicable) can carry with a 36 percent ratio. To do this, multiply your monthly gross income (your total income before taxes and other expenses such as health care) by .36. For example, if your gross income is $6,500:

$6,500 (Gross monthly income)
x .36 (Debt-to-income ratio)
= $2,340 (Total allowable monthly debt payments)

Next, add up all your family's fixed monthly debt expenses, such as car payments, your minimum credit card payments, student loans and any other regular debt payments. (Include monthly child support, but not bills such as groceries or utilities.)

Minimum monthly credit card payments*: _________
+ Monthly car loan payments: _________________
+ Other monthly debt payments: ________________
= Total monthly debt payments: ________________

*Your minimum credit card payment is not your total balance every month. It is your required minimum payment -- usually between two and three percent of the outstanding balance.

To continue with the above example, let's assume your total monthly debt payments come to $750. You would then subtract $750 from your total allowable monthly debt payments to calculate your maximum monthly mortgage payment:

$2,340 (Total allowable monthly debt payments)
- $750 (Total monthly debt payments other than mortgage)
= $1,590 (Maximum mortgage payment)

In this example, the most you could afford for a home would be $1,590 per month. And keep in mind that this number includes private mortgage insurance, homeowner's insurance and property taxes. To determine the price of home you can afford based on this amount, use our home affordability calculator.

Exceptions to the 36 percent rule
In regions with higher home prices, it may be hard to stay within the 36 percent guideline. There are lenders that allow a debt-to-income ratio as high as 45 percent. In addition, some mortgage programs, such as Federal Housing Authority mortgages and Veterans Administration mortgages, allow a ratio higher than 36 percent. But keep in mind that a higher ratio may increase your interest rate, so you may be better off in the long run with a less expensive home. It's also important to try to pay down as much debt as possible before you begin looking for a mortgage, as that can help lower your debt-to-income ratio.

Step 1: Check your credit report and score.
Next step: Finding the best mortgage for you.

 

Step 3: Finding the best mortgage for you
(Fri, 8 Sep 2006 03:16:00 EST)

One of the most important steps in buying a home is determining what kind of mortgage is right for you. After all, a mortgage is a financial commitment that will last for many years. Make sure you select a mortgage that matches your risk tolerance and financial situation.

Fixed rate mortgages
With a fixed rate mortgage, the interest rate and monthly payments stay the same for the life of the loan.

These mortgages are usually fully amortizing, meaning that your payments combine interest and principal in such a way that the loan will be fully paid off in a specified number years. A 30-year term is the most common, although if you want to build equity more quickly, you might opt for a 15- or 20-year term, which usually carries a lower interest rate. For homebuyers seeking the lowest possible monthly payment, 40-year terms are available with a higher interest rate.

Consider a fixed rate mortgage if you:

• are planning to stay in your home for several years.
• want the security of regular payments and an unchanging interest rate.
• believe interest rates are likely to rise.

Adjustable rate mortgages (ARMs)
With an adjustable rate mortgage (ARM), the interest rate changes periodically, and payments may go up or down accordingly. Adjustment periods generally occur at intervals of one, three or five years.

All ARMs are tied to an index, which is an independently published rate (such as those set by the Federal Reserve) that changes regularly to reflect economic conditions. Common indexes you'll encounter include COFI (11th District Cost of Funds Index), LIBOR (London Interbank Offered Rate), MTA (12-month Treasury Average, also called MAT) and CMT (Constant Maturity Treasury). At each adjustment period, the lender adds a specified number of percentage points, called a margin, to determine the new interest rate on your mortgage. For example, if the index is at 5 percent and your ARM has a margin of 2.5 percent, your "fully indexed" rate would be 7.5 percent.

ARMs offer a lower initial rate than fixed rate mortgages, and if interest rates remain steady or decrease, they may be less expensive over time. However, if interest rates increase, you'll be faced with higher monthly payments in the future.

Consider an adjustable rate mortgage if you:

• are planning to be in your home for less than three years.
• want the lowest interest rate possible and are willing to tolerate some risk to achieve it.
• believe interest rates are likely to go down.

Hybrid mortgages
A hybrid mortgage combines the features of fixed rate and adjustable rate loans. It starts off with a stable interest rate for several years, after which it converts to an ARM, with the rate being adjusted every year for the remaining life of the loan.

Hybrid mortgages are often referred to as 3/1 or 5/1, and so on. The first number is the length of the fixed term -- usually three, five, seven or ten years. The second is the adjustment interval that applies when the fixed term is over. So with a 7/1 hybrid, you pay a fixed rate of interest for seven years; after that, the interest rate will change annually.

Consider a hybrid mortgage if you:

• would like the peace of mind that comes with a consistent monthly payment for three or more years, with an interest rate that's only slightly higher than an annually adjusted ARM.
• are planning to sell your home or refinance shortly after the fixed term is over.

Option ARMs
Also called "flex ARMs" or "pick a payment mortgages," these are adjustable rate mortgages with a twist. Each month, rather than paying a set amount, you'll receive a statement with up to four payment options, ranging from a small minimum to a fully amortized payment. You select the amount you want to pay each month.

Option ARMs entice borrowers by offering initial low minimum payments, but after an introductory period, the required minimum rises substantially. In addition, if you choose the minimum payment option too often, you won't build equity in your home and may even end up increasing your loan's balance.

Consider an option ARM if you:

• want flexibility because you have a fluctuating income -- for example, if you're self-employed or work on commission.
• are financially disciplined and won't be tempted to simply pay the minimum every month.

Interest-only and balloon mortgages
Unlike an amortized mortgage where you pay a combination of interest and principal each month, with an interest-only mortgage you pay only interest for a fixed period -- usually from five to 10 years. This means the principal never goes down, and after this period has elapsed you have to either pay the entire principal off or start paying down the principal, which results in much higher monthly payments.

Balloon mortgages also offer low regular payments for a number of years (often just slightly below what you'd pay for a 30-year fixed rate mortgage). After this fixed period, the principal must be repaid as a lump sum, which generally means refinancing. Because very little of the principal has been paid down, once again, your payments will increase.

These loans can be helpful temporarily, but they don't allow you to build equity in your home, and they can cause serious financial strain when the principal comes due.

Consider an interest-only or balloon mortgage if you:

• are buying a home with the expectation of an improvement in your financial situation -- for example, you have a large debt that will be paid off in a few years.
• want to stay in your current home but are experiencing a temporary financial squeeze -- for example, you are going back to school, or taking a few years off to stay home with your children.

The details
Once you know what type of loan is right for you, look at the specifics. First, of course, is the interest rate. Remember, however, that the rate you're offered may not tell the whole story. Are there closing costs, points or other charges tacked on? Make sure you ask for the loan's annual percentage rate (APR), which adds up all the costs of the loan and expresses them as a simple percentage. Lenders are required by law to calculate this rate using the same formula, so it's a good benchmark for comparison.

The features of your loan -- which may be buried in small print -- are just as important. A favorable adjustable-rate loan, for example, protects you with caps, which limit how much the rate and/or monthly payment can increase from one year to the next. Ask whether a mortgage carries a prepayment penalty, which may make it expensive to refinance. And don't be seduced by low monthly payments -- some of these loans leave you with a large balloon payment due all at once when the term is up.

Step 2: Determine what price house you can afford.
Next step: Get prequalified for a mortgage.

 

Step 4: Getting prequalified for a mortgage
(Thu, 7 Sep 2006 03:15:00 EST)

It's a good idea to get prequalified for your mortgage before shopping for a home. Prequalification involves supplying a lender with basic information regarding your debt, income and assets. From this information, lenders can get an idea of the mortgage amount for which you qualify, and it can usually be done at no cost.

Being prequalified can help you narrow the range of homes in which you are interested, as it's another way of knowing what you can afford. It can also help you act fast if a home you're interested in has a lot of interest. Prequalification shows you are a serious shopper, and your offer will be taken more seriously than an offer from someone who has not spoken with a lender.

The initial pre-qualification stage also allows you to discuss with your lender any goals or needs you may have regarding your mortgage. He or she can then explain your mortgage options and recommend the type that might be best suited to your particular requirements.

It's easy to get loan offers through LendingTree. Fill out one simple form and get up four real offers!

Step 3: Which type of mortgage is right for you?
Next step: Compare mortgage offers.

 

Step 5: Compare mortgage offers
(Wed, 6 Sep 2006 03:14:00 EST)

When buying a home, you shop around for the house that best suits your wants and needs. But did you know that you should do the same for your mortgage?

One of the first things you should look at when comparing mortgage offers is the interest rate. Generally, the lower the interest rate, the better for you and your expenses. Even a slight difference in interest rates can mean a lot of money over the life of a loan. Make sure you understand if the rate offered includes discount points, which is money you pay up front to lower your interest rate.

But the interest rate isn't the only rate to look for. Another good benchmark for comparing offers is their annual percentage rate (APR). This figure combines the interest costs and other fees charged by a lender over the life of the loan, and expresses them as a yearly percentage. Make sure to ask for an itemized list of what's included in each APR calculation, so you know you're making a fair comparison, as some lenders don't include all of their fees in the calculation.

Other details matter too: Do the lock in terms vary? Is there a pre-payment penalty? What are all the closing costs and fees? Ask for a read a Good Faith Estimate (GFE) for each loan, and ask questions if something doesn't make sense.

Last, you'll also want to consider customer service. Look for a lender who is quick to return calls and responsive to your questions.

LendingTree® makes it easy and convenient to shop for a mortgage. Just fill out one simple form and get several offers from which to choose. Or call 1-888-624-2206 to speak with a loan specialist now.

Step 4: Get prequalified for a mortgage.
Next step: Get preapproved by your lender.