What To Do
MORTGAGE LENDING by Lauren Henry
To buy, or not to buy, that is the question home-owning hopefuls are pondering at the moment. With so many gems on the market resulting from the recent glut of inventory in today’s market, what are the mortgage options available to make one your own and what processes need to be set in motion to ensure that the house of your dreams becomes your reality? PRE-APPROVAL The first step is to work with a lender to attain pre-approval, or a promise from the lender that you are qualified to borrow up to a certain amount of money at a specific interest rate. During the pre-approval process, the lender looks closely at your credit and verifies your income information, though getting pre-approved does not absolutely guarantee that your loan will be approved. You must also provide your lender with pay stubs, bank statements, tax returns and W-2 forms from the previous two years, and documents showing other sources of income, so if you have yet to begin this process, start saving these forms now. At this point, though the lender is confident that you can make the necessary down payment and that your income is sufficient to cover the mortgage payments, he or she needs to be sure that the home is appraised for an amount more than or equal to the purchase price. Thus, it is important to get pre-approved because in today’s competitive housing market, sellers prefer a pre-approved buyer. PRIMARY OR INCOME PROPERTY Once you have been pre-approved, you will need to determine whether or not you will occupy the property as a primary residence. Generally speaking, the best deals on mortgage terms are available to people who are going to occupy the property as their primary residence, though it is important to know how an income property mortgage will differentiate. An income property loan is given to an investor seeking to purchase a residential or commercial rental property. Income property mortgages are typically much harder to qualify for and often require a borrower to include estimates of the rental income that will be received from the property. FIXED MORTGAGES After determining that you are planning to occupy a property as your primary residence, you can delve into the varying options of mortgages and select the best one for your personal goals and needs. If, for example, you are interested in a mortgage that presents predictable housing costs for the entirety of the loan, a fixed rate mortgage may be the optimum choice for you. A few examples of fixed rate mortgages include but are not limited to: 30-year mortgages, 15-year mortgages, bi-weekly mortgages, and even “convertible” mortgages. The 30-year loan remains the traditional favorite because it offers the lowest monthly payments of fixed rate loans while providing for a never-changing monthly payment schedule. Some lenders also offer 20, 25, and even 40-year mortgages but it is important to remember that the longer the term of the loan, the more total interest you will pay. Another of the more familiar mortgage plans is the 15-year fixed rate mortgage and it allows homeowners to own their homes free
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and clear in half the time and for less than half the total interest costs of the traditional 30-year loan. A few of the lesser known mortgages include the biweekly mortgage, which shortens the loan term to 18 to 19 years by requiring a payment for half the monthly amount every two weeks, and the convertible mortgage which offer today’s homebuyer the option to change the loan’s interest rate after some period of time or some specified movement in interest rates. ADJUSTABLE RATE MORTGAGES Also consider Adjustable Rate Mortgages, or ARMs, which have become one of the most popular and effective tools for enabling one to achieve the dream of owning a home. ARMs were developed during a period involving high interest rates that kept many people out of the housing market and they offer lower initial rates by sharing the future risk of higher rates between the borrower and the lender. Under certain conditions, such as rising income expectations, high interest rates, and short-term homeownership, ARMs can be an excellent choice of financing. Each Adjustable Rate Mortgage is comprised of four components including: initial interest rate, adjustment interval, index, and margin. REFINANCE Once you have obtained your dream home, at some point in the future, you will consider refinancing. With interest rates at record lows, refinancing is a great option if your goals are to reduce the interest expenses and/ or reduce your monthly mortgage payment. Another consideration for refinancing involves debt consolidation, by combining both a first mortgage and a home equity line of credit. When you do decide to refinance, you will need to choose which type of new mortgage is the best fit for you. The two main types of refinancing are cash-out refinancing and standard refinancing. Cash-out refinancing involves taking out a new mortgage on your current property where the amount of cash borrowed is greater than the amount of the previous mortgage. Typically, a cash-out refinancing will have a slightly higher interest rate than standard refinancing as the lender will have more money at risk. This type of refinancing plan is also often used to pay down debt.