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Mortgage FAQs

Whether you are looking for your first home or trying to save money by refinancing your current home the process of obtaining a mortgage can be scary especially if your not exactly sure you know what you’re doing. We’ve all heard the horror stories of people not realizing what they were getting themselves into and losing their homes because of it. Here are some questions that I am frequently asked that I will share to keep you from being one of those people.

What is an ARM?
Besides a very important part of the human body and ARM is a mortgage acronym that stands for Adjustable Rate Mortgage. The rate is generally fixed for a short term at the beginning of the loan, generally for the first 3, 5, or 7 years of the loan and after that the rate adjusts to the current market rate as often as stated in the contract, usually annually. The reason people usually choose an ARM is a bet that rates are going to drop. An ARM usually offers a lower initial interest rate, someone choosing an ARM generally wants to take advantage of the initially low interest rate but intends to refinance at the end of the fixed period, or if they think rates will drop further they will take advantage of the rate adjustments while rates decline.

What is a Balloon?
A balloon is a short-term loan that is amortized over a long period of time to get the borrower a low payment. For example a 100,000 loan could be set up as a 5 year balloon with a 30year amortization. Lets say the payment is 500 per month. In this instance the borrower pays 500 per month for the first 59 months and the remaining loan balance is due in full on the due date for month 60. A balloon mortgage is usually used in a strategy where the borrower only intends to own a property for a short time or refinance quickly.

What is the most Stable Type of Mortgage Loan?
By far the most stable type of mortgage is the Fixed Rate Mortgage. They are most commonly offered in 30 and 15 year terms. The nice part of these loans is that the principal and interest payment is the same for the life of the loan so there are no surprises. This type of loan is preferred by most people who plan to stay in their home long-term.

How can I make sure that I am not paying unnecessary closing costs?
All lenders are required by law to disclose the costs to you in writing, both at the time of application and at closing. At application they will give you a Good Faith Estimate of settlement costs, and at closing they will give you what is called a HUD-1 statement of settlement costs. Have your lender explain this to you and explain where the money is going for each line item. Common costs are Appraisal fees, Title insurance fees, Title search fees and flood certification fees.

When’s the best time to buy a house?
The best time to buy a house is when you’re ready. Although housing prices fluctuate, traditionally they have increased over time. Even in markets with modest gains in housing prices, there are tremendous tax advantages to owning your own home. There are also huge quality of life issues involved. It’s great to know that you’re the King – or Queen – of your own castle. If you have children, the security of owning your own home, and giving them a backyard to play in, is priceless.

Should I pay off all my debts and bills before applying for a mortgage?
Not necessarily. Before you rush to pay off student loans, a new car loan or other obligations, talk to your lender. Paying off bills may be a bad idea if it depletes your savings or reduces your down payment. Either one presents the appearance that you are living beyond your means.  On the other hand, paying off some debt may be wise if you need to lower your total debt-to-income ratio. A good way to approach this is to be prequalified for the loan. Most lenders will offer advice on how to improve your financial situation before you actually apply for the loan.

Is a big down payment really important?
That depends on your situation. There are a wide variety of loan products available today that make home ownership possible for almost everyone, even without a down payment. However, you may not want to use them.  Historically, people who buy without a down payment are much more likely to default on their mortgages. It’s really simple – an owner who has invested more in a home, is going to work harder to keep it, because they have more to lose. Higher default rates mean higher interest rates. So, if you have little or no down payment, you are likely to end up paying a higher interest rate than someone with a large down payment.  Conventional mortgages usually involve a down payment of 20% or more. Many people, especially first-time homebuyers, start with a 5% down payment. The highest interest rates are usually charged by lenders when there is no down payment.

How important are debt ratios?
Debt ratios are general guidelines, not hard and fast rules. Many conventional mortgage lenders like to see a 20% down payment with a house payment that is no more than 28% of gross income. They like the total monthly obligations to be no more than 36% of gross income. But, those are only guidelines. Mortgage lenders make exceptions to the guidelines every day, based on the buyer’s total financial position and credit history. Don’t let a higher debt ratio keep you from buying the home of your dreams!