Tuesday, November 24, 2020
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Home Loan Basics-techlive24

Purchasing or refinancing a home can be either a rewarding experience or a financial nightmare depending on how informed you are when you begin the process. Mortgage brokers have numerous ways to make a lot of extra money off of unprepared customers, so it is in your best interest to be prepared. This page will tell you everything you need to know to make sure your home loan process is a success.
Obviously having a higher credit score, and a lower debt to income ratio will help you get better mortgage terms, but there is nothing you can do to directly affect those variables. This page will focus on a few easy things you can do to make sure you get the best loan possible.
The first thing you will need to do is familiarize yourself with common mortgage lingo. If you are speaking the language of the lender, then the lender will be much less likely to try to take advantage of you. The best place to start is by learning the different loan types. Choosing a loan type is something you should do yourself. If you let your loan officer choose for you, he will likely just pick whichever loan type makes the most money for himself. Familiarize yourself with the following basic loan types.
Loan Types
Fixed Mortgage - This is the standard mortgage everyone is familiar with. The borrower pays back the loan with the same monthly payment for a specified number of years. The loan is typically scheduled for 30 years, but 15 year, 20 year, and even 50 year options are available. Generally, a longer loan repayment schedule will mean a higher interest rate and lower monthly payments than a shorter term loan.
Adjustable Rate Mortgage (ARM) - ARM loans are typically scheduled to be paid over 30 years, but the interest rate is adjusted each year on the anniversary of the loan. A 3/1 ARM will have a fixed rate for the first 3 years, then adjust annually, while a 5/1 ARM will be fixed for the first 5 years with annual adjustments for the remainder of the loan. There are also ARM loans in which the rate will fluctuate just once every 5 years or 3 years, but these are less common.
Interest Only - An interest only loan is exactly what it sounds like. The required payment each month is simply your interest rate multiplied by the loan amount. You are free to pay down the principle at your convenience.
Balloon - A balloon loan is paid just like a 30 year fixed loan for a set number of years, at the end of which the remainder of the loan is due in one payment. So, someone entering into a 5 year balloon would make fixed payments for 5 years, then repay the entire remaining balance in one payment at the end of the fifth year.
How to get the right type of loan
To determine what loan is best for you, you need to assess your plans for the home and your comfort level with various risk factors. A good way to do this is to answer the following questions.
1. How long do you plan to be in the home?
A traditional 30 year fixed is best if you plan to be in the home over the long term, but if you are planning on moving in 5 to 7 years, then the lower interest rates allowed by an ARM or a Balloon might be more practical for you.
2. Is your income stable and reliable, or seasonal/commission based?
Interest only loans are better suited to people with seasonal or commission based income (they can make the minimum payments when income is low, and make additional principle payments when income is high). People who earn a steady salary would be best served to choose a fixed mortgage and avoid the associated risks of interest only loans.
3. Are property values in your area expected to increase?
Any homeowner hates to see their property value decrease, but interest only loans and balloon loans are particularly risky in housing market bubbles. If home prices decrease sharply, people with an interest only loan can suddenly owe more than their property is worth. Similarly, people in a Balloon loan can be stuck with a balloon payment of more than their property is worth with no options but to take a loss. Loans with longer terms have a longer time to wait out the declines in property value, and therefore are much less risky for the borrower.
4. Are interest rates expected to increase or decrease?
This is usually unclear, but there are certain times when the answer seems obvious. For example, in the summer of 2003 mortgage rates were at 40 year lows. It was obvious that rates could only go up from there, because there was no room for them to drop any further. Locking yourself into an adjustable rate mortgage at that time would not have been wise. If rates are predicted to rise, a fixed mortgage is best. If rates are expected to fall, then an ARM is a good choice. When in doubt, a fixed rate is always less risky and usually a wise choice.
Once you have answers to the questions above, your optimal loan type should be easy to determine. In most cases the traditional 30 year fixed mortgage is the best choice, but there are certain scenarios where one of the other options is a better fit.
How to get the best rate
Many people think that getting the lowest possible interest rate for their loan is the most crucial factor in home finance. Those people are sorely mistaken. The truth is, most mortgage brokers are really just trying to make as much money from you as they can. Brokers constantly advertise rates that seem too good to be true, and they usually are. These are called "teaser rates" and they are just designed to get you in the door, on the phone, or to a questionable website. You can rest assured that if one lender offers you a rate that is significantly lower than every other offer you have seen, that lender will charge you points on the front end of the loan and likely try to surprise you with strange fees at closing time.
It is important to understand how loan officers get paid. The higher rate they get you to agree to, the more money they are paid by the bank when the loan closes. Loan officers call this compensation the "back end" of the loan. The first rate a loan officer quotes you will often correspond to a target amount of money the loan officer wants to make on the back end. With this target and corresponding rate in mind, your loan officer will then be willing to offer you a lower rate... with a catch. In order to get a lower interest rate, you will often have to pay "points" on your loan. Points are a percentage of the total loan value that you pay to the lender up front, or on the "front end" of the loan to make up for the income the loan officer is forgoing on the back end (1 Point = 1% of the loan value).
So, for example, a loan officer might offer you a $200,000 30 year fixed loan at 6% with no points, or the same loan at 5.5% with 1 Point. In the first loan scenario, the loan officer would make all of his money on the back end (the lender would pay the loan officer). In the second loan scenario, the loan officer would receive $2,000 from you on the front end, but the lender would pay him less on the back end. The loan officer would probably structure both scenarios such that he is indifferent to which you choose, therefore making it entirely your decision.
So how do you know which scenario would be best for you? Well, if you have the cash on hand and can afford to pay the points at closing, it is probably best to pay the points. In that case, you will be making lower monthly payments for the next 30 years. If, however, you need the money at the time of closing for furniture, home repairs, or to pay off other bills, then obviously it would be best to take the higher rate and pay nothing at closing.
How to avoid unnecessary fees
The key to avoiding unnecessary fees is having numerous loan offers to compare. The first step will be to contact at least three separate mortgage brokers or lenders and ask for a "Good Faith Estimate" based on the same loan type, amount, and home value. The good faith estimate is the broker's best guess of what the final closing documents will look like. The estimate should provide a line by line breakout of the various fees and costs associated with your loan along with the interest rate and monthly payment amounts you will make. You will be able to see which lender will give you the best deal from comparing the estimates. One lender might give you the best rate, but charge you a lot more than the others for an appraisal and title insurance. You might see fees on one of the estimates that are not included on the others, such as a fee for obtaining a credit report. If you find a broker that you would like to work with, you can use the other estimates to get the broker you choose to lower or drop some of his questionable fees. If the broker can't explain one of his fees to you, and the other lenders don't include similar fees, then the fee is probably unnecessary. If that is the case, then the broker will likely drop it if you question him about it.
The Bottom Line
The bottom line is that if you are informed and prepared you can truly save yourself hundreds of dollars at closing time, and probably thousands of dollars over the life of the loan. By learning the lingo, deciding on your loan type yourself, understanding the goals of the lender, and comparing Good Faith Estimates, your broker will be unable to surprise you with unnecessary fees or an outrageously high interest rate. Just remember, your broker will have his best interest in mind regardless of how nice he is, so the only person really looking out for your best interest is you.

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