Barbara Sondgerath

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Working hard to make it easy for you!

from Buying, Selling, and Owning Your Home

The Good Old Days
Mortgage Planning
All the Options
How Much does it Cost?
Credit Checks!

The Good Old Days
When your mother and father bought their first home, they probably financed it through their local savings and loan, where the bank officer knew their first names  and always asked about the children.  The down payment was 20 percent, the mortgage lasted for 30 years at the same interest rate, and paying it off was a real sign of financial success.  Almost none of that applies any more.

Today, you can go to any number of sources for a mortgage - banks, mortgage companies, insurance companies, private investors, or even pension plans.  How you structure your mortgage, and what rate of interest  you pay are almost infinitely flexible as well.  And no one is surprised if you roll over your mortgage every few years; staying in one place for 30 years is a thing of the past in our increasingly mobile society.

Even paying off your mortgage isn't regarded in the same light today.  Most, if not all of your mortgage interest payments are deductible, so hanging into a mortgage lowers your taxes.

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Mortgage Planning
The type of mortgage you seek will depend on a number of factors.  If your are a qualified veteran of the armed forces, you may be able to obtain a 0%  downpayment loan.  Other loan programs require as little as 3% down, with standard loans available with 5, 10, 20 % or more down.  Your agent can often help you determine the best loan for you and may recommend that you get "pre-qualified" or "pre-approved" for a specified loan amount.

You can save yourself thousands of dollars by taking the time to explore all the possible mortgage plans for which you may qualify.

A lot of your mortgage planning is going to be based on how large a monthly payment you can afford to make.  For our example, let's say you want to put down the standard 20 percent on a $95,000 house.

That leaves $76,000 to be paid.  Financial planners say you shouldn't pay more than 28 percent of your gross income for housing, a figure that includes principal, interest, real estate taxes and property insurance (PITI).

If you earn $45,000 a year, 28 percent is $12,600, or roughly a thousand a month.  Can you make a $75,000 mortgage work?  Depending upon the amount you'd have to pay for taxes and insurance, probably you  can.

You can quickly find out from the real estate agent how much mortgage flexibility your income will provide.  Agents have these payment tables available. 

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All the Options
After you know how much you can afford to pay, choosing a mortgage plan is the next step.  There are dozens of loan possibilities out there.  Following are just a few of the options you can consider:

Traditional Fixed Rate - usually carried for 30 years, its virtue is that the payment rate always stays the same.  When you budget, that unchanging sum is something you can count on, and you won't get any nasty surprises if inflation goes crazy.  Still the most popular type.

Adjustable Rate - ARMs, as they're known, can save you quite a bit of money.  You pay less initially, often as much as two or three percent less than the going mortgage rate.  But later, if interest rates increase, so does your payment.  There are also ARMs that build increases into your loan no matter what happens to mortgage rates.  First-year payments may be low, but they increse (or "balloon") regularly.

All of this is okay if you only plan to hold the mortgage for two or three years.  Richard A. Winters, a mortgage professional from Southold, New York, says "If the buyer has a good idea that he needs the  loan for the very short term, than it's wise."

For the long term, Winters thinks such a mortgage is risky; you're gambling that interest rates won't change.

Convertible - These loans are adjustables with one foot in the fixed-rate world.  You can convert it to a fixed rate at certain times during the course of the loan.

Two-Step Loans - These may be fixed or adjustable mortgages with a built-in rate increase after five or seven years.  Although the initial rate is temptingly low, after the increase your rate is always higher, Richard Winters explains, than that paid by the rest of the world.

He adds, "For the last 23 or 25 years of the loan, you're paying more than the going rate.  Also, you may have to qualify again when the rate jumps, and that can be difficult if your life circumstances  change."

Fifteen-Year Mortgage - A 15-year payout can save your thousands of dollars in interest.  The drawback, of course, is that your monthly payments will be a lot larger.  Ask yourself if the tax benefits you lose will be really worth it.

FHA and VA Loans - You don't apply directly for Federal Housing Administration and Veterans Administration government-backed loans.  You go through your lender, who will tell you if you qualify.  Both types allow you very low down payments or, in the case of VA loans, no down payment at all.  Your real estate agent can tell if you and the property you want to by, fit the criteria.  A warning:  The application process can be very time-consuming.

Owner Financing - Sometimes the property owner will be willing to take back all or part of the mortgage.  Generally, owner financing will be at a rate higher than average, and it won't last for long - two or three years is common.  The balance of the note, known as a balloon, has to be paid off in full when it comes due.  If you get owner financing, try for the longest possible term and be certain you can switch over to a bank or mortgage lender.

No Income Check, No Asset Check - There is a mortgage out there for anyone, even people with uncertain incomes or a poor credit history.  No income, no asset loans aren't quite that open-ended.  The lender will want to see your tax returns and other proof of your ability to pay.  Because they are more flexible in terms of qualifying, these loans command a much higher interest rate.

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How Much does it Cost?
With the variety and complexity of loan packages avaiable you might want to use a mortgage professional.  Mortgage professionals line up the kind of  financing that best fits your financial profile.  Generally, they charge a fee of a point or two for processing the loan although zero point loans are often available, typically at a higher interest rate than a  loan where points are charged.

A point, in real estate parlance, is one percent of the total loan.  If you are getting a $75,000 mortgage, the point is valued at $750.  No one has ever been able toexplain why lenders confuse the issue  with points, but they do.  Most lenders will add a couple of points for making you the loan, and the sum is usually paid out of the closing.  If your bank is charging you two points, you will have to pay that fee, or $1,500 on a $75,000 loan.

When you choose the kind of loan you want and fill out an application for the lender, expect to pay a few up-front fees.  Sometimes the application fee will include an appriaisal fee and a credit report fee;  other institutions charge separately for the appraisal.  Generally these are non-refundable.

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Credit Checks!
Before you invest in an application, it's a good idean to get a copy of your credit report from a national reporting agency such as TRW.  (Some mortgage companies also make credit reports.)  Often credit reports contain inaccuracies and you want to be able to correct them.

Because loan approval is based in part on your credit history, try to make it look as good as possible before the credit check.  Lenders generally believe you can afford only 36 percent of your income tied up in debt payments, and that includes your housing payment.  So, if your mortage insurance and tax payment is going to eat up 28 percent of your gross income, that only leaves eight percent for other debt.  Try  to get your credit card bills down, and put as much cash  money as you can come up with, even temporarily, in your bank accounts.

Don't be too upset if a lender turns you down because of your credit history.  You still can find a mortgage; you'ss just have to pay more for it.

Richard Winters says mortgage money is definitely out there.  "What's tightened up is not the availability, but the details the lenders want.  You really have to make sure all your I's are dotted and  your T's are crossed before you apply or it will be kicked back to you."

So make sure you can contribute your part of the paper trail before you set out.  Expect to be asked for two or three years of income tax returns.  If you own your own business, or have income outside of  your job, you'll probably have to supply a financial statement.

Now, prepare to spend from 3-5 weeks locking up your mortgage.  It can be a very long process, but of course, it's going to be worth it the moment you become a homeowner.

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