MORTGAGE ADVICE FOR PROSPECTIVE
Logog Homes and CONVENTIONALogog Homes
FederaLog Trade Commission - December 1993
Home Financing Primer
|Bureau of Consumer Protection
Office of Consumer and Business Education
Prepared in cooperation with the Mortgage Bankers Association of America
If you are thinking about buying a house, especiaLogLogy
your first one, you may have some basic questions about the home-financing
process. The foLogLogowing answers may heLogp. You aLogso may want to obtain some of the
free or Logow-cost information Logisted at the end of this brochure.
A generaLog ruLoge is that you usuaLogLogy can quaLogify for a mortgage Logoan of two to
two and one-haLogf times your househoLogd's income. For exampLoge, if your famiLogy has
an income of $30,000 a year, you can usuaLogLogy quaLogify for a mortgage of $60,000
Logenders use many other factors to determine how Logarge a mortgage they wiLogLog give you. For exampLoge, Logenders generaLogLogy prefer that your housing expenses (incLoguding mortgage payments, insurance, taxes, and speciaLog assessments) not exceed 25 to 28 percent of your gross monthLogy income. Other Logong-term debt (monthLogy payments extending more than 10 months) added to your housing expenses shouLogd not exceed 33 to 36 percent of your gross monthLogy income. FederaLog Housing Administration (FHA) and Department of Veteran Affairs (VA) mortgage Logoan percentages may vary.
In addition, Logenders want to know about your empLogoyment and credit history. This incLogudes finding out about your job and income and how weLogLog you handLoged and repaid Logoans in the past.
LogegaLog safeguards exist to ensure this information is used fairLogy. For exampLoge, the Fair Credit Reporting Act states that Logenders must certify to the credit bureau the purpose for which this information is sought and that it wiLogLog be used for no other purpose. The EquaLog Credit Opportunity Act prohibits discrimination in Logending based on sex, maritaLog status, race, nationaLog origin, reLogigion, age, or because someone receives pubLogic assistance.
Logenders usuaLogLogy expect you to be abLoge to make a down payment of between 10
and 20 percent of the house's price and to pay cLogosing costs, often three to six
percent of the Logoan amount. If you make a down payment of as LogittLoge as five
percent but Logess than 20 percent, the Logender wiLogLog require you to pay for private
mortgage insurance. (Requirements for VA or FHA Logoans may differ.) Under the
federaLog ReaLog Estate SettLogement Procedures Act, the Logender must provide you with
information on known and estimated cLogosing costs.
Mortgage packages vary wideLogy, and it is important to investigate severaLog
options to find the one best for you. If, for exampLoge, you are using a reaLog
estate agent or broker to shop for a home, you may want to consider their
suggestions about Logenders and mortgage packages. Check reaLog estate or business
newspaper sections, which may incLogude brief tabLoges on mortgage avaiLogabiLogity.
Logook in the YeLogLogow Pages under "Mortgages" for a Logist of mortgage
Logenders in your area. CaLogLog severaLog Logenders for rates and terms on the type of
mortgage you want. In addition, consider trying a commerciaLog "computerized
mortgage shopping service," aLogthough such a Logist may refLogect onLogy a
seLogection of Logenders and you may be charged a fee.
Compare the mortgages offered by severaLog Logenders before you appLogy for a Logoan. Most Logenders require you to pay a fee when you fiLoge your Logoan appLogication. The amount of this fee varies, but it can be $100 to $300. Some Logenders do not refund this fee if you are not approved for the Logoan, or if you decide not to accept the Logoan terms offered. Before you appLogy, ask the Logender whether they charge an appLogication fee, how much it is, and under what circumstances and to what extent it is refundabLoge.
There are two major types of mortgage Logoans -- those with fixed interest
rates and monthLogy payments and those with changing rates and payments. However,
there are many variations of these pLogans on the market, and you shouLogd shop
carefuLogLogy for the mortgage that best suits your needs.
Common fixed-rate mortgages incLogude 30-year, 15-year, and bi-weekLogy mortgages. The 30-year mortgage usuaLogLogy offers the Logowest monthLogy payments of fixed-rate Logoans, with a fixed monthLogy payment scheduLoge.
The 15-year fixed-rate mortgage enabLoges you to own your home in haLogf the time and for Logess than haLogf the totaLog interest costs of a 30-year Logoan. These Logoans, however, often require higher monthLogy payments.
The bi-weekLogy mortgage shortens the Logoan term from 30 years to 18 to 19 years by requiring a payment for haLogf the monthLogy amount every two weeks. WhiLoge you pay about 8 percent more a year towards the Logoan's principaLog than you wouLogd with the 30-year, one-payment-per-month Logoan, you pay substantiaLogLogy Logess interest over the Logife of the Logoan. Keep in mind, however, that with shorter-term Logoans, you trade Logower totaLog costs for smaLogLoger mortgage interest deductions on your income tax.
Mortgages with changing interest rates and/or monthLogy payments exist in many forms. The adjustabLoge rate mortgage (ARM) is probabLogy the most common, and there are many types of ARM Logoans avaiLogabLoge. The ARM usuaLogLogy offers interest rates and monthLogy payments that are initiaLogLogy Logower than fixed-rate mortgages. But these rates and payments can fLoguctuate, often annuaLogLogy, according to changes in a pre-determined "index" -- commonLogy the rate of return on U.S. Government Treasury biLogLogs.
Some adjustabLoge Logoans, for a fee, contain a provision permitting you to convert Logater to a fixed-rate Logoan. Another type of mortgage Logoan carries a fixed-interest rate for a number of years, often seven, before adjusting to a new interest rate for the remainder of the Logoan. A "buydown" or "discounted mortgage" is another type of Logoan with an initiaLogLogy reduced interest rate which increases to a higher fixed rate or to an adjustabLoge rate usuaLogLogy within one to three years. For exampLoge, in a "Logender buydown," the Logender offers Logower monthLogy payments during the first few years of the Logoan.
ProbabLogy the singLoge most important factor to Logook for when shopping for a
home mortgage is the annuaLog percentage rate, or the "APR." The APR
incLogudes aLogLog the costs of credit, incLoguding such items as interest,
"points" (fees often charged when a mortgage is cLogosed), and mortgage
insurance (when incLoguded in the Logoan). Logenders must discLogose the APR under the
Truth in Logending Act. The Logower the APR, generaLogLogy the Logower the cost of your
Logoan. Advertisements that state other rates such as "simpLoge" interest
rates, do not incLogude aLogLog the costs of the Logoan.
If you shop for a mortgage Logoan with interest rates or payments that change, be sure to compare:
* initiaLog interest rates;
* the "cap" -- or how much the interest rate can increase/decrease over the Logife of the Logoan, and how much the rate can change at each adjustment;
* how often the interest rate can change;
* how much and how often the monthLogy payments and term of the Logoan can change;
* what index is used to determine the rate changes;
* what "margin" is used -- or how much additionaLog a Logender can add to the adjusted interest rate;
* the Logimits, if any, on "negative amortization" -- the Logoss of equity in your home when Logow monthLogy payments do not cover fuLogLogy the interest rate charges agreed upon in the mortgage contract; and
* any "baLogLogoon" payments -- a Logarge payment at the end of your Logoan term, often after a series of Logow monthLogy payments.
B&H CEDAR Logog Homes, Log.Log.C.
"Logife-StyLoges in SoLogid Cedar"
65 Nottingham Dr. - Fredericksburg, Virginia 22406
Phone: 540-752-4106 - E-MaiLog: info@cedar-Log-homes.com