Mortgage Information

Purchasing a home is a huge investment. Educating yourself on options available to you is the best way to make a decision on which mortgage will work best for you. You may not qualify for all types, but investigating your options in advance could save you money and possibly worry in the future.

TYPES OF MORTGAGES
There are a variety of mortgages from which to choose.

FIXED RATE MORTGAGES - You plan on living in your new home for many years and/or you want to avoid risk and prefer the stability of paying a fixed, predictable mortgage each month

PROS - Your loan amount and interest rate are calculated and locked in, and a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan. Making extra payments against the principal allow you to pay off the loan sooner. If interest rates are low, the fixed rate loan will protect you against rate hikes.

CONS - If interest rates are high at the time you secure the fixed rate mortgage, you'll be stuck with the interest rate for the life of the loan, unless you choose to refinance.

Below are the advantages and disadvantages of the varying lengths and terms related to fixed-rate mortgages:

    15-Year Fixed-Rate Loan
    Advantages - pay off the loan in half the time of the 30-year loan
                             equity builds more quickly than in the 30-year loan

    Disadvantages - payments are higher than the 30-year

    20-Year Fixed-Rate Loan
    Advantages - pay off the loan in 2/3 the time of the 30-year loan
                             the overall interest paid is considerably less than for a 30-year loan

    Disadvantages - payments are higher than the 30-year

    30-Year Fixed-Rate Loan
    Advantages - the lowest hurdles for qualification; it is the most common choice, especially for                              first-time home buyers
                             monthly payments are lower than for 15-year and 20-year loans
                             this loan provides the maximum interest deduction for income tax purposes

    Disadvantages - equity builds more slowly than with the shorter-term loans.
                                   you will pay significantly more interest over the life of the loan


ADJUSTABLE-RATE MORTGAGES (ARMS) - If interest rates are historically high at the time you secure a loan, you are comfortable assuming the risk associated with rising interest rates, or you only plan to own the home for a short period, an adjustable-rate mortgage (ARM) may be the best loan choice. Initially, not necessarily long-term, the interest rate will be lower than a fixed-rate mortgage.

An ARM interest rate rises and falls with the prevailing interest rate; therefore, your mortgage payment will rise and fall accordingly. If your income is insufficient to cover the highest payment you might experience, this option is not for you. On the positive side, the lower initial payments of an ARM will allow you to qualify for a larger loan than with the fixed-rate option.

Typically, ARM interest rates are tied to a specific financial index and your payment will be based on the index selected by the lender, plus a margin of two to three points. Obtain the formula used by your lender in writing and make sure you understand what it means.

Fortunately, the amount an ARM can increase is limited. There are "caps" on how much the lender can increase the interest rate, both over a one year period and over the life of the loan. Have your lender calculate the maximum payment possible, should your interest rise to the highest rate allowed by the cap. If you are not confident in your ability to pay this highest possible monthly payment, perhaps you should avoid this type of loan.


CONVERTIBLE ARMs - If neither the fixed-rate or adjustable-rate mortgage seems optimal, another option is the convertible ARM. This loan type combines the initial low-rate advantage of an ARM plus a fixed rate after a predetermined number of years.


GOVERNMENT LOANS - Buyers who meet the qualifications may want to consider a government loan.

VA Loans - Veterans may qualify for a Veterans Administration loan; however, here is a cap on the amount the veteran can borrow. This option is best for those buying a lower priced home.

FHA Loans - The Federal Housing Association (FHA) offers loans to lower-income Americans. Look for the phrase "FHA approved" when looking at ads for homes.


GETTING THE BEST RATE FOR YOUR MORTGAGE
Finding the best rate requires research. Check the internet regularly as mortgage rates change quickly and are not secured until your rate has been locked.

Ask the lender for a statement detailing all fees associated with a prospective loan. Factors such as "points" (loan fee), interest rate and "garbage fees" (extra fees which some lenders charge) can vary greatly from one lender to another.

ESCROW AND SETTLEMENT
You will be asked to place a down payment on the home your new home. You can choose to put down as much or as little as you want (depending on the mortgage type). Keep in mind that if you put down a higher amount, you will reduce the loan payoff time as well as your monthly mortgage payments. Your down payment may be held by one of the following depending on your particular arrangements: escrow or settlement company, closing attorney or in the mortgage broker's trust account.

Please know that your deposit check will be cashed. Assuming the sale goes through, these funds will be applied to the purchase price of the home. If for any reason the sale is not consummated, you may be entitled to have your deposit returned, less any standard cancellation fees. If the purchase agreement so states, the seller may be entitled to your down payment as liquidated damages. Prior to signing a purchase contract, speak with your attorney as to whether it makes sense to allow a liquidated damages clause as a component of the agreement.

Review the title report with your attorney or title officer. The title must be "free and clear" to ensure there are no legal flaws regarding your ownership. Check on local and state ordinances regarding property transfer and ensure that you and/or the seller have fully complied.

Secure homeowner's insurance. This will be required before closing the sale. Dealing with requirements such as special fire and/or earthquake insurance may prolong the time required to bind the insurance contract. Apply immediately after signing the purchase agreement.

Contact local utility companies to schedule service to coincide with your projected move in date.

Schedule the final walk-through (inspection) prior to closing. This walk through is your opportunity to ensure that the property is exactly as the contract stipulates. Make sure all light fixtures, appliances and any other equipment included with the property, are in place.

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