• Types of Loans

    Thirty-Year Fixed Rate Mortgage

    The traditional 30-year fixed-rate mortgage has a constant interest rate and monthly payments that never change. This may be a good choice if you plan to stay in your home for seven years or longer. If you plan to move within seven years, then adjustable-rate loans are usually cheaper. As a rule of thumb, it may be harder to qualify for fixed-rate loans than for adjustable rate loans. When interest rates are low, fixed-rate loans are generally not that much more expensive than adjustable-rate mortgages and may be a better deal in the long run, because you can lock in the rate for the life of your loan.

    Fifteen-Year Fixed Rate Mortgage

    This loan is fully amortized over a 15-year period and features constant monthly payments. It offers all the advantages of the 30-year loan, plus a lower interest rate—and you’ll own your home twice as fast. The disadvantage is that, with a 15-year loan, you commit to a higher monthly payment. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years. This approach is often safer than committing to a higher monthly payment, since the difference in interest rates isn’t that great.

    Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)

    These increasingly popular ARMS—also called 3/1, 5/1 or 7/1—can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a “5/1 loan” has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable-rate loan, based on then-current rates for the remaining 25 years. It’s a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs.

    Adjustable Rate Mortgages (ARM)

    When it comes to ARMs there’s a basic rule to remember…the longer you ask the lender to charge you a specific rate, the more expensive the loan.

    2/1 Buy Down Mortgage

    The 2/1 Buy-Down Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best long-term rates. However, keeping the loan in place even for three full years or more will keep their average interest rate in line with the original market conditions.

    Annual ARM

    This loan has a rate that is recalculated once a year.

    Monthly ARM

    With this loan, the interest rate is recalculated every month. Compared to other options, the rate is usually lower on this ARM because the lender is only committing to a rate for a month at a time, so his vulnerability is significantly reduced.

  • Conforming and Non-Conforming Loans

    One way home loans are differentiated is by their GSE eligibility. If the loan meets requirements set forth by Fannie Mae and Freddie Mac, it is considered a conforming loan. If the loan doesn’t meet all the underwriting requirements set forth by the pair of GSEs, it is considered “non-conforming.”

    One of the main guidelines that determines whether a mortgage is conforming or not is loan amount. Generally, a mortgage with a loan amount below $417,000 is considered conforming, whereas any loan amount above $417,000 is considered a “jumbo loan.” However, in Alaska and Hawaii the confirming limit is $625,500.Note that the conforming limit may change annually, and has risen quite a bit in the past few years as housing prices skyrocketed.

    A jumbo loan may meet all of Fannie Mae and Freddie Mac’s loan underwriting guidelines, but if the loan amount exceeds the conforming limit, it will be considered non-conforming and carry a higher mortgage rate as a result.

    If your loan amount is on the fringe of the conforming limit, sometimes simply dropping your loan amount a few thousand dollars can lower your mortgage rate tremendously, so keep this in mind anytime your loan amount is near the limit.

  • Your FICO score!

    In today’s increasingly automated society, it should come as no surprise that when you apply for a mortgage, your ability to pay can be reduced to a single number. All the years you’ve been paying your mortgage, car payments, and credit card bills can be analyzed, sliced, diced, spindled and mutilated into a single indicator of whether you’re likely to meet your future obligations.

    All three of the major credit reporting agencies (Equifax, Experian and TransUnion) use a slightly different system to arrive at a score. The best known is called the FICO score, based on a model developed by Fair Isaac and Company (hence the name) and used by Experian. Equifax’s model is called BEACON, while TransUnion uses EMPIRICA. While each of the models considers a range of data available in your credit report, the primary factors are:

    Credit History How long have you had credit?
    Payment History Do you pay your bills on time?
    Credit Card Balances How much do you owe on how many accounts?
    Credit Inquiries How many times have you had your credit checked?
    Each of these, and other items, are assigned a value and a weight. The results are added up and distilled into a single number. FICO scores range from 300 to 800, with higher being better. Typical home buyers likely find their scores falling between 600 and 800.

    FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.

    What can you do about your FICO score? Unfortunately, not much. Since the score is based on a lifetime of credit history, it is difficult to make a significant change in the number with quick fixes. The most important thing is to know your FICO score and to ensure that your credit history is correct. Conveniently, Fair Isaac has created a web site www.myFICO.com) that let’s you do just that. For a reasonable fee, you can quickly get your FICO score from all three reporting agencies, along with your credit report. Also available is some helpful information and tools that help you analyze what actions might have the greatest impact on your FICO score. Each of the credit services offers similar services on their web sites: www.equifax.com, www.experian.com, and www.transunion.com.

    Armed with this information, you will be a more informed consumer and better positioned to obtain the most favorable mortgage available to you.

  • Tips Reading the Inspector Report

    When interviewing a home inspector, ask the inspector what type of report format he or she provides. There are many styles of reports used by property inspectors, including the checklist, computer generated inspection programs, and the narrative style.

    Some reports are delivered on site and some may take as long as 4 – 6 days for delivery. All reporting systems have pros and cons.

    The most important issue with an inspection report is the descriptions given for each item or component. A report that indicates the condition as “Good”, “Fair” or “Poor” without a detailed explanation, is vague and can be easily misinterpreted. An example of a vague condition would be:

    Kitchen Sink: Condition – Good, Fair, or Poor.

    None of these descriptions gives the homeowner an idea what is wrong. Does the sink have a cosmetic problem? Does the home have a plumbing problem? A good report should supply you with descriptive information on the condition of the site and home. An example of a descriptive condition is:

    Kitchen sink: Condition – Minor wear, heavy wear, damaged, rust stains, or chips in enamel finish. Recommend sealing sink at counter top.

    As you can see, this narrative description includes a recommendation for repair. Narrative reports without recommendations for repairing deficient items may be difficult to comprehend, should your knowledge of construction be limited.

    Take the time and become familiar with your report. Should the report have a legend, key, symbols or icons, read and understand them thoroughly. The more information provided about the site and home, the easier to understand the overall condition.

    At the end of the inspection your inspector may provide a summary with a question and answer period. Use this opportunity to ask questions regarding terms or conditions that you may not be familiar with. A good inspector should be able to explain the answers to your questions. If for some reason a question cannot be answered at the time of the inspection, the inspector should research the question and obtain the answer for you. For instance, if the inspector’s report states that the concrete foundation has common cracks, be sure to ask, “Why are they common?” The answer you should receive will be along these lines: common cracks are usually due to normal concrete curing and or shrinkage. The inspector’s knowledge and experience is how the size and characteristics of the cracking is determined.

    We recommend that you accompany your inspector through the entire inspection if possible. This helps you to understand the condition of the home and the details of the report.

    Read the report completely and understand the condition of the home you are about to purchase. After all, it is most likely one of the largest investments you will ever make.

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