Mortgage : Understand you financial options : Strongsville Real Estate : Keller Williams Realty

By:
CJ Harrington
Keller Williams Realty
www.cjharrington.com
cjharrington.crs@gmail.com
440.336.0612

Date:
10-23-08

Buying a home is the biggest financial investment most of us will ever make. As with any large project, it requires dealing with a variety of complex issues. The best approach is to divide the process into manageable tasks. The steps are gathering your records, determining what you can afford, and understanding mortgage options.
First and foremost, you should determine how much home you can afford. Most lenders will prequalify you to borrow up to a certain amount. Prequalification allows you to focus in on a realistic price range and makes you a more attractive buyer.
Next, it is a good idea to review your credit report. Contact local lenders to determine which credit bureaus they use. Then contact the credit bureaus and request a copy of your credit report (in most states, credit bureaus are required to provide individuals with a free copy of their report, or just go to freecreditreport.com). Review your report. If you have past credit problems, don't lose hope. Be prepared to present a rationale for each slipup, and demonstrate an improvement in your ability to pay bills on time.
The Federal National Mortgage Association is a government-sponsored organization that purchases mortgages from lenders and sells them to investors. Two income-to-debt ratios are standard requirements for conventional mortgages. The first requirement is that monthly mortgage principal and interest payments (P & I), plus insurance and property taxes, cannot exceed 28% of the buyer's gross monthly income. The second requirement limits total monthly debt payments (housing, credit cards, car payments, etc.) to 36% of gross monthly income. In addition, you may have to pay 10% to 20% down on the total purchase price to qualify for a conventional mortgage.
How much house you can buy also depends on your mortgage's term and interest rate. The term is the length of time payments will be paid (usually 15 or 30 years). The rate can be fixed or adjustable. Thirty-year fixed-rate mortgages remain the most popular. The longer term lowers the monthly payment, while the fixed rate provides stability over the life of the loan. Given relatively low interest rates, these mortgages are attractive to buyers planning to stay at least six or seven years in their new home.
A 15-year term lowers the interest rate, reduces total interest payments, and increases principal payments, but it also increases monthly payments. If you can't afford the higher payments now, you might opt for a 30-year mortgage. Making just one extra monthly payment a year will pay off a 30-year mortgage in less than 22 years and can save tens of thousands of dollars in interest costs.
If you plan to stay in a home no more than three years, you might want an adjustable-rate mortgage (ARM). ARMs offer initial rates that are lower than fixed mortgages. Most ARMs include a cap on rate increases in any given year, as well as over the life of the loan. Some ARMs offer initial rates at least 2% below fixed rates and limit increases to 1% annually and 5% to 6% over the life of the loan. Many home buyers are attracted by the affordability of an ARM during the initial period. However, you should be confident that your future income will be sufficient if both interest rates and your monthly payments increase.
Another popular mortgage involves a balloon payment. A balloon is a lump-sum payment that pays off the loan in full after a fixed period of time. Generally the rates on balloon mortgages are 1/4% to 3/4% less than on 30-year fixed mortgages, but during an initial period of between 3 and 15 years, payments are similar. After this period, the remaining outstanding principal balance is either due in full or subject to refinancing. This is a good option for home buyers who plan to sell before the final payment is due.
So when choosing financing, remember to estimate how long you expect to live in the house, shop around for mortgage rates, and add up all the costs for each lender. Honestly, understanding you options is just the beginning, but it is a great place to start.

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