How much house can I afford?
There are two parts to this question. One being, “How much can I qualify for?” and the other being, “What mortgage payment can I comfortably afford month-to-month, year-to-year?” With regards to purely qualification, there are two ratios that mortgage lenders heavily rely on to determine your maximum mortgage amount. They are your housing ratio (total monthly housing obligation over your gross monthly income) and your debt ratio (total monthly housing obligation, plus your minimum monthly obligations over your gross monthly income). An FHA loan is usually capped at 29/41, while some more conservative loan programs cap there ratios at 28/36
What is a Loan-To-Value (LTV) ratio? How does it determine the size of the loan?
The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: with a 95% LTV loan on a home priced at $200,000, you could borrow up to $190,000 (95% of $200,000), and would have to pay $10,000 as a down payment.
The LTV ratio reflects the amount of upfront equity borrowers have in their homes. The higher the LTV ratio, the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require a mortgage insurance policy.
What types of loans are available and what are the advantages of each?
Fixed Rate Mortgages: Principal and interest payments remain the same for the life of the loan and your housing cost remains unaffected by interest rate fluctuation.
ARMS (Adjustable Rate Mortgages) are linked to a specific index and generally offer a lower initial interest rate, but can adjust after the initial fixed rate period.
When do ARMS make sense?
An ARM may make sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates or volatility of the housing market.
Can I pay off my loan ahead of schedule?
Yes. By sending in additional principal each month or making an extra payment at the end of each year, you can accelerate the process of paying off the loan quite dramatically. Use our amortization calculator to figure out how much you can save. When you send in your payment, be sure to indicate that the excess money is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your loan officer for details.
Are there special mortgages for first time homebuyers?
Yes. Your loan officer can help you understand and choose from the several affordable mortgage options designed for first-time homebuyers.
How large of a down payment do I need?
There are mortgage options now available that only require a down payment of 3.5% or less of the purchase price. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and possibly repairs and decorating.
What is included in a monthly mortgage payment?
The monthly mortgage payment consists of your principal and interest payment from your loan, as well as real estate taxes, homeowner's insurance, and mortgage insurance (if applicable).
What factors effect mortgage payments?
The amount of your loan, down payment, interest rate, and the length of the repayment will all affect your mortgage payment. Other factors include any changes in your real estate taxes on the property, the policy you choose on your homeowner's insurance, and although not included in your mortgage, you must consider your HOA fees if applicable.
How does the interest rate factor in securing a mortgage loan?
A lower interest rate equals a lower monthly payment. This can be beneficial for qualifying purposes, and of course securing the lowest monthly payment possible. Interest rates can fluctuate as you shop for a loan, so be mindful of the market and ask your loan officer about locking into your interest rate once you have secured your loan type and property. Compare the Annual Percentage Rate (APR) which can show you the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points and fees included in the loan.
What happens if interest rates decrease and I have a fixed rate loan?
If interest rates drop significantly, you may want to consider refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is makes sense. There are several factors that you must weigh in to this decision. Discuss these options in detail with your loan officer
What are discount points?
Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 to 1/4 (or.125 to .25) of a percentage point. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.
What is an escrow account and do I need one?
Established by your lender, an escrow account is where they will set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are required in some loan programs.