—Information—

About Mortgages—

Shopping for a mortgage loan is every bit as important as shopping for your new home, and should be done first. You need to get pre-qualified to know how much home you can afford and that your credit report is in good shape. Once pre-qualified, you know where you stand and can then proceed to choose a lender and get pre-approved. There are a variety of mortgage lenders and loans available, and there is a right one for you.

First, how much home can you afford? This you determine by:

•  the amount you have for a down payment and
•  the amount you are qualified to borrow.

For a down payment you will need between 5% and 20% of the selling price of the home. That means that you will have to borrow between 80% to 95%.

You need to know if you qualify for a mortgage loan of that size. Whether or not you qualify depends upon how much monthly payment; principal, interest, taxes and insurance, you can afford. Another important consideration is your past payment history gleamed from your credit report. It is a good idea to get a copy of your credit report before you approach a lender, so you know what it says about your payment history and to make sure there is no erroneous information in the report. If there is, it will have to be cleared up before you get approved for a loan.

Generally, lenders use ratios to determine how much debt you can handle and how much of a mortgage payment you can afford. The debt to income ratio is usually about 36% to 40%. This takes your long term debt, longer than a year, and compares it to your gross income. Monthly figures are used. The principal and interest ratio looks for your monthly payment for principal and interest on a mortgage to range from about 25% to 33% of your gross monthly income.

Take a close look at your assets: income, savings, IRAs, investments, life insurance, pensions and such. Also look at any equity you have in other real estate. What are your liabilities: outstanding loans including auto, credit card balances, alimony, and other long term debt.

These are all of the things a lender will use to determine how much loan you can afford and at what rate. Many things beside current market conditions go into determining a mortgage loan rate. Two of which are the term of the loan, and the amount of risk involved.

The lender looks at how much risk is involved in making this loan to you. The risk determines if he will make the loan, and at what rate. You too have a risk factor to determine. All of us have a setpoint for risk. Some of us are conservative and prefer a sure thing, others have a different setpoint, and actually thrive on risk taking. Knowing what type you are helps determine what kind of loan is right for you. If you are willing to share some of the lenders risk you can negotiate a better rate.

You will also need to think about the source of your income and whether it is stable over the next few years, or will it change. All of these factors go into determining the right kind of mortgage for you. If you are a conservative risk taker and your income is stable you may prefer a fixed rate loan. If you anticipate greater than cost-of-living increases you may want to go with an adjustable rate loan with a balloon or one that is convertible to a fixed rate in 3, 5, or 7 years.

You need to consider the term of the loan also. 30 year loans are the norm, but 15 year loans have been increasing in popularity. The pros and cons here are again based on risk. For instance, if you are certain your income is going to keep increasing at a reasonable pace, you may opt to save a bundle of interest and take the 15 year loan. However, if something comes out of left field, that you are not prepared for, and your income should suffer, it may be very difficult to make those much larger payments every month. Greater risk here. A good option, and more conservative which answers your desire to pay down your loan faster, is to take out the 30 year loan and increase the amount of principal you pay each month; Or, you can opt to make one additional payment each year. This is optional on your part and if you have temporary financial difficulties you don't have to do it. With a high payment 15 year loan, you are committed to those payments for the term of the loan. With the 30 year loan you have the option to pay it down or not.

The annual percentage rate or APR reflects the total interest charged on your loan. It includes the loan rate plus prepaid finance charges. Points and origination fees are the most common charges.

A point is an up front, one-time fee you pay the bank. Points effect the rate. When you pay points your rate is usually lower than if you do not. One point equals 1% of the mortgage loan.

The origination fee is an up front, one-time mortgage loan processing fee.

Other costs involved include private mortgage insurance premiums if your down payment is less than 20%, and the estimated interest prorated from the date you close to the end of the month you close in.

Once you have done all the paperwork and decided on a loan type you will need a rate lock while you are looking for a home. A rate lock guarantees you will get the interest rate you are quoted by a lender for a set period of time, usually 30 to 45 days. Rate locks are generally available up to 120 days for an additional fee, but be sure to check with your lenders policies.

Today, most loans have prepayment clauses which allow you to prepay your loan if desired without a penalty. Don't take anything for granted, check this out with your lender too. You need this option if you want to prepay some of your principal or refinance, at some point.

Now, armed with your pre-approval letter from the lender, you can shop for your dream home. Seller's prefer to work with pre-approved buyers because the transaction has a better chance of closing when the buyer is pre-approved.

If you have any questions, I am happy to help. You can email or phone me at 407.894.8291.

Try our Prequalification Calculator to determine your principal, interest, tax and Insurance (PITI)and the Annual Salary you will need to qualify at any mortgage amount.

—REX- Real Estate Exchange, Inc.—
–Licensed Florida Real Estate Broker–
1337 Brandy Lake View Circle
Orlando, FL 34787
PHONE: 407.894.8291 FAX: 407.464.9199
EMAIL:   info@rexrealestateorlando.com

CONTACT: BarbaraMary Ann