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How do I know if I am choosing the right mortgage? Whether you are purchasing or refinancing, it is important to understand and weigh your options before applying for a home loan. 30 Year fixed, Interest only, ARM's, Loan Origination fees, Points, APR... what do all of these mean? How do they affect you and how much are you going to pay in fees as well as interest? These are all very important questions and a good mortgage broker or banker should be able to answer these for you. But, you have to ask yourself, do they have any vested interest in you doing the loan with them? Of course they do. That is why it is important for you to understand some of the basics, so you don't get the wool pulled over your eyes.
How do lenders decide who gets approved for a mortgage loan and who doesn't?
There are four factors that are looked at when reviewing a mortgage application for potential approval.
They are called the four C's:
Character: The main area that is looked at to determine your financial character is your credit report. To find out more information on your credit score and what affects it visit the Credit Score section.
Capacity: Refers to your ability to make the payments on the loan, your cash flow. This an extremely important part of the approval guidelines. Mortgage companies will often refer to this as your Debt to Income Ratio (DTI).
Collateral: Is the house that you are purchasing or refinancing worth more than what you are taking the loan for? Since a mortgage is secured by the property itself then the property is the collateral. This is where the Loan to Value (LTV) comes in. LTV is the amount of the loan (or Loans) as a percentage to the total value of the house.
Capital: Capital refers to your total assets and the ability to repay your debts. Lenders will look at everything from your net worth to cash flow to determine this factor.
How do I know which mortgage is the best mortgage for me?
Having a good mortgage broker or banker can help you a lot with this question, because they can ask questions about your goals and financial plans to help determine how to best structure your home loan.
Because there are literally thousands of different combinations of home loans, for simplicity sake, we are only going to discuss three main types of home loans: Fixed, Variable, & Interest Only.
Fixed: 30 Year fixed is one of the most common loans out there. The benefits: Your rate & payment doesn't change for 30 years so, you have peace of mind. A 15 Year fixed mortgage can sometimes be a benefit it a substantially lower rate is offered and your goal is to pay of the mortgage quicker, sacrificing some cash flow in the present.
Variable: There are multiple variable type loans. Common Adjustable Rate Mortgages (ARM) are the 3/1, 5/1, 7/1, & 10/1 ARM's. The first number generally refers to the period of which the rate is fixed, so a 5/1 ARM would be fixed for 5 years and then once a year after that it can adjust (there are mortgages that can adjust more or less often as well). How much can it adjust? Good question! You will want to ask the mortgage company about this, but it is commonly referred to as the margin and can vary greatly, so make sure you know what it is. There may also be a life cap or the maximum amount that the loan can change within the life of the loan. The benefits: If you relocate often and know you will not be in a house for more than 2-3 years, having a 5/1 ARM could save you some money on the interest you would pay. Also, if you are in a period of historically high interest rates (which we are in a historically low period currently), having a variable rate mortgage could benefit you when rates go down. (check with your mortgage company to make sure that the rate will also adjust down)
Interest Only: Interest only loans are just like what they sound, for a period of time you make payments to only the interest of the mortgage. There are both fixed and varible interest only mortgages. The benefits: If increasing cash flow is a goal, having an interest only loan can help you achieve this. Generally the lower the loan amount, the less cash flow it frees up. If you have a 600,000 dollar loan on interest only (like everyone else in CA) it makes a substantial difference in monthly payment, but if your loan is only for 150,000 an interest only loan wouldn't have as large an impact. Understand that you are not paying down the principal balance of the loan and that this could cause issues later.
Tip: Often the rate & fees quoted by a mortgage company are negotiable. Do not hesitate to shop around and get multiple quotes. Make sure you compare all facets of the loan, the lowest interest rate is not the sole deciding factor, especially if you are paying much higher fees to get it. Comparing the Annual Percentage Rate (APR) is a good way to compare different options as the APR takes both the interest rate and fees into account.
(Always review a good faith estimate from a lender in order to review the details of the loan.)
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Mortgage Basics
How do lenders decide who gets approved for a mortgage loan and who doesn't?
There are four factors that are looked at when reviewing a mortgage application for potential approval.
They are called the four C's:
Character: The main area that is looked at to determine your financial character is your credit report. To find out more information on your credit score and what affects it visit the Credit Score section.
Capacity: Refers to your ability to make the payments on the loan, your cash flow. This an extremely important part of the approval guidelines. Mortgage companies will often refer to this as your Debt to Income Ratio (DTI).
Collateral: Is the house that you are purchasing or refinancing worth more than what you are taking the loan for? Since a mortgage is secured by the property itself then the property is the collateral. This is where the Loan to Value (LTV) comes in. LTV is the amount of the loan (or Loans) as a percentage to the total value of the house.
Capital: Capital refers to your total assets and the ability to repay your debts. Lenders will look at everything from your net worth to cash flow to determine this factor.
Choosing the Right Mortgage
How do I know which mortgage is the best mortgage for me?
Having a good mortgage broker or banker can help you a lot with this question, because they can ask questions about your goals and financial plans to help determine how to best structure your home loan.
Because there are literally thousands of different combinations of home loans, for simplicity sake, we are only going to discuss three main types of home loans: Fixed, Variable, & Interest Only.
Fixed: 30 Year fixed is one of the most common loans out there. The benefits: Your rate & payment doesn't change for 30 years so, you have peace of mind. A 15 Year fixed mortgage can sometimes be a benefit it a substantially lower rate is offered and your goal is to pay of the mortgage quicker, sacrificing some cash flow in the present.
Variable: There are multiple variable type loans. Common Adjustable Rate Mortgages (ARM) are the 3/1, 5/1, 7/1, & 10/1 ARM's. The first number generally refers to the period of which the rate is fixed, so a 5/1 ARM would be fixed for 5 years and then once a year after that it can adjust (there are mortgages that can adjust more or less often as well). How much can it adjust? Good question! You will want to ask the mortgage company about this, but it is commonly referred to as the margin and can vary greatly, so make sure you know what it is. There may also be a life cap or the maximum amount that the loan can change within the life of the loan. The benefits: If you relocate often and know you will not be in a house for more than 2-3 years, having a 5/1 ARM could save you some money on the interest you would pay. Also, if you are in a period of historically high interest rates (which we are in a historically low period currently), having a variable rate mortgage could benefit you when rates go down. (check with your mortgage company to make sure that the rate will also adjust down)
Interest Only: Interest only loans are just like what they sound, for a period of time you make payments to only the interest of the mortgage. There are both fixed and varible interest only mortgages. The benefits: If increasing cash flow is a goal, having an interest only loan can help you achieve this. Generally the lower the loan amount, the less cash flow it frees up. If you have a 600,000 dollar loan on interest only (like everyone else in CA) it makes a substantial difference in monthly payment, but if your loan is only for 150,000 an interest only loan wouldn't have as large an impact. Understand that you are not paying down the principal balance of the loan and that this could cause issues later.
Tip: Often the rate & fees quoted by a mortgage company are negotiable. Do not hesitate to shop around and get multiple quotes. Make sure you compare all facets of the loan, the lowest interest rate is not the sole deciding factor, especially if you are paying much higher fees to get it. Comparing the Annual Percentage Rate (APR) is a good way to compare different options as the APR takes both the interest rate and fees into account.
(Always review a good faith estimate from a lender in order to review the details of the loan.)
Read More Articles about Mortgage
