Advertising space

WHAT'S THE BEST LOAN FOR ME?

How do I choose the best loan?

What type of loan should I choose?

The right answer depends on you...the best mortgage for you depends on many factors:

Finding a mortgage begins with education. There are multitudes of information sources, including web sites, topical newspaper articles,mortgage books, consumer seminars and workshops, financial planners, real estate agents, mortgage brokers and lenders that can assist you in your search.

A part of your research should be becoming familiar with the types and terms of mortgages. Knowing which type and term is right for you could prevent needless headaches and could save you thousands of dollars. Example; a 15-year fixed rate mortgage can save you money in interest payments over the life of the loan, the downside...your monthly payments will be higher. An adjustable rate mortgage may get you a lower monthly payment, the downside...your payments get higher when the interest rate changes.

You should know that lenders use certain guidelines to determine the mortgage amount they will lend a prospective home buyer, two such guidelines are housing expenses and long term debt. Lenders look for housing expenses (including mortgage payments, insurance, taxes and special assessments) that do not exceed 25% - 28% of the homeowner's gross monthly income.

For FHA (Federal Housing Administration) loans, this figure should not exceed 29% of the home buyer's gross monthly income. With loan guaranteed by the VA (Department of Veteran's Affairs), lenders measure prospective home buyers with "Residual Income," or the monthly income minus expenses. The remainder is then measured against geographical and family size data to qualify the borrower.

The usual definition of long-term debt is, monthly expenses extending more than 10 months into the future and these expenses should not exceed 33% - 36% of the homeowner's gross monthly income.

What types of loans are available?

Most lenders offer unique mortgage programs with loans specifically tailored to meet the needs of:

Loan Types

Combination loan
A combination loan combines a first and second mortgage for up to 90% of the property's value in a single loan application. This way you can avoid the additional costs of private mortgage insurance (PMI), the higher rates of a jumbo loan or both.

Commercial
If the primary function of your property is to host a business then the loan would be considered a commercial loan.

Construction
This loan type choice is if you are building a home. Lenders specializing in construction loans can lend you the money, whether or not you own the land. If you own land, they will lend you a percentage of the properties future value. If you don't yet own land, they will lend you a percentage of its existing value.

Debt Consolidation
If you have many creditors at high interest rates, such as,credit cards, personal loans, car and boat loans, you can combine everything into one loan with a lower interest rate and payment.

FHA - VA
Select the FHA or VA purchase or refinance options if the loan you are looking for would be a government insured loan through the Veterans Administration or Federal Housing Administration.

Home Equity Line of Credit (HELOC)
A HELOC is a second mortgage that works like a revolving credit line.

Home Improvement Loans
Consider this option if you are planning a major improvement to your existing home and you don't want to refinance your first mortgage. Home improvement loans are typically second mortgages because you are not replacing your fist mortgage.

Jumbo loans
These are loans for homebuyers who require larger loan amounts. Jumbo loans are available in both fixed-rate and adjustable-rate mortgages and generally have higher interest rates due to the amount of money borrowed.

Refinance
If your home loan has higher interest rates than current rates, you can get a new loan for your home with a lower interest rate and use the money to pay off the old loan.

Reverse Mortgage
A loan which gives the borrower a steady monthly income. When the borrower dies the home is sold and the loan is repaid. This is particularly well suited for senior citizens who have paid off their homes.

Fixed or adjustable rate?

Fixed Rate Mortgages
Are the most common type of mortgage loan, your monthly payments for interest and principal never change. Other home related costs like property taxes and homeowners insurance may increase, but your monthly payments will be the same for the life of the loan.Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years, the 15 year and 30 year are the most common fixed rate loans. "Biweekly" mortgages are also available, they shorten the loan by making half the monthly payment every two weeks. Since there are 52 weeks in a year, you make a total of 26 payments, or 13 "months", every year.

Fixed rate fully amortizing loans have two distinct features.

1. The interest rate remains fixed for the life of the loan.
2. The payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term.

Early in the amortization period, a large portion of the payment is applied towards the interest, as the loan is paid down, more of the monthly payment is applied to the principal . A typical 30 year fixed rate mortgage takes 22.5 years of payments to pay half of the original loan amount.

Adjustable-rate mortgage (ARM)
The interest rate on an ARM will change over its lifetime and you should consider how and when the rate changes when you research ARMs. These factors will affect how much your monthly payment is. An ARM rate is calculated by the lender by adding a "margin," usually two to four percentage points, to the index.

The interest rate then adjusts up or down, depending upon current economic trends.The rate you pay on an ARM is based on that fluctuating index plus a fixed extra amount (margin), keep in mind that different indexes go up and down faster than others -- both the index used and the margin can vary among lenders.The one-year U.S. Treasury bill is commonly used because its yield is similar to the 30-year U.S. Treasury bill which is used to set rates on 30-year fixed mortgages. ARMs start out like fixed-rate mortgages, initially the interest rate and your monthly payment remain the same. This time period can vary from several months to several years. After that, the rate and your monthly payment can go up or down for the remainder of the term. In general, ARMs come in terms terms of 15 to 30 years.

Some other important questions to ask:

Locking in an interest rate

Depending on how far along you are in your home search, you may think about locking in locking in a rate.

Comparing costs

The fees you pay to get a loan are known as closing costs; they include fees that your lender charges, including points and various third-party fees:

Costs and fees associated with getting a mortgage

Typical lender charges

  • Appraisal
  • Credit report
  • Inspection
  • Processing
  • Underwriting
  • Administrative

Typical third-party fees

  • Escrow
  • Document preparation
  • Title insurance
  • Notary
  • Attorney
  • Recording

Down payment - Money you contribute toward the purchase of the home when you borrow money is called your down payment. The amount you need varies depending on the type of mortgage you choose, the purchase price of the home and your financial situation.

Closing costs- Costs for processing your loan and transferring the property ownership from the seller to you. Closing costs can range from 3% - 5% of your loan amount, depending on where you live, the loan you choose and your closing date. You may be able to finance certain closing costs in your mortgage loan. When you apply for a loan, your lender will give you an estimate of closing costs, which may include:

Origination fees, which are the costs of processing your loan (including property survey and appraisal)

  1. Items paid in advance, including first-year mortgage insurance premium, first-year hazard insurance premium and first-year flood or earthquake insurance premiums, if required
  2. Escrow account - an account held by the lender which usually pays for city/county property taxes, mortgage insurance, hazard insurance and flood or earthquake insurance, if required
  3. Title insurance charges
  4. Recording and transfer charges
  5. Attorney's fees

Mortgage insurance - If your down payment is less than 20% of the home purchase price, you can expect to pay some form of mortgage insurance. Home loans that are insured let you buy a home with a lower down payment than the lender would otherwise require. Mortgage insurance costs vary, depending on the amount of your down payment and the type of loan you select.

Mortgage payment - When you make a mortgage payment, most of your payment goes toward the principal and interest of your loan. The principal is the remaining balance of your loan, and the interest is the cost of borrowing the money. Typically, all or most of your interest payments are tax deductible. In addition, a portion of your mortgage payment is usually set aside in an escrow account to pay property taxes, mortgage insurance and hazard insurance.