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Keith Blackburn, GRI

Loan and Mortgage Financing FAQ’s

Home Mortgage and Financing FAQs

1. What is the first step I should take in the home loan process?

When you’re searching for a home loan, the first thing you should do is get prequalified or preapproved. This will ensure that you’ll be able to secure a loan when you find the home you want to buy. Plus, you’ll have a better idea of how much house you can afford.

Not only does a preapproval make you more attractive to sellers, but you’ll also save loads of time during the closing process. Because your lender will complete the verification and underwriting steps during the preapproval process, you won’t have to go through those steps again at closing.

2. How do I find the best lender?

Take time to shop around and find the best possible interest rate and loan terms. You should talk to a minimum of three different lenders before you make your final decision. Ask your realtor, friends and family members if they can recommend a good lender. Whatever you do, do not settle for the first company that offers you a loan. Find a trustworthy, reliable lender that is the best fit for you.

3. How much will I have to pay in closing costs?

There are countless fees and closing costs associated with mortgage loans. These fees can add up quickly and easily push you over budget. Make sure your lender provides you with a Good Faith Estimate, and take time to read all the fine print. Ask plenty of questions about any fees you don’t understand or consult an attorney for further explanation.

4. How can I lock-in an interest rate on my home loan?

If you expect interest rates to rise in the near future, you should ask your lender for a mortgage rate lock-in when you apply for the loan. This ensures that the rate the lender offers you will stay the same for certain period of time (usually 30 to 60 days.) That way, if you buy a home within the next month or two, you’ll be guaranteed the same mortgage rates that are available today. Once you lock in your rate, ask your lender for a contract or statement including your interest rate and the amount of time the rate will stay the same.

5. What’s the difference between a fixed-rate mortgage and an adjustable rate mortgage (ARM)?

A fixed-rate mortgage has an interest rate that locked in throughout the life of the loan (usually 15 to 30 years.) On the other hand, an adjustable rate mortgage (or ARM) has interest rates that vary over the life of the loan. With an ARM, your interest rates can change every six to 12 months or even monthly. Typically, an ARM’s interest rates are tied to an economic index, such as the national mortgage rate. When rates are high, your rate will increase. When rates are low, your rate will drop.

If mortgage rates are extremely low when you’re buying a home, you should probably choose a fixed rate loan. That way, your rate will be locked in at this low level for the life of your loan. On the other hand, if interest rates are very high and you think they will decrease soon, you may consider an ARM. However, this is an extremely complicated decision, so you may want to discuss your options with your real estate agent or a financial advisor.

6. Should I choose a 15 or 30-year home loan?

It really depends on your unique situation. The difference in payments on a 15-year fixed-rate loan and a 30-year fixed-rate loan will depend on your loan amount and interest rate. For example, if you have a $100,000 loan at a 7.25% interest rate, your monthly payments for a 15-year loan would come out to $912.86 vs. a monthly payment of $682.18 for a 30-year loan.

However, you could save a bundle in the long run with 15-year-loan. Because the period of amortization is half that of a 30-year loan, you will pay significantly less interest over the life of a 15- year loan. On the other hand, if your income status were to change, you may have a hard time paying the higher monthly mortgage of a 15-year loan.

Of course, there are many other factors to consider as you decide whether a 15 or 30-year loan is the best option for you. Talk to a financial professional to discuss the pros and cons of each.

7. What is PMI?

You are required to pay Private Mortgage Insurance (PMI) if your down payment on a home is less than 20 percent of the total purchase price. PMI is a type of insurance that protects the lender against the risk of your default—which is what happens if you can no longer make your monthly mortgage payments.

Although the cost of PMI varies depending on your mortgage company, premiums typically run about 0.5 percent of the loan amount for the first year of the loan. PMI premiums usually decrease after the first year.

In most cases, you can stop paying PMI when your equity reaches 20 percent (and your loan-to-value ratio falls below 80 percent). If your loan closed after July 29, 1999, the Homeowners Protection Act requires that PMI be dropped when your loan-to-value ratio reaches 78 percent of the home’s original value. You may also be able to stop paying PMI if you improve your property and refinance at a loan- to-value ratio of 80 percent or less.

8. How much should I save up for a down payment on my home?

This really depends on your unique situation. Most real estate experts say that you should put down as much as possible—and at least 20 percent of the purchase price of the home to avoid paying PMI. The larger your down payment is, the lower your monthly payment will be. Plus, when you make a healthy down payment, you greatly reduce the amount of debt you’ll have to finance through the loan.

On the other hand, some experts say you should put down as little as possible so you can take full advantage of home owner tax benefits. Because mortgage interest and property taxes are fully tax deductible from state and federal income taxes, the more you pay each month, the more you’ll save on taxes. Not to mention that if you drain your personal savings for the down payment on your home, you’ll have no cash reserves left for emergencies or home improvements.

If you are not sure how much to save for a down payment, discuss your options with a financial advisor.

9. Can I get a home loan with no down payment?

Yes, you can get a home loan with zero down payment, but some real estate experts say this may not be the smartest choice. First of all, it can be extremely difficult to find a legitimate lender who offers no down payment loans. Secondly, you may run the risk of getting caught up in a mortgage scam.

However, some builders will offer zero down payment loans in hopes of selling new homes in a slow- moving community. Also, if a seller is desperate to sell their home, they may offer to finance the full purchase price so you don’t have to put any money down.

Additionally, the Department of Veterans Affairs (VA) offers a loan program that allows buyers who are veterans to receive a legitimate no down payment loan. Through this valuable loan program, veterans can get a no-down loan and still avoid paying PMI.

10. Who qualifies for a VA loan?

Millions of veterans and military personnel are qualified to receive a Department of Veterans Affairs home loan. There are several different eligibility requirements you must meet to qualify for a VA Loan. You may qualify if you fall into one of the following categories:

  • Active-duty Veterans honorably discharged during WWII or later
  • Active-duty Veterans with at least 90 consecutive days of service during a major conflict
  • Peacetime Veterans and active-duty personnel with at least 180 days of consecutive service
  • Enlisted Veterans whose service began after 1980, or officers whose service began after 1981, and who have served at least 2 years
  • National Guard and selected Reserve members

If you want to apply for a VA loan, you’ll first have to complete a Certificate of Eligibility. If you are not sure whether or not you qualify, talk to a mortgage broker or a VA Loan Specialist. You can also call the U.S. Department of Veterans Affairs directly at (800) 827-1000 or visit homeloans.va.gov