Home Buying Basics AZ

Arizona Real Estate

Financing Your Home

STEP 1 - Choosing the right mortgage.

Fixed-Rate Mortgages

Fixed-rate mortgages are the most common mortgage for many homebuyers because the monthly payments are stable. The interest rate you lock-in will be the same interest rate you pay for the life of the loan - whether it's a 15 or 30 year loan. What are the benefits of a fixed-rate mortgage?

Inflation protection.
If interest rates increase, your mortgage and your mortgage payment won't be significantly affected. Even if your taxes or insurance costs go up over time, your basic loan payment (principal and interest) will stay the same. This is especially helpful if you plan to own your home for five or more years.
Long-term planning.
You know what your monthly housing expense will be for the entire term of your mortgage. This can help you plan for other expenses and set long-term financial goals for yourself and your family.
Low risk.
You always know what your payment will be, regardless of what current interest rates are. This is why fixed-rate mortgages are so popular with first-time buyers.

There are additional considerations to be aware of with fixed-rate mortgages:

Your mortgage interest rate won't go down, even if interest rates drop, unless you refinance your mortgage.
Because the interest rate is generally higher than other types of mortgage loans, you may not be able to qualify for as large a loan with a fixed-rate mortgage.
Your total monthly payment can occasionally increase based on changes to your taxes and insurance. In many cases you pay these costs through an escrow account that your lender keeps for you.

When you're looking for a mortgage, you need to decide which loan term you want and choose the type of interest rate. The loan term is the length of time you have to pay back the loan. The longer the term, the lower the monthly mortgage payment. The shorter the term, the higher the monthly mortgage payment. Most home mortgage lenders offer two basic terms: 15 and 30 years, and many also offer 20-year fixed rate mortgages.

15-Year Term
This term has higher monthly payments because the loan is shorter. The interest rate is usually lower and you can build equity faster.
20-Year Term
This fixed-rate mortgage builds equity more quickly than with a traditional 30-year mortgage as well as saves you interest over the life of your loan.
30-Year Term
Interest rates may be somewhat higher for this term and you pay more interest over time.

What type of loan term should you choose?

If you can make higher payments and want to build equity quickly, a 15-year term may work for you.
If you want to qualify for a larger loan amount, a 30-year term may be a good choice - especially if you don't plan to move and the interest rates are reasonable when you sign the loan. This is generally the easiest loan term to qualify for. You can always make larger monthly payments and ask your lender to re-amortize your loan to pay your loan off faster.

Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARMs) are popular because they usually start with a lower interest rate and a lower monthly payment. The lower rate (and lower monthly payments) may also allow a higher loan amount. However, the interest rate can change during the life of the loan, which would mean that your monthly payment would increase (or decrease).
It's important to understand the specifics of an adjustable-rate mortgage, commonly called an ARM:

Adjustment periods.
All ARMs have adjustment periods that determine when and how often the interest rate can change. There is an initial fixed-rate period during which the interest rate doesn't change - this period can range from as little as 1 month to as long as 10 years. After the initial period, the interest rate will often adjust each year. For example, with a 3/1 ARM, your interest remains the same during the first 3 years, and then can adjust every year following, up to a maximum amount (the "lifetime cap").
Indexes and margins.
At the end of the initial period and at every adjustment period, the interest can change based on two factors: the "index" and the margin. Interest rate adjustments are based on a published index. There are many indexes but some commonly used for ARMs are the LIBOR and the U.S. Treasury Bill. The rates for indexes reflect current financial market conditions, which is why your interest rates can change at each adjustment period. The margin is the amount (shown as a percentage) that is added to the index to determine what your new mortgage rate will be until the next adjustment period.
Caps, ceilings, and floors.
All ARMs have rate caps, also known as ceilings and floors. Caps decide how much the interest rate can increase or decrease at each adjustment period and over the life of the loan. Most ARMs have a lifetime cap that limits the amount your interest rate can increase over the life of your mortgage.
The number system.
There are several types of ARMs, such as the 10/1, 7/1, 5/1 and 3/1. The first number (10 for example) is the length of the initial period, during which the interest rate can't change. The second number (1 for example) is how often the ARM is adjusted after the initial period. So, a 10/1 ARM won't change for the first 10 years, but can change in the 11th year and again every year after that. Depending on the initial cap the change could be as high as 5 percentage points above what it was before.

There are additional considerations to be aware of with adjustable-rate mortgages:

Because the initial interest rate is usually lower than a fixed-rate mortgage, your initial payments will be lower and you may qualify for a larger mortgage amount.
If interest rates are high when you get your mortgage but drop during any adjustment period, your monthly payment may decrease.
An ARM with a low initial interest rate and an initial adjustment period after 5 or 7 years can save you money.
ARMs can, and often do, have interest rate increases at adjustment periods. You may have an increase in your monthly mortgage payment after each adjustment period. The amount your mortgage might increase would depend on the periodic cap (how much of an increase is allowed each year), the lifetime cap (the maximum interest rate or maximum number of increases allowed), and the size of your mortgage's margin. If the life cap is 5%, the maximum interest rate adjustment would be to 10.75%

STEP 2 - Choosing the lender.

Once you decide on the mortgage you want, do your homework. Different lenders offer different rates, points, and fees. Ask around and compare.
Questions we ask of the lenders involved in financing the transactions of our Buyers and Sellers ask:
            The obvious: interest rate, points, costs?
            Are you a mortgage broker or mortgage banker?
            Is the loan going to be a portfolio loan or sold to an investor?
            Do you have In-House Underwriting?
            Do you do table funding or if not, is funding done locally?
            Will the closing package be at the escrow office 2-5 days prior to closing?

Choosing a lender because they've quoted the lowest interest rate or loan costs could be a mistake. If the loan package is not at the title company for closing in adherence to the contract, the seller has the right to cancel the contract. The consultants of CENTURY 21 Solutions know which lenders perform in a manner that minimizes inconvenience and stress.

STEP 3 – The Application

APPLICATION CHECKLIST:

Residence addresses two years.
Most recent pay stubs for the last month, W-2's, tax returns for two years.
Names and addresses of all employers past two years.
Names, addresses and account numbers of any indebtedness. Balances and monthly minimum payments on all open loans/credit cards. Copy of most recent statements.
Most recent bank statements for all checking and savings accounts for three months if possible.
Addresses of all real estate owned, account numbers, balances and monthly payments. Name and address of current lenders.
Check for credit report and appraisal payable to the Lender.
Certificate of Eligibility or DD 214 if applicable
Copy of purchase contract.
Copy of divorce decree if applicable.
Copy of bankruptcy documents if applicable.
Documentation concerning child support or alimony , if applicable.
The lender will provide an estimated cost statement when the application is taken. Be sure to give a copy of the estimate to your consultant so that a comparison can be made to the preliminary closing statement prior to closing.

Cautionary notes:
Any circumstance or condition which would prevent you from qualifying for the loan must be disclosed to the seller.

The most prevalent reason for an escrow not closing on time is because the Buyer failed to provide full and accurate information or documentation in a timely manner. Its important to complete the loan application process within the first five days after the contract is signed.

Pre-Approval vs Pre-Qualification

There is a difference between pre-approval and pre-qualification. To obtain pre-approval you’ll go through the application process before you’ve even found your next home. By doing so, you’ll have the advantage of a stronger negotiating position.

Recent years have seen a proliferation of “internet-based” Lenders. These Lenders rely on massive advertising to drive traffic to their respective sites. The ads promise low rates and encourage price shopping. Our experience is these lenders do not perform as efficiently as a local lender when there are problems. Our advice, use a live person instead of an internet lender. In most cases the cost will be the same.

Finding the best loan and lender is part of the service you can expect from us. We will recommend a lender based on actual past personal experience. Because the lenders want our future business referrals, we can hold them to a higher standard.