STEP 1 - Choosing the right mortgage.
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 over a 15 year or 30 year term.
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
- 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
- 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
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
- 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
- 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:
interest rate, points, costs?
a mortgage broker or mortgage banker?
Is the loan
going to be a portfolio loan or sold to an investor?
Do you have
Do you do
table funding or if not, is funding done locally?
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.
STEP 3 – The Application
- Residence addresses two years.
- Most recent pay stubs for the last month, W-2's, tax returns for
- 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
- 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.
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
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.