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For BuyersTypes Of Loans Types of LoansFixed Rate Mortgages: With a fixed rate mortgage the interest rate and payments remain the same throughout the term of the loan. This offers you the advantage of knowing that the amount you owe each month will never change. However, the lender sets the interest rate on a fixed higher than that on an adjustable rate mortgage as protection against losing money. This increases monthly payments and may make it harder for you to qualify for a mortgage. Adjustable Rate Mortgages (ARM's): With this type of mortgage, the loan period is fixed but the interest rate varies as inflation and financial markets fluctuate. The adjustments in the interest rate on the loan are set at regular intervals, typically six months or one year. Often, these loans have a cap on how much the interest rate can be adjusted at each interval and how much it can vary over the term of the loan. An Adjustable Rate Mortgage may also have a payment cap. This guarantees that the monthly payment will not change by more than a preset amount. If the interest rate rises to a point where the total interest per month is greater than the maximum payment permitted by the cap, the payment won't rise, but you still owe all the interest. The interest you do not pay is added to the principal of the loan, increasing the total amount you owe. This is called negative amortization. Graduated Payment Mortgage: A variation on the fixed rate mortgage, this type of loan has a fixed interest rate and loan period. The payments, however, start low and increase over the first 5 to 10 years of the loan before becoming constant. If you expect your income to rise significantly in the first few years after your home purchase, you should investigate the graduated payment option. Be warned: you may accumulate negative amortization if your low initial payments do not cover the interest on the mortgage. The total amount you owe may actually increase during the first couple of years! Hybrid Mortgages: These combine the characteristics of fixed rate and adjustable rate mortgages. Some offer 3, 5, or 7-year fixed terms before reverting to an adjustable rate mortgage. Loan periods: Lenders offer a lower interest rate on a loan with a shorter period because they are less likely to loose money due to dramatic market fluctuations. The traditional loan is a 30-year fixed. But in recent years, 15 year loans have become also popular. For other real estate advice, call Century 21 Nason Realty 207-873-2119 What is Private Mortgage Insurance or PMI?Private Mortgage Insurance or PMI is insurance that protects the lender in case a buyer defaults on a loan. Most lenders require PMI whenever a buyer is putting down less than 20% of the purchase price of a home and then pass the cost on to the borrower. PMI does not, as some people believe, provide protection for a buyer, such as paying off the mortgage balance in the case of death, disability or unemployment. PMI is required by lenders in most cases where the buyer's equity position is less than 20% of the home's value, because the less equity a buyer has in a home, the more risk there is that s/he may default on the mortgage. If PMI protects only the lender, how does it benefit the buyer? The most important benefit of PMI is that it opens the door to homeownership for many buyers, enabling them to buy a home sooner (often by several years) than they otherwise could, because they don't have to wait until they save a 20% down payment. Even buyers who can afford a 20% down payment may opt to put a smaller amount down - usually for tax or investment reasons. In the past, PMI premiums were fairly consistent, ranging from .005% to .0025% of the loan amount per month depending on the level of equity the borrower had in the home. Recently, PMI insurers made a beneficial change providing an alternative to the large up-front premium that borrowers traditionally paid when the loan closed. Now, borrowers have the option of paying an up-front fee or paying a slightly higher monthly premium. A few lenders - Prudential Home Mortgage is one of the most prominent - offer buyers an alternative to PMI. Basically, the lender self-insures, offering a loan to the buyer at a slightly higher rate, which compensates the lender for added risk of a low down payment loan. Going with the lender who self-insures has two advantages: First, PMI companies sometimes turn down borrowers who lenders have already approved. With a self-insuring lender, this risk is eliminated. Also, the extra interest paid may be tax deductible, unlike PMI payments, which are not. There are three main types of mortgage insurance: Veterans Administration (VA)... VA insured loans are available to military veterans and certain other government workers for a 1% fee. If you qualify, you can get a loan with no money down. However, lenders are unlikely to make very large loans since they are guaranteed reimbursement only up to $36,000. To apply for a VA loan, you need a "Certificate of Eligibility", available from the local VA office. For more information, contact the VA office in the Federal Government listings in your phone book. Federal Housing Administration (FHA)... Under FHA insurance, anyone can obtain financing with less than 5% down. This is an attractive proposition for first time home buyers. If you are interested in this option, check with your lender. Some lenders will not work with FHA loans because of the tremendous paperwork required by the government. The maximum loan amounts FHA insurance will cover are geared to the prevailing values in an area but typically do not exceed $125,000. Borrowers must pay a one-time insurance premium of 3.8% of the loan total. This can be paid at closing or added to the amount of the loan. Private Mortgage Insurance (PMI)... Borrowers can get a loan with as little as 5% down through PMI. There is no limit on the amount of the mortgage. The premium varies from .3% to 1.2% at settlement and .3% to .55% a year thereafter. The rate depends on the size of the down payment and the type of mortgage. The more you put down, the lower the premium. The change is lower for a fixed rate mortgage than for an adjustable rate mortgage. As an alternative to paying monthly premiums, you can pay the entire fee in a lump sum payment. This amount can also be financed. Once the amount due on your loan has dropped below 80% of the purchase price or appraised value (whichever is less), you no longer pay premiums. You must tell your lender and insurance provider this has occurred. They do not automatically stop requiring payments. Your loan officer can provide additional information about private mortgage insurance. Latest Breaking News! PMI will now be dropped automatically by your lender, but do check with your loan agent, once your home equity reaches 20% of its fair market value. Should you appraise your home before putting it on the market?It isn't necessary, because rarely does an appraisal have anything to do with the price the seller will actually get for his or her property. Here's why: First, to determine the asking price, a seller's agent will look at the "comps," - the price for which "comparable" homes in the area have recently been sold. Based upon these prices, the seller should adjust what they are asking. For example, if similar properties in the area are selling for $210,000, then trying to get $250,000 usually does not make sense. Thus, before putting the house on the market, a seller should review the "comps," which can be obtained from a local real estate agent. The appraisal process used by a licensed appraiser is more theoretical than a "comp," and does not predict what a buyer will be willing to pay. Why would anyone ever get an appraisal then? Although rarely needed by buyers or sellers, appraisals are normally required by lenders who are considering making a loan. However, sellers of expensive, custom homes may get appraisal, because there may not be any home in the area that compare. Buyers of these one-of-a-kind homes will also have more confidence in an asking price that is supported by an appraisal. Before determining an asking price, sellers should give their agent a list of major improvements done to the home, such as a new roof or upgraded heating system. This will help the agent consider all the factors when recommending a price. It will also put him or her in a better position to sell the house - and all of its features - for the best possible price. Negotiating the DealPre-Approval One of the first things you might want to consider doing as you begin searching for a new home is to get pre-approved for a mortgage. A pre-approved buyer is one who has completed the mortgage process and has actually been approved for a mortgage up to a specified amount. A pre-qualified buyer is one that has submitted certain income information that a lender uses to say they are qualified to borrow up to a specified amount. However, the lender has not verified any of the information that has been submitted and may also require additional information before final approval is granted. Generally, mortgage companies and banks look for a monthly mortgage payment that is 28% or less of your gross monthly income and total debt including bank loans and credit cards that is less than 36% of your gross monthly income. Being pre-approved is useful for a number of reasons. First, it lets you know just how much you can afford to spend on a home purchase. You'll know exactly what the bank will finance, you'll know how much you need for a down payment, and finally, you'll know just how much closing costs will be. Once you've been pre-approved, you can also sleep at night knowing that as you shop for your new home, there won't be any obstacles to financing the purchase. Secondly, pre-approval will aid you in your purchase negotiations. Most offers to buy property are contingent on being able to finance the purchase. A pre-approved buyer is a fully qualified buyer which the seller is often more willing to negotiate the price with. The Offer You've been pre-approved for a mortgage and you've found the house you want to buy. You like the neighborhood, the schools, the community facilities, the shopping and the roads into and out of the neighborhood. Now it's time to negotiate the price. It is important to remember that the seller has made a valid, legal offer to sell his or her home at a specified price and inclusive of specific personal property. In reality, you are presenting a counter offer or proposal. When considering the seller's initial offer you should keep in mind several key factors: The offering price as it compares to your budget, The price of similar homes in the area, The prices you've seen on other similar homes you've considered. The age and maintenance needs of the property Any personal property that stays with the house like appliances, spas, window treatments, furniture, etc. Given your consideration of all the above topics, you're ready to make a counter offer. In doing so, try not to criticize the furnishing of the individual's home. You may not like the color of the carpets, walls, or wallpaper; but, saying so will only alienate the seller and make them less willing to negotiate. Unless they are in poor condition, something you've already considered in the inspection phase, their aesthetics do not detract from the value of the home. Likewise, a low ball offer will almost always be rejected and can only serve to alienate the seller, making them less willing to negotiate in good faith. Be reasonable in your offer and you are more likely to get a fair price. There is nothing wrong, however, on countering with a low offer on a home that you feel is grossly overpriced based on your research. Finally, your counter offer should be for a very short time duration; often 24 hours. This prevents the seller from shopping your offer to another buyer and using it to get a higher price. Elements of an offer Price: the amount of money you are willing to sell or pay for the home Terms: includes the price of the deal and the financing details Conditions: conditions either the buyer or seller must meet prior to the contract being finalized and the deal closed. Inclusions or exclusions: those items that either remain or don't with the house after it is sold. Closing date: the date the financial transactions are completed and the title to the property is legally transferred. For other real estate advice, call Century 21 Nason Realty
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