How Much Can You Afford?
If you are like most homeowners, you will likely need to secure a mortgage to buy a home dreams. Only you can decide how much you feel comfortable borrowing and what type of mortgage is best. A rule of thumb, to give you a quick ballpark figure of how much you can afford, is the 2.5x calculation. For example, if a couple has a combined annual income of $40,000, they should be able to borrow up to $100,000. More accurately, your monthly mortgage payments should not exceed 28% of your gross monthly income, or 36% if you add all your present debts and projected housing costs.
Down Payment
Of course, the more money you are able to put towards a down payment, the smaller your mortgage will be. Down payments usually range from 5% to 20% of the selling price of a home. If you put down less than 20%, you will probably be required to purchase private mortgage insurance (PMI) to protect the financial institution in case you default on your mortgage payments.
Closing costs
To determine the total amount you can afford for your new home, remember to consider a variety of additional expenses, and closing costs (usually ranging from 3% to 6% of your mortgage).
Hiring a buyer's agent may require that you sign a contract. The contract is signed prior to services being rendered. It usually identifies a time period during which the agent will work with you to find a house. Any buying agent should be able to provide the following services:
- Up front advanced mortgage payments
- Transfer and relocation taxes
- Title insurance
- Appraisal fees
- Survey fees
- Document preparation fees
Other costs to consider:
- Moving expenses
- Utility deposits
- Curtains and/or window furnishings
- Relocation costs
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How Interest Rates Affect Your Mortgage
Take a look at the effect of interest on a $90,000 mortgage.
Not many years ago, interest rates on 30-year, "fixed rate" mortgages were in the 10% range. At that rate, the monthly payment would have been $789.81 per month for principal and interest.
Today, rates have fallen into the 6-7% range At 6.5%, the payment on that same $90,000 mortgage over a 30-year period would be only $568.87. That represents a drop of almost 28% in the monthly payment.
Adjustable rate mortgages offer a lower interest rate during the first one to three years, then fluctuate higher or lower based on certain money-market criteria. The initial rate might be as low as 5% This means that on the same $90,000 mortgage, payments could be as low as $483.14 per month. That's an additional 15% less than the payments on a 6.5% "fixed rate" loan. One way to learn more about current interest rates and their effect on monthly payments is to ask a real estate agent, a loan officer or utilize the internet. These professionals are in daily contact with mortgage companies, and they understand the impact of interest rates on home buying. You may qualify for a special rate, or a lower down payment. They will explain the difference between all of the mortgage options and how your decision will impact your bottom line.
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What is Your Credit Rating?
Anyone who has ever had a bank account, a mortgage, a credit card, a car loan, or an account with a retail store will most definitely have a credit rating. Most information in your credit rating comes from the companies you have credit with. Also your credit rating can come from certain public records such as lawsuits, tax liens, judgments and bankruptcies.
In accordance with federal law, accurate negative information, such as late payment or an account turned over to a collection agency can remain on your credit report for seven years. If you have been denied credit, insurance, a job or a rental dwelling opportunity because of information contained in your credit report, you are entitled to a complimentary copy of your credit report within 60 days. If you believe any information contained in your report is incorrect, you may file a brief statement explaining why. Inaccurate information on your credit report may be removed, but accurate, current or verifiable information cannot be removed from your record.
Credit reports are usually divided into five sections:
- Your credit history
- Have there been any previous offers? If yes, why weren't they accepted?
- Parties who have requested your credit history.
- Information you have given to the credit information company.
- Specific identification information on you.
- Explanatory notes and comments.
Different states have different conditions that regulate credit reporting. These states include California, Colorado, Connecticut, Maryland, Massachusetts and Washington.
Two leading Consumer Credit Companies are:
Experian 800-422-4279
Equifax 800-685-1111
A variety of financial institutions can assist you with securing a mortgage loan.
They include:
- Mortgage companies
- Commercial banks
- Savings & Loan associations
- Federal credit unions
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Assuming an Existing Mortgage
When a buyer assumes an existing mortgage, he or she is agreeing to assume and pay the sellers' financial obligations under the existing mortgage and becomes completely responsible for the repayment of the loan.
If you are involved in a loan assumption, either as a buyer or a seller, be aware of several areas of potential concern. These revolve around rights of the original lender to whom the money is owed.
Before buying or selling under an assumption, read the mortgage documents - both the note and deed of trust - or ask your attorney to do so. Even if an assumption is allowed, the seller may still bear ultimate responsibility for repayment of the loan.
Some mortgages contain an "acceleration clause" or a "due on sale" clause. Either of these provisions makes it possible for a lender to force full payment of the loan if the property is sold. For example, if the mortgage clearly states that the loan is not assumable, and it is sold to a buyer who assumes responsibility, the lender may "accelerate" payment of the entire remaining balance on the loan as protection. The "due on sale" clause also states that the entire balance becomes due if the property is sold under certain conditions.
Although a loan assumption is a viable method to buy or sell a home without the need for new financing, ask the lender for clarification of its terms before agreeing to do so.
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What are Discount Points?
Discount points represent a fee charged to either the buyer or the seller, or both, by mortgage lenders.
In the 1940s, when "points" were originally created, they served a narrow and specific purpose. When the Federal Housing Administration first began offering "FHA" loans, interest rates were set lower than rates offered on "conventional" loans. To compensate for the lower rates, lenders created a system in which one discount point was equal to 1/8% interest on a mortgage, or one percent of the loan amount.
For example, if interest on FHA loans was 5 3/4%, when 6% could be charged on a conventional loan, the lender would be short two-eighths of one percent interest on that loan. To compensate for the difference, an up-front fee of two discount points (equal to 2/8 of 1%) was charged.
Today, discount points are charged on almost all mortgage loans, including FHA, VA and conventional. The purpose of charging points today is to increase the lenders "yield" on the mortgage. Each point still equals 1% of the mortgage amount. Because a point increases the lenders' yield in small increments, 1/8%, it is used to compensate for daily fluctuations in the money market, without the need for daily interest rate changes. Without points, interest rates would be on a constant roller-coaster ride attempting to find a market level acceptable to lenders.
Because points are used by lenders to adjust for daily fluctuations in money markets, quotations should be obtained when buying or selling a home. Points can then be "locked-in" for a period of time when obtaining a loan. Payment of points is often negotiable between buyers and sellers, but must be paid by the sellers on some loans. Your real estate agent can explain points in more detail.
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