Financing a home can be confusing and frustrating. Here are the most commonly asked questions and answers about home financing. And if your answer is not found here, you can find an agent using ERA Online's Contact ERA section.
What is a mortgage (bond), and what are the benefits of different kinds of mortgages?
Simply put, a mortgage is a loan that a home buyer obtains directly from a lender to purchase real estate. The mortgage is a lien on the property that secures a promissory note (promise to repay the debt) that states the terms of the loan, including the interest rate, and the number of payments.
The most popular mortgages available to home buyers today can be divided into two general categories: those which offer fixed interest rates and monthly payments, and those where one or both of those factors are adjustable.
Fixed rate/fixed payment loans are more traditional, and remain the most popular home financing method, currently accounting for about two-thirds of all residential mortgages. Their advantages are well-known: You always know what your monthly principal and interest payment will be, so your basic housing cost will remain unaffected by interest rate changes until the mortgage is paid off.
Mortgages that entail flexible rates and/or payments have grown in popularity in recent years, primarily during periods of high interest rates and/or rapidly rising home prices. Many offer lower-than-market initial interest rates that allow buyers a measure of affordability unavailable in fixed-rate loans. The tradeoff may be higher interest rates and higher monthly payments later on.
What are the different types of lenders, and how do I choose the right one for me?
Before someone lends you the money to purchase your home, they'll want to know a lot about you. And you're entitled to know as much as you can about them, too.
It's important because getting a mortgage is not just a one-time signing of documents, a handshake and a check. You will be depending on your lender to fund the loan as promised, on time, and over the life of the loan, to keep good payment records, pay your taxes and insurance (if included in your monthly payment) and many other continuing services.
Talk to your ERA Real Estate Specialist about the lenders you have in mind. Experienced agents are quite familiar with mortgage lenders and can give you sound advice about a lender's reputation, qualifying procedures, and the unique programs and benefits they offer home buyers.
How much of a down payment will I need to buy a home?
The amount of money that a buyer must put down at closing depends on the loan-to-value ratio -- the percentage of the property's appraised value or sales price(whichever is less) that a lender is willing to loan.
For example, if a property is appraised at R100,000 and the loan-to-value ratio is 90%, the lender would be willing to loan R90,000. The buyer's down payment is the remaining R10,000. Because the loan-to-value is a percentage, the higher the sales price of a house, the higher the down payment.
A down payment of 20% has been the benchmark for conventional financing, but today, many options are available, some requiring as little as 5% down.
How does a lender determine the maximum mortgage I can afford?
The three primary areas lenders examine in determining the size of mortgage you can handle include your monthly income, non-housing expenses, and cash available for down payment, moving expenses and closing costs.
The most common way lenders interpret these variables to estimate your mortgage capacity is the Percentage Method. Most lenders feel a family should spend no more than 28% of its income on housing costs, including the mortgage, insurance, and real estate taxes. Also, these housing costs plus your long-term debts (car loans, child support, minimum credit card payments, student loans, etc.) shouldn't exceed 36% of your income.
Although this is not a true method, you can use the Multiplier Method formula as a general rule of thumb to determine how much home you can afford. Most lender's guidelines allow a family to carry a mortgage that is two to three times its gross annual income (income before taxes and expenses are taken out). The amount of down payment and the type of mortgage (fixed or variable rate) will determine the precise ratio used by the lender.
When you apply for a mortgage, you will need to furnish information regarding your income, expenses and obligations. It will be very helpful and a time-saver, if you have the following items available:
Most recent two pay stubs
W-2's for the last two years
Last two months' bank statements
Long-term debt information (credit cards, child support, auto loans, installment debt, etc.)
You can expect to pay the following closing costs at the time of settlement:
appraisal fee - covers the cost of a professional written estimate of the property's value.
Attorney's or escrow fees - your own, and the lender's if they have one.
Credit report fee.
Documentation preparation - covers the cost of preparing the deed and other paperwork.
First-year's premium on fire and hazard insurance.
Impounds - sufficient to cover real estate taxes on the purchased property for the current tax period to date. The lender then pays these bills when they come due.
interest - paid from the date of closing until 30 days before your first monthly payment.
The annual percentage rate is a calculated rate of interest for a loan over its projected life. This rate includes the interest, mortgage insurance, and other charges associated with making the loan that the lender collects from the borrower.
The APR is calculated by a standard formula that all lenders use. This enables the borrower to comparison shop between lenders and/or loan products.
Your lender or loan agent must provide you with a good-faith estimate within three days of your application. This is the information you need to make a fair and accurate judgment when shopping for a loan.
Your estimate is a written document that shows all the costs that can be estimated in advance by the lender. You need this information so there are no surprises on the day you close your sale on the property to be purchased. You will be expected to pay closing costs.
If you can afford it, and are interested in the considerable advantages of having more equity and/or owning your home free and clear at the earliest possible date, the answer in most cases is yes.
What are the respective advantages of 15-year and 30-year loans?
The 30-year fixed rate mortgage remains the standard mortgage, with an array of valuable benefits designed especially for buyers who expect to stay in their homes for a long time. Because the borrower pays more interest than principal for the first 23 years, the tax deduction is substantial. And as inflation causes income and living expenses to increase, your unchanging monthly mortgage payments account for a relatively smaller portion of income as the years go by.
As you'd expect, a 15-year monthly mortgage means higher monthly payments than an equivalent 30-year loan ... but not as much higher as you may think. At the same rate of interest, payments on the 15-year mortgage are roughly 20-25% higher than a loan that takes twice as long to pay off. And one of the benefits of choosing a 15-year mortgage is that you can generally get a lower interest rate for an otherwise similar loan. Another advantage is faster equity build-up because a larger portion of your early payments are going to pay off principal. This makes the 15-year mortgage an ideal alternative for couples approaching retirement or anyone else interested in owning their home free and clear as quickly as possible.
What can I do if I have a fixed rate loan, and interest rates go down?
When interest rates drop significantly as they have in recent times, the homeowner should investigate the financial advantages of refinancing. Essentially, this means taking out a new loan to pay off your existing loan.
Refinancing may require paying many of the same fees paid at the original closing, plus origination fees. Most mortgage experts agree that if you can get a rate 2% less than your existing loan, and you plan on staying in your home for at least 18 months, refinancing is a good investment.
What is the difference between pre-qualifying and pre-approval?
A pre-qualification consists of a discussion between you and a loan officer. The loan officer will collect information regarding your income, monthly debts, credit history and assets, and based on this information calculates an estimated mortgage amount for which you qualify. The pre-qualification is not a mortgage approval, but more an estimate on what you can afford.
A pre-approval, on the other hand, is a more comprehensive approach giving an actual decision on a home loan. What could be more comforting than the peace of mind that goes with knowing that your mortgage is fully approved?
You will have a greatly improved negotiating position when you are pre-approved for a mortgage. Sellers are more apt to negotiate with someone who already has a mortgage approval in hand. The pre-approval letter lets the seller know they are working with a serious cash buyer. A pre-approved buyer can also close on a property more quickly--another major consideration for a motivated seller. We strongly recommend it.
