What is a mortgage, and what are the benefits of different kinds
Simply put, a mortgage is a loan that a homebuyer 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
The most popular mortgages available to home buyers today can be
divided into two general categories: those that offer fixed
interest rates and monthly payments, and those in which 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
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,
including the popular ARMs (Adjustable Rate Mortgages),
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.
The "Mortgages at a Glance" table provides a brief synopsis of
some of today's most popular mortgages, their benefits and
drawbacks. To find out about any one of them, talk to your your
real estate professional. He or she can put you in touch with a
representative from our preferred lenders.
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 to perform many other continuing services.
Our preferred lenders will
provides all such services.
Talk to your your real estate professional about the lenders you
have in mind. Experienced sales professionals are quite familiar
with mortgage lenders and can give you sound advice about a
lender's reputation, its qualifying procedures, and the unique
programs and benefits it offers home buyers.
Are there any mortgages especially designed for first-time
Today, first-time buyers enjoy a number of mortgage
options that make purchasing a home more affordable by
minimizing down payments and keeping monthly payments as
low as possible during the early years of the loan.
Most ARMs feature an interest rate that is below market
for the first year and may only rise gradually after that.
VA- and FHA-insured loans call for extremely low down
payments (zero to five percent of the purchase price) and often
offer a below-market interest rate. Similarly favorable terms
can be arranged with the help of private mortgage insurance or
Finally, first-timers who can find a cooperative seller or
third-party investor can look into such non-traditional
financing methods as a lease/buy arrangement. Check the
"Mortgages at a Glance" table for the unique benefits and
requirements of several major mortgage alternatives.
Anyone can apply for an FHA mortgage provided the loan
amount doesn't exceed the maximum allowed by law.
Can I get an FHA or VA mortgage?
Just about anyone can apply for an FHA-insured mortgage
through banks and other lending institutions. They are
particularly well-suited for buyers of moderate income; the low
down payment requirements (as low as five percent of the
purchase price) are matched by a relatively low maximum mortgage
Similarly, VA-guaranteed loans often require no down payment for
up to four times the amount guaranteed by the VA. These loans
are reserved for either active military personnel or veterans,
or spouses of veterans who died of service-related injuries.
If there is a downside to these loans, it's the qualifying
process. Though you apply for government-insured financing
through a lending institution, the Federal Housing
Administration or the Department of Veterans Affairs must insure
or guarantee the loan and may require specific documentation or
procedures not necessarily required for conventional financing.
That may take more time than is generally required for
conventional mortgage approval. Additionally, FHA-required
insurance must be added to your payment.
Our preferred lenders have been delegated authority by each of
these agencies to ensure a quicker loan process.
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 $100,000 and the
loan-to-value ratio is 90 percent, the lender would be willing
to loan $90,000. The buyer's down payment is the remaining
$10,000. 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 percent has been the benchmark for
conventional financing, but today, many options are available,
some requiring as little as five percent down. A representative
from our preferred lenders can help you determine which down payment
option is right for you and your budget. Contact me
for more information about their services.
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 percent of
its income on housing costs, including the mortgage, insurance,
and real estate taxes. In addition, these housing costs plus
your long-term debts (car loans, child support, minimum credit
card payments, student loans, etc.) shouldn't exceed 36 percent
of your income. Some mortgage companies, including our lenders,
have relaxed ratios to help you purchase the home of your
Although it is not a standardized method, you can also use the
Multiplier Method formula as a general rule of thumb to
determine how much home you can afford. Most lenders' 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.
To get an idea of how much home you can afford, use the Sample
Housing Cost Worksheet, or contact ERA Mortgage to receive a
free pre-qualification in minutes.
What are the steps involved in the loan process?
When you apply for a mortgage, you will need to furnish
information regarding your income, expenses and obligations. It
will be very helpful, and save time, if you have the following
Two most recent pay stubs from your employer
W-2s for the last two years
Last two months' bank statements
Long-term debt information (credit cards, child support, auto
loans, installment debt, etc.)
CAN'T AFFORD A 20 PERCENT DOWN PAYMENT? ASK YOUR REAL
ESTATE PROFESSIONAL ABOUT PRIVATE MORTGAGE INSURANCE (PMI).
For buyers who qualify for conventional financing, but
can't handle the high down payment requirements, Our preferred
may still offer this financing with PMI, or private
Designed to protect the lender against default by the borrower,
PMI allows you to obtain traditional financing with a down
payment significantly lower than the standard 20 percent. By
using PMI, you may be able to get a fixed-rate or
adjustable-rate mortgage by putting as little as five percent
As with an FHA-insured loan, you must pay premiums for
PMI coverage, the amount being determined by the type and amount
of your loan. But unlike FHA financing, the maximum loan amount
is determined by the lender. Moreover, PMI premiums are often
lower than FHA insurance, and may be paid as part of your
monthly mortgage payment, in annual installments, or in a lump
sum at the time you obtain the loan.
If you'd like to find out more about the unique advantages of
PMI, ask your me to put you in touch with Our preferred lenders.
What are points, and what's the point in paying them?
In real estate, the term "point" refers to one percent of the
total mortgage loan amount. Buyers often pay lenders a
supplemental fee, calculated in points, to get a better
interest rate on a particular mortgage.
For instance, a lender may offer you a choice of two 30-year
mortgages: the first at eight percent with no points, and the
second at 7.5 percent with an additional three points. If the
loan is for $100,000, those three points will cost you an extra
$3,000 up front — but you'll get a payback of significantly
lower monthly payments for the lifetime of the loan.
Many lenders will advise you to pay the points for the better
rate if you can afford it, especially if you plan on keeping the
home for more than a few years. Like interest, the money
you pay for points may be tax-deductible, and the investment may
pay for itself through savings generated by lower monthly
payments. We suggest you call your tax preparer.
Is the lending process regulated by the government?
Most definitely. There are many laws and government regulations
that all lenders must follow to ensure that all applicants are
given fair and equal treatment. For example, in 1968, Congress
passed the Truth in Lending Law, which requires that lenders
provide borrowers with information about a loan's true
interest rate. By law, lenders must reveal a loan's
annual percentage rate (APR).
The law also stipulates that for refinancing and second mortgage
loans, the borrower has up to three days after closing to
change his or her mind and call the deal off. The lender may not
disburse money until after this three-day "recession period" has
The annual percentage rate (APR) is a calculated rate of
interest for a loan over its projected life. This rate includes
the interest, all points (which are considered prepaid
interest), Mortgage insurance, and other charges
associated with making the loan that the lender collects from
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.
What is a good-faith estimate?
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.
What does my monthly mortgage payment include?
The bulk of your monthly mortgage payment goes toward paying off
the principal and interest of your loan. In addition, most
lenders require that you pay a sufficient amount to cover your
local real estate tax, plus your homeowner's or hazard
insurance. This amount is placed in an escrow account, from
which your lender then pays your tax and insurance bills as they
Can I pay off my loan early?
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. Earlier in this section, "How to Pay off a 30-Year
Mortgage in 15 Years Without Really Feeling It" — outlines a
popular formula for pre-payment.
The FHA, VA, and even some states do not allow lenders to
charge penalties for paying mortgages early or refinancing. In
fact, many lenders now include space on monthly statements for
borrowers to itemize an additional principal payment they
wish to include with their regular payment.
If you're unsure about the rules governing pre-payment, review
your loan agreement.
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 both living expenses and income 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 percent 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 is 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.
Consider paying the points for the better rate if you can
afford it, especially if you plan on keeping the home for
more than a few years. Like interest, the money you pay
for points may be tax-deductible, and the investment may
pay for itself through savings generated by lower monthly
Do adjustable-rate mortgages offer any protection against rising
Yes. ARMs and other variable-rate-of-payment plans offer
lower-than-market interest rates initially, but because
they are tied to the interest rates of U.S. Treasury Bills or
other indexes, interest rates later in the loan term may rise.
However, many such loans offer built-in safeguards designed to
minimize the effect of any rapid escalation in interest rates.
One such safeguard is the rate cap. Many ARMs include
provisions for the maximum amount your rate can rise, both
annually and over the life of the loan. For example, if your
initial rate is 6.5 percent, the loan may include one-percent
annual and five-percent lifetime caps...which means even if
rates rise dramatically, you'll pay no more than 7.5 percent
next year, 8.5 percent the following year and so on, until a
maximum rate of 11.5 percent is reached.
An ARM may also allow your rate to decrease when the index it is
tied to goes down. As you might expect, decreases are usually
capped as well.
A second protective device included in some ARMs is the
payment cap. Under this provision, your monthly payments may
rise by only a set dollar amount. The potential disadvantage of
this type of cap is that it can slow or even reverse your
equity build-up. If rates rise dramatically, you could
actually wind up owing more principal at the end of the
year than you did at the beginning.
Of course, ARM holders can also consider refinancing to a
fixed-rate loan after a few years. Some ARMs even include a
provision for converting to a fixed-rate loan after a set period
What can I do if I have a fixed-rate loan and interest rates go
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 two percent
less than your existing loan, and you plan on staying in your
home for at least 18 months more, refinancing is a good
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 calculate an estimated mortgage
amount for which you qualify. The pre-qualification is
not a mortgage approval, but more an estimate on what you can
A pre-approval, on the other hand, is a more comprehensive
approach giving an actual decision on a home loan. With our
preferred lenders, a credit report is ordered electronically and is
received within 30-60 seconds. This is an actual credit approval
and it carries with it some considerable benefits. From this
information, a loan approval is given agreeing to finance a home
and specifying the total mortgage amount available to you.
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.
WANT TO PAY OFF YOUR LOAN EARLY? THERE ARE SEVERAL WAYS.
Save some extra money every month. With the interest you
earn on savings you may be able to make an extra payment at the
end of the year.
Pay an extra twelfth of your principal and interest
payment every month.
Send whatever extra you can every month.
Whichever method you choose, be sure to clearly indicate that
the excess payment is to be applied to principal.
Beyond that, we're sincerely interested in helping make the
experience of selling your home as smooth and easy as possible.
So even if you're not ready to list your house — if you simply
have questions about the market in your area, price or mortgage
trends, or anything else about real estate as it relates
to you — just pick up your phone and call me your real estate broker