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For Sale by Owner Guide

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Lender and Mortgage Financing Options

Lender Types

Fixed-Rate vs. Adjustable Mortgages

You've probably found that there are a myriad of mortgages out there, and that the mortgage you choose could save--or cost--you thousands of dollars. But don't let that overwhelm you. Choosing a mortgage doesn't have to be as complicated as it may appear. A lender can discuss your options and how they might benefit you. There are only a few important things to consider when selecting your mortgage.

Ask yourself:

  • What is my current financial situation? How might it change?
  • How long do I intend to keep this house?
  • How comfortable would I be with the possibility of my payments increasing?

Keep these things in mind as you consider your mortgage options. And, though there may seem to be a lot of loans on the market, there are really only three kinds of mortgages: 1) fixed mortgages whose interest rates and monthly payments remain unchanged, 2) adjustable mortgages with rates and payments that increase or decrease with the market and 3) those that fall somewhere in between and are a hybrid of the two first types. The other articles in this section explain the different mortgage types in-depth and outline which types might suit you.

Fixed-Rate Mortgages

The most common type of loan is the 30-year fixed rate mortgage. There are also 15-year (and even 10- and 20-year) fixed-rate mortgages, which allow you to pay off your mortgage in less time, with less interest. A fixed-rate loan is one in which principal and interest are amortized, or spread out, evenly over the term of the loan, so that both interest rate and monthly payments remain unchanged for the life of the loan.

Fixed-rate mortgages protect you from the risk of rising interest rates. If interest rates are particularly low when you purchase your new home, or if you expect them to rise, a fixed rate mortgage could be a wise investment. On the other hand, unlike adjustable-rate mortgages (ARMs), fixed-rate loans won't take advantage of falling rates. Since you're locked into one rate for the life of your loan, you could end up with interest higher than current market rates in the years to come. At that point, however, refinancing might enable you to take advantage those lower rates.

Adjustable-Rate Mortgages

Adjustable-Rate Mortgages (commonly called ARMs) are flexible loans with interest rates and monthly payments that rise and fall with the economy. With an adjustable loan, the borrower shares in the benefits and risks of having the loan tied to market changes. Because the borrower shares in the risk of rising rates, lenders are able to offer lower initial interest rates than on fixed-rate mortgages. The interest rate on your loan is then adjusted periodically according to whatever market index you chose when selecting your ARM.

Interest rate and monthly payment can change every six months, once a year, every three years, or every five years. For example, a one-year ARM has an adjustment period of one year, which means that the interest rate and monthly payment can change once a year. The frequency and dates of adjustments are established when you apply for your loan.

The interest rate on an adjustable mortgage changes according to a financial index. You may choose an ARM tied to any one of a variety of market indexes, such as CDs, T-Bills, or LIBOR rates. When your interest rate is up for adjustment, your lender will take the current rate of the index to which your loan is tied and add a margin, a certain set number of interest points laid out in your loan agreement, to determine your new rate. So, your interest rate and monthly payments could increase or decrease over the life of your loan, depending on the activities of the market.

Caps set forth in your loan agreement limit the amount by which the interest rate can increase at each adjustment. And ceilings, or lifetime caps, limit the total rate increase over the life of the loan. So, if you have a typical one-year ARM, your annual rate increases may be capped at 2%, which means that your interest rate can never increase by more than 2% over the previous year. Separately, your loan may have a lifetime rate cap of 6%. So, if you had an initial interest rate of 5%, the highest interest rate you could ever pay would be 11%. Caps protect you from drastic changes in interest rate, but do not guarantee you the stability of a fixed rate loan. With an ARM, you exchange the possibility of lower interest rates for the possible risk of rising rates.

An ARM might benefit you in several ways. ARMs usually come with initial interest rates that are 2-3 points lower than those on comparable fixed-rate mortgages. The lower initial interest rate can help you qualify more easily and afford the house you want to buy. You will most likely qualify for a larger loan with an ARM than with a fixed rate mortgage. You might also want to consider an ARM if you plan to move in a few years, so you are not concerned about the possibility of rate and payment increases. If you plan to move within 5 years, a 5-year ARM would even give you the advantages of a lower interest rate with none of the risks. And, even if you plan to live in your new home for longer, it might be safe to take the risks involved in an ARM if you expect your income to increase enough to cover potential increases in payments, or if you expect rates to fall.

FHA & VA Loans

FHA loans are insured by the U.S. Department of Housing and Urban Development, designed to make housing more affordable for first-time homebuyers and buyers with low to moderate incomes. With FHA, eligible buyers can purchase a home with a down payment of as little as 3% of the FHA appraisal value or the purchase price, whichever is lower. Qualifying standards are not as strict as conventional loans, although property standards may be more strict. Both fixed and adjustable rate FHA loans are available, and, in most states, FHA loans can also be used for refinancing.

VA loans are government-insured loans administered by the U.S. Department of Veterans Affairs. Designed to make housing affordable for U.S. veterans, VA loans are available to veterans, reservists, active-duty personnel, and surviving spouses of veterans with 100% entitlement.

VA loans are fixed rate loans with competitive interest rates. Eligible buyers can purchase a home with no down payment, no cash reserve, no application fee and lower closing costs. And, in most states, VA loans are also available for refinancing.

Many lenders are approved to handle VA loans. To find out if you are eligible, contact your nearest VA regional office.

© Copyright by Bank of America, Inc. All Rights Reserved.

Lender Terms

It's time to take the mystery out of financing.

As you begin to work with a lender, you'll hear many new terms and will be introduced to new procedures. Some of the major concepts and terms you should know are:

Shopping Rates

When shopping interest rates among lenders, it isn't always easy to compare. Interest rates are expressed as:

Loan Type Int. Rate Points Orig. Fee
30yr fixed 8.25% 1.25% 1%
1yr ARM 7.00% 1% 1%

The top line translates to an 8.25% interest rate with 1.25 discount points and 1% origination fee.

Discount Points

Discount points are equal to a percent of the loan amount. 1.25 points is equal to 1.25% of the loan amount. For example: On a $100,000 loan that equals $1,250. If you pay more points it will lower the interest rate. Paying points can be good if you plan on living in the home for more than three years, and the points may be tax deductible.

Loan Origination Fees

Origination fees are often expressed as a percentage. A one percent loan origination fee is equal to 1% of the loan amount. Countrywide does not charge an origination fee on most conventional loans.

Some lenders may only tell you about the discount points and loan origination fees when you ask about closing costs or specifically the discount points associated with the interest rate quote. Don't let them get away with it! Get an itemization of the costs to close the loan and of the recipients of the fees (also called a Good Faith Estimate).

Annual Percentage Rate (APR)

The APR combines the interest rate, points and related fees to more accurately reflect what you will be paying. Note: Lenders are required by law to disclose the APR.

Rate Lock-in

Once you have chosen a certain loan program with a lender, you should ask them to guarantee, or lock-in, the interest rate that you've discussed. Better yet, make sure that they will let you grab a lower rate in the event that rates should fall during the process. Make sure the lock-in period is long enough to get you to the closing and that the sellers can vacate in 45-60 days.

Prepayment Fees

Home loan interest rates are at or near historical lows, and that means you can further maximize your home purchasing power with Countrywide's Reduced Rate Option, while avoiding costly penalties that many other lenders impose. This alternative reduces the interest rate on your loan up to 0.375%, or cuts the discount points by a full 1%, when you agree to a "pre-payment" penalty on your loan should you decide to refinance it. However, you can still pay off the loan early should you sell the home. As today's low interest rate environment makes it unlikely that future refinancing will be a sensible option to further lower your rate, this is a great way to reduce monthly loan payments or qualify for a larger loan amount.

© Copyright by Onewest Bank All Rights Reserved.

Private Mortgage Insurance (PMI)

Private mortgage insurance (also called PMI) is insurance provided by a mortgage insurance company to protect a lender in the event of default on a loan. PMI is generally required when a borrower puts less than 20% down on a loan.

The borrower pays for mortgage insurance on a monthly basis in addition to the principal and interest payments that are made on a loan. The lender then transfers the PMI payments to the insurance company.

MI companies offer several options to the borrower. A monthly premium plan requires two monthly premiums to be prepaid at closing, with a fixed premium due monthly.

An annual plan requires one year of premiums paid at time of closing, but offers lower monthly premium payments.

Most buyers are choosing the monthly premium plan.

© Copyright by E-LOAN, Inc. All Rights Reserved.

Lender Savings

Interest rates on mortgages are continuing to hold at historically low levels. These low levels, combined with the tremendous variety of lenders and loan products available to the consumer, provide an opportunity that has never existed before. The smart borrower can now put together financing packages that his parents never would have even dreamed of.

This article touches on a few ways that consumers can use current low rates and new loan item of debt on a personal balance sheet. Managing this debt wisely can reap substantial benefits to almost every homeowner.

No Closing Cost Loans

Any loan where the broker or lender pays all of your closing costs is commonly referred to as a "no closing cost" loan. These closing costs would include title & escrow fees, appraisal, lender's fees, credit report fees, and other expenses which are non-recurring over the life of the loan. Lenders use the term non-recurring to refer to only those expenses which are one-time, and to exclude items such as interest, insurance, and property taxes, which are considered recurring closing costs because they will continue to be expenses every month. Recurring costs are not covered expenses in a no closing cost loan.

In the mortgage market, there are a variety of interest rate and point combinations available to the borrower at any point in time for the same product or loan type. As an example, for a loan amount of $200,000, the quoted interest rate could be 6.75% with one point, 7.0% with zero points, or 7.25% with no closing costs. All three of these quotes are for a 30-year fixed-rate mortgage. The lender allows the borrower to choose amongst rate and point combinations since some people prefer a lower rate immediately, while others prefer minimizing how much they pay out of pocket upfront. Thus, the borrower can select the combination for their personal situation. For some borrowers, the no closing cost option of 7.25%, while providing a slightly higher rate, still requires the least investment upfront and therefore is the best option.

No closing cost loans can be used for either a refinance or a purchase transaction, although they are most commonly associated with a refinance. A no closing cost refinance is the quickest way to generate immediate interest rate and payment savings with no upfront investment in closing costs. To continue with our example, let's assume that a borrower is currently at 7.5% on a 30-year fixed-rate loan and is interested in refinancing now that interest rates are declining. But what is the best time to finally "bite the bullet" and lock in a rate? If the person chooses to refinance using the no closing cost method, it doesn't matter when they lock in, so long as they are immediately saving money by refinancing. By choosing the 7.25% no closing cost loan, their payment would decrease right away, with no upfront investment to refinance. Should interest rates continue to decline, the borrower can simply refinance again to obtain additional savings.

In a purchase situation, a no closing cost option can work extremely well when the borrower has limited funds available for closing or when the rate market is declining and the borrower may want to refinance quickly. While most people associate a purchase with paying points just to obtain tax deductibility of the points, this is simplistic. While the tax deductibility is an important factor, it is only one consideration for a borrower. In a steadily declining interest rate market, paying points upfront to secure a low rate may be simply throwing money away.

With a true no closing cost loan, you can refinance for any incremental drop in your interest rate. Because there is absolutely no investment in upfront costs, the savings of refinancing are immediate. In a market where you believe rates may continue to fall, it makes sense to refinance at no cost. Should interest rates decline further, you can refinance again without having to recoup the closing costs. Many borrowers refinance every year or less at no cost, while keeping their initial teaser rate in an adjustable-rate mortgage.

Fixed-Rate Buydown Loans

A fixed-rate buydown loan is a standard fixed rate loan that has been "bought down" over the first two or three years of the loan. The benefit of a buydown is that you can qualify at the "bought down" rate, so you can borrow more. This is how it works: let's say your fixed rate is 7.5% for 30 years. A 2/1 buydown would give you a 5.5% interest rate the first year, a 6.5% interest rate the second year and 7.5% for all the remaining years. The cost to "buy" the 2/1 buydown is about 2 points on the loan.

Hybrid Loans

If you want the security of a fixed rate mortgage but like the lower payments of an adjustable-rate mortgage (ARM), a hybrid loan may be the product for you. A hybrid loan is one of the many loans currently available that is fixed for a shorter time than the traditional 30 or 15 years.

Hybrid loans can be found with fixed rate periods of 3, 5, 7 and 10 years. All of these loans are still amortized over 30 years so there is no need to worry about the monthly payment being too high. And, at the end of the fixed period, these loans automatically roll into another ARM, so there is no balloon payment to anticipate. By matching up how long you plan on keeping your loan with the closest fixed term you can minimize your interest rate, since a 30 year fixed mortgage is a much more expensive option. The advantage of a hybrid loan is the lower rate of interest that they require.

Eliminating Mortgage Insurance

If you are purchasing your home with less than 20% down, chances are you have a loan that is insured by "Mortgage Insurance" (MI). Most borrowers are aware that they are paying it on a monthly basis, but you can check your statement to be sure. As your home appreciates or your loan balance decreases (or a combination of the two), your equity in the home will exceed 20%. At that time a favored method of eliminating the MI tied to the loan is to refinance. The savings on the MI alone can often warrant the refinance.

Be aware that mortgage lenders value your property at what the comparable homes have sold for in the last 6 months, not what they are currently listed for. If you are close to that 20% mark, ask your mortgage source to give you a "compel search" figure which will tell you what the lenders will see your home's value as.

To summarize, there are many ways to approach your home financing that can save you thousands of dollars over the life of your home ownership. Since most people have mortgage balances that are substantially greater than their total assets, the limited time spent in creatively viewing your financing can save you substantial interest costs. Times have changed and the choices for mortgage loans have grown so investigate your options and enjoy the benefits of lower interest.

© Copyright by E-LOAN, Inc. All Rights Reserved.

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