PURCHASING OVERVIEW

1.  Plan your purchase:

  • Calculate your total liquid assets.
    Be prepared to document cash for down payment, closing costs and cash reserves.
  • Document your income to qualify.
    Thirty days of pay stubs and two years of W-2's are required by your lender to verify monthly income. If self-employed, prepare a year to date Profit and Loss Statement and have two current years fully scheduled tax returns available.
  • Examine your outstanding credit balances.
    Are you over obligated? Can you pay down debt to qualify? Are all accounts paid as agreed?
  • Work with your lender to find a loan that fits your needs.
  • Before you shop for your home, get qualified.
    Obtain a credit pre approval from your lender.

2.  A mortgage is the money you borrow to buy your home

Mortgage terms include:

  • A specific period of time (i.e., 30 years)
  • A specific interest rate (i.e., 8%)

Your loan payment is calculated based on making payments at the specified interest rate for the specified period of time.

3.  Costs associated with most mortgages

  • The rate, or percentage, at which the money is lent to you (i.e., 8%)
  • The points, a one-time fee added by the lender (i.e., 2 points)
  • The application fee charged by the lender to cover credit report and home appraisal expenses (i.e., $350)
  • Closing costs, including transfer taxes, title insurance, escrow, inspection, notary, and so on.

4.  How interest rates affect the cost of a loan

Compare the short-term and long-term impact of a 1% variance on a $200,000 loan:

Interest Rate 7% 8% Difference
Monthly Payment $1,330 $1,468 $138
Total Payment
over 30 years		 $478,800 $528,480 $49,680
*Example is monthly principal and interest only. It does not include taxes, insurance, and so on.

As you can see, a lower interest rate makes a big difference!

5.  How points affect the cost of a loan

  • 1 point = 1% of the amount borrowed
  • Although points are a fee paid to your lender, they also enable you to "buy" a lower interest rate.
  • As a rule, the more points you pay, the lower your interest rate.
  • One point can "buy" you a 0.25%+/- discount on your interest rate.
  • Most lenders require you to pay your points up front.

6.  A savings comparison

Mortgage Interest Points
$200,000 7.5% 0
$200,000 7.0% 2
2 points = $4,000.
In exchange for paying 2% of your loan amount, you could lower your interest rate by as much as .5%. This could amount to considerable savings over the life of your loan.

7.  The two most popular types of mortgages

  • Fixed Rate
    The most straight forward type of loan. Because the interest rate never changes, you pay the same amount every month until the loan is paid off.
     
  • Adjustable Rate
    Because this interest rate fluctuates at predetermined intervals (i.e., every month, every 6 months, every year), it is more complex than a fixed-rate loan.

8.  Fixed Rate Mortgages

The term, or length of the loan, is usually 30 or 15 years.

  • 30-year term
    This is the most conventinal loan term. It allows you to repay slowly, with moderate monthly payments.
  • 15-year term
    This term allows you to repay twice as fast. Although your monthly payments are higher than a 30-year term (albeit not twice as high), a larger percentage of your payments is applied to principal.

9.  Adjustable Rate Mortgages

  • Term
    Calculated on a 30-year basis
    Starts with a fixed-rate period, then adjusts thereafter, i.e., Fixed for 3 years, then adjusts every year after
  • Rate
    Adjusts at scheduled intervals
    Adjusts according to an index, i.e., Treasury Bills, LIBOR, 11th District Cost of Funds (COF), CDs, and so on.
  • Margin
    Percentage added by the lender to the index interest rate
    The sum of the rate and margin is the rate you pay, called the fully indexed rate
  • Other ARM info
    As interest rates fluctuate, your ARM payments will vary.
    To minimize the risk of extreme fluctuations, caps are imposed on your rate.
    Caps protect you by limiting the percentage by which your rate can go up.

10.  Building equity in your home

  • Equity is the portion of your home that actually belongs to you.
  • Each time you pay your mortgage, your equity increases.
  • The rate at which you build equity depends on how much of each payment is applied to principal and how much is applied to interest.
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