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Financing Your Home

ARMs

When you are shopping for Adjustable Rate Mortgages (ARMs), the "margin" is almost as important as the initial rate. The margin is the percentage point above the average yields for Treasury notes on which future rate adjustments will be calculated.

Let's compare two hypothetical one-year ARMs. The first may have an initial interest rate of 7% with a 2.5 margin, while the second begins at 6 7/8% with a 2.75 margin. Both loans have rate caps of 2%. Suppose that at the end of the first year of the loan, the average of the one-year Treasury note yield has been 5 1/2%. For each loan, the lenders will add the margin to that 5 1/2% average yield. Thus the interest rate for first loan would increase from 7% to 8%, and the second would go from 6 7/8% to 8 1/4%. While the first ARM had a slightly higher initial rate, it will have lower rates in subsequent years, unless the Treasury note rates increase enough to activate the annual caps on the amount of the increase. There is a wide variance among margins in ARMs offered by competing lenders, and this should be a factor when you decide on your loan.

Assuming a Mortgage

You may be able to assume the seller's mortgage liability when buying a house instead of having to apply for a new loan.

Assuming a loan could minimize your down payment or closing costs and get you a more advantageous interest rate. To know whether an assumption will work, find out the loan balance. If the balance is a small fraction of the purchase price, you will have to come up with a large down payment or get a second loan for the difference, unless the seller is willing to provide some of the financing. If the loan balance is high, the loan may have been made when interest rates were higher than they are today. Most newer loans that are assumable have adjustable rates. If you are considering an assumption because of credit problems, you will need the lender's approval to make the transaction work.

Balloon Loans

Today's economics have produced many more financing options for home buyers which provide buyers with flexibility regarding the price they can afford to pay. Financial institutions can acquaint a buyer with the current market and provide a mortgage instrument to meet any financial need.

Buying Cooperatively

Today it is becoming quite common for friends to pool their resources to buy a larger home than either of them could afford alone. Some builders cater specifically to this group of buyers by offering homes with two "master suites" instead of the more typical room arrangement. If you are considering a joint purchase, you and your buying partner should outline clearly your agreements about your shares in the down payment, the monthly mortgage payments, and what you will do if one of you decides to move out.

Before committing to a property, sit down with a real estate professional to discuss your options. Should you take possession as joint tenants? Will you have a 50/50 interest in the property, or should the interest be adjusted to reflect each person's share of the down payment or the monthly mortgage payment? Your agreements with your buying partner should be clearly expressed in writing.

Convertible ARMs

Many lenders are offering a type of Adjustable Rate Mortgage which will allow the buyers to convert their ARM to a fixed-rate mortgage without the expense of refinancing. There are several variations of this type of loan, so you should be informed about the various options before you decide on a loan.

Each lender places restrictions on when the ARM can be converted to a fixed-rate loan. Some allow a conversion after the first year of the mortgage, while others allow a change only on the rate adjustment dates. There is usually a fee for converting the mortgage, but it is much less than the cost of refinancing. The rate that you will pay after the conversion may be slightly higher than the going rate for fixed-rate mortgages. A Realtor can provide you with a list of lenders who offer convertible ARMs, so that you can shop for the one that's best for you.

Credit Card Mania

Most people know that a checkered credit history can disqualify you for a home loan, and maxed-out credit cards can do the same thing. But what most people don't know is that merely having a large number of credit cards, even with low balances and a history of timely payments, can disqualify you for a home mortgage loan just as quickly.

According to credit experts, having a number of credit cards can be just as detrimental to the granting of further credit as a history of late payments. Lenders look at it this way: If you have ten credit cards, each with a limit of $5,000, that means you have the potential to run up $50,000 in debt virtually any time you choose. That mere possibility makes you a greater risk, from their point of view.

The moral of the story? If you are planning to apply for a home loan in the future, keep only those credit cards you actually need to use and cancel the others.

FHA Advisory

If you are in default on an FHA-insured mortgage, and the lender intends to foreclose, you should know about the Mortgage Assignment Program. You will have to provide certain information to the FHA to apply for this program. To be considered eligible for assistance, the home must your primary residence, you must be at least three full payments behind on the mortgage, and the reason for your failure to make the mortgage payments must be due to circumstances beyond your control, such as unemployment. The FHA must be reasonably certain that you can resume making the payments at the end of 36 months and that the accrued deficiencies will be paid back before taking over the loan.
The Veteran's Administration also has a mortgage assistance program for those who have VA mortgages.

Financial Help

Escalating home prices often cause many first-time buyers to seek help from their families for the down payment on a new home. If your parents are providing financial assistance for the purchase of a home, it is important that you have very clear agreements with them about the conditions under which their help will be provided.

Sit down with your parents to discuss the details of the arrangement. Is the money they are providing a gift or a loan? If it is a gift, be sure to check with your tax expert to minimize the tax implications. If your parents are loaning the money for the down payment, how will it be paid back? Will there be joint ownership with an equity-sharing agreement? Will your parents be named on the ownership papers with you? Are special documents needed? Whatever form it takes, parents who help their children buy a home give them an incredible gift!

Financially Qualified

With home prices and interest rates increasing, many buyers are having to stretch themselves financially to buy a home, especially first-time buyers. Most purchase agreements allow buyers to get out of the contract if they can't qualify for a mortgage, so be sure to get some reassurances before you make a commitment to buyers. Most contracts now require timely loan applications and pre-qualifying letters from the lender.

There is no way to be absolutely certain that buyers will be able to obtain financing, but I will eliminate those who are not financially qualified. As a real estate professional, I help buyers determine what they can afford and whether there are financing alternatives that can stretch their buying power. My training and experience enable me to resolve difficulties quickly to avoid wasting time.

Financing Clauses

Residential sales agreements usually have clauses referred to as financing contingencies which allow the buyers to declare the contract null and void if they are unable to obtain financing. This may be the most important condition in your contract if you are buying a home, so read the contract carefully before you sign it.

Most financing clauses set a time limit of from 30 to 45 days for obtaining a firm commitment from a lender. They may set deadlines for applying for a loan, and require the buyer's full cooperation in obtaining all the information needed to process your loan. If the loan is not approved by the deadline, it may be necessary to request an extension from the sellers or take specific steps to void the contract and get your deposit money back. Be sure to note all of the financing deadlines in the contract, apply for your loan as soon as possible, and be diligent about providing the lender with any documents that are requested.

Financing Contingencies

Standard real estate purchase agreements usually contain language that releases the purchaser from an agreement if they are unable to get financing within a specified period of time, with a full return of their earnest money deposit. If you are buying a home, you should read the financing clause carefully and be sure that you fully understand the terms of the agreement.

You are usually required to apply for your loan promptly and to comply with requests from the lender for any documentation needed to complete the loan application. The contract will also set a time limit by which you must have loan approval. If your lender cannot meet the financing deadline and needs additional time to complete the loan, you must ask the sellers for a written extension.

Finding A Loan

Now that you have found the perfect home and negotiated the price and terms with the sellers, you come to the most difficult part of the transaction--finding the perfect loan.

You should do some comparison shopping among lenders. Your Realtor can refer you to several reputable lending institutions which should be able to complete the loan process before your proposed financial approval date. The loan officer will take your application and have you sign all the necessary papers to authorize credit and employment verifications. You and the Realtor should get periodic progress reports to make sure that all of the details are taken care of. Such reports will help to ensure that any potential problems are discovered and addressed before they can threaten the transaction.

Finicky Financiers

Buying an old house to fix up has an attraction for many people. If you can find a house with charm and character, a renovation may enable you to create just the living environment that you want. You should start with a good Realtor to help you locate the right house and recommend lenders who make both acquisition and construction loans.

Financing a renovation is perhaps the most difficult part of the whole project, especially if the house needs extensive work. Few banks will make these loans to people who are not professional developers. You should prepare for your loan application by having a written proposal. It helps to have an engineer's report or architectural plans and to include estimates from contractors covering the costs and timetables for the work to be done. Your Realtor can help you put together a market analysis of the neighborhood to show that you will not be over-improving the property compared with other homes in the area.

Good Faith Estimates

Several years ago the U.S. Congress tried to protect consumers from a few unscrupulous lenders by requiring all lenders to calculate and disclose the annual percentage rate (APR) you pay on your mortgage loan. Do yourself a favor. Forget about APR and instead direct your attention to the Good Faith Estimate of Settlement Costs (GFE).

Though Congress meant well, in practice the APR is not helpful and is confusing. If you are looking for a good way to understand your costs of borrowing and/or to compare one lender's costs to another, the GFE is your best bet. Get your lender(s) to provide a written GFE before you commit your mortgage business.

When reviewing a GFE, keep in mind that the lender actually controls only a handful of the disclosed costs. Other parties typically control costs of appraisal, settlement, title insurance, recording fees and taxes, survey, and the "prepaid" expenses of homeowner's insurance, mortgage insurance, real estate taxes, etc. Most of the remaining costs are controlled by your lender. Review these origination fees, discount points, etc. and you will have the ability to understand the full costs of your proposed mortgage loan.

Happy Banking

When you have found the perfect home in the Overland Park area, the search for the perfect loan begins. There are other factors you should consider besides the interest rate and loan fees when you are shopping for a loan, such as the lender's general reputation.

A professional Realtor can provide you with the names of several mortgage lenders and can help you compare their programs. Some lenders may have great rates, but may have very conservative standards for qualifying customers. Others may be more willing to consider people who are marginally qualified or have less-than-perfect credit histories. While some lenders have local underwriters and can process loans quickly while others may need extra time to process paperwork. The ordinary consumer deals with only a few mortgage lenders over a lifetime, but Realtors deal with many lenders every month. Our expertise can help you match your individual needs to the many offerings in this complicated marketplace.

Home Buyers Education

As the number of mortgage lenders increases, competition forces lenders to get more creative in finding ways to lend people money. This often takes the form of a "break" in the down payment. The downside of this approach is that statistically, the smaller the down payment, the more likely the borrower will default. Lenders have put together an education program to prevent delinquencies, which fills a much-needed gap in the increasingly complex world of home finance.

Home buyer education classes focus on a variety of money management topics, including all the costs connected with obtaining and owning a home. One lender got together with FANNIE MAE (a government-sponsored loan guarantor) to launch a 3 percent down payment loan which requires participation in this education course. Other lenders have shown a decline in the default rate with five percent loans that are associated with similar education courses.

Home Free

Conventional wisdom says, "Don't pay off your mortgage early." So are you foolish to consider an early payoff? Absolutely not. By adding just $50 to $100 to your mortgage payment every month, you can save thousands of dollars in interest, pay off your loan quicker, and eliminate a major monthly expense.

The argument usually given against paying a mortgage early is that you can make investments with your extra cash which pay higher returns, such as mutual funds or stocks and bonds. This approach enables you to take the mortgage interest deduction and have easy access to your money, in case you need it. These are all definite pluses, but are not guaranteed savings results.

Any extra income which an investment might generate, over your home equity appreciation, can be offset by a bad year in the investment market. Investment earnings can virtually eliminate the income tax advantage of your mortgage interest deduction, since stocks and bonds are likely to generate a fair amount of dividends, interest income and capital gains.

It isn't as simple as conventional wisdom--consult a financial expert.

How Do Bridge Loans Work?

You already own a house, but one day you hear that the house you have desired for years is on the market. Out of curiosity, you call your favorite Realtor and arrange to see if the inside of your dream house is as terrific as the outside, and--suddenly you are in love. The sellers need a relatively fast settlement, and are not in a position to accept an offer that is contingent on selling your home before closing on the new one. While you are confident your house will sell fairly quickly, you can never be sure in a fluctuating market.

A bridge loan may be the answer to your situation. Many lenders specialize in providing short term loans for just this type of situation. The principal and interest is paid back when you close the sale of your present house. If the market in your area is strong and there is a good possibility of selling your home quickly, or if you are willing to offer your home at a price that will move it in a sluggish market, then a bridge loan is a tool that could make the home you love a real possibility. A good Realtor and a knowledgeable loan officer are the team you need to turn this kind of possibility into your future.

If You Are Self Employed

There's no doubt about it, it could be more difficult for you to get a mortgage loan if you are a free lance viola player than if you are a government accountant. Traditionally lenders have been more cautious when evaluating loan applications of buyers who are self-employed than people who work for a regular salary.

If you are self-employed, there is no reason for you to shy away from applying for a home mortgage loan, however, especially if your earnings have been in the same field for at least two years. It is a good idea to meet with one or more loan officers before you begin your search. They will probably want to analyze your tax returns for the past 2 or 3 years, keeping in mind that many self employed people can look impoverished on paper, since you can write off some expenses that salaried individuals can not. Try to get pre-approval by the lender, and ask for a letter stating that you have pre-qualified for a loan which the Realtor can attach to any offer you submit on a home. This will make you more attractive to the sellers.

Leaving Yourself a Financial Cushion

When you calculate how much you will need to purchase a home in the Overland Park area, you will add up the down payment and closing costs. It is also a good idea to leave yourself with some financial cushion to cover the incidental expenses associated with moving.

First, you will have to pay the moving company unless you can find friends with strong backs who will help you. Then many buyers plan to do some work, such as painting, replacing carpet, or refinishing floors. If you are moving into a larger space, you may find yourself making some major furniture purchases within a few months of closing. A financial cushion is important enough that some lenders require buyers to have an amount in the bank equivalent to two or three months mortgage payments. This is especially true for buyers who are putting less than ten percent down. Your Realtor can give you guidance. A lot depends on your overall financial situation. If your mortgage is a relatively low percentage of your monthly income, you will be able to rebuild a comfortable amount of savings in a few months.

Lenders Want to Say "Yes"

If you consider yourself incapable of getting credit, you may be living in the past in terms of assessing your financial situation. Lenders are now bending over backwards to give money to borrowers. A recent survey of mortgage lenders found some interesting trends. Ninety-six percent of those surveyed had cut their standard down payment requirements for moderate-income buyers. Ninety-three percent said they are more lenient in their income-ratios (the ratio of your debts to income), and 94% of those surveyed said they now have more flexible approaches to credit histories, and look at rent and utility payments more than credit cards.

Seventy-nine percent of lenders say they have relaxed employment criteria. They now look more at your capacity to generate a stable flow of income rather than requiring a long history at one job.
There are more lenders today, and they are in fierce competition with each other. The home loan industry has created entire markets that cater to those with less-than-perfect credit.

Loan Pre-Approval

Many lenders help prospective buyers get pre-approved for a mortgage loan before they begin a serious house-hunting effort. Give the loan officer all of the information about your assets, income, and debts so they can tell you how much money you will be able to get under the available loan options. The loan officer will do a credit check and work with the lender to straighten out any problems with your credit rating.

Pre-approval from a lender can make you more attractive to the seller when you find the home you want. Occasionally multiple offers come in on a house, and you find yourself competing with other buyers. In that case, it is helpful if you have included a letter from the lender with your offer stating that you have an approved loan and are, indeed, qualified to buy. This will also save you time by eliminating from consideration any homes that you would not be able to afford.

Low Interest Rates

Today the interest rates charged on fixed-rate mortgages are almost the lowest they have been in two decades. That's good news for potential home buyers. Even better news is the fact that the interest charged on some Adjustable Rate Mortgages (ARMs) is at a level not seen in four decades. However, you should be cautious if you choose an ARM.

First, keep in mind that the ridiculously low rates offered on ARMs usually are guaranteed just for the first year.

You should also be aware that, because of the potential for volatility, lenders will usually require that you qualify for a mortgage loan several percentage points above the actual initial rate charged on the ARM. This is intended to eliminate marginal borrowers from becoming overburdened by debt. You should also be on the alert for lenders who charge special fees or caps that can increase the cost of the loan to you.

Low Interest Rates

When you are buying a new home in the Overland Park area or refinancing your present one, it is smart to do some comparison shopping among lenders. A low interest rate isn't the only criterion by which to judge a loan. You should also consider the terms of the mortgage, what your closing costs will be and the reputation of the lender.

Realtors are a good source of information about loans and lenders, whether you are buying a home or just refinancing your present home. We routinely assist buyers when they need a mortgage in order to purchase a home. We know what loan packages are available and the qualifying requirements. The companies with the lowest rates sometimes have very conservative underwriting guidelines, and may not be willing to make loans on certain types of property or to buyers who are marginally qualified. We can tell you which companies and loan officers will go the extra mile to provide excellent service to make sure that the transaction closes.

Margin's & ARMs

When you are shopping for an Adjustable Rate Mortgage, the important thing to consider is the margin. Each time your loan is adjusted, the new interest rate will be tied to an index of Treasury notes. The margin is the percentage point above that index where your rate will be set.
Let's suppose that you have a one-year ARM with a 2.5 margin. Your initial rate was 7.5%, and during the first year of the loan, the index of 1-year Treasury notes was at 6.25%. The rate for the second year of your loan would be adjusted to 8.75%. With a margin of 2.75, it would increase to 9%. Some lenders offer lower initial rates with higher margins. In this case, the subsequent rates could be higher after the first year, than if you chose a higher initial rate with a lower margin. If you are confused by the various mortgage offers, ask a professional mortgage broker to sit down with you and show you how it works. Today the rates and different financial possibilities change so frequently that it is a good idea to talk to a mortgage broker--they usually know where the best rates can be found.

More Down Payment Help

Perhaps the most common deterrent to first-time home buyers is the lack of a down payment. The home loan industry has practically re-created itself in the last ten years, making it easier than ever to obtain a mortgage, and new mortgage programs are always cropping up.

Some states have a state-sponsored loan program which allows buyers to purchase a home without putting any money down. A parent or other relative can guarantee repayment of ten percent of the loan if the buyer defaults. The only cash needed is for the closing costs, which typically run about three percent of the loan.

Parents can also give their children down payment help through a personal note or second trust deed. The terms could be set up for monthly payments or annual payments amortized over a period of time. You could pay the interest only, and have the payoff due when the property is sold.
With so many alternatives, doesn't it make sense to call your Realtor for a free consultation? You may be closer to the end of the rent trap than you think.

More On ARMs

Lenders are always looking for new ways to help buyers get into the home of their dreams. Today they frequently use adjustable rate mortgages (ARMs) to increase the buyer's options. The interest rate on an ARM changes periodically to reflect changes in the national market. Since the loan starts at a rate that is lower than the national average, lenders can reduce the borrower's qualifying criteria.
One way to distinguish between different ARMs is by the national index to which they are tied. Some ARMs are tied to a slow-moving index called the cost-of-funds index; these are usually the most desirable. ARMs that are tied to a more volatile index, such as Treasury Notes, can be adjusted upward at a quicker rate.

Look at all the factors before choosing a loan. The faster index loan may start out with lower rates and lower monthly payments, but the slower index ARM may eliminate your concern about having to re-finance down the road.

Mortgage Costs

Cost cutting has become something of an art form for those who are serious about saving money. One potential area for saving that most people fail to consider is their mortgage. You can shave years off your mortgage and save thousands of dollars in interest by adding a little extra to your mortgage payment each month.

Suppose you took out a 30-year mortgage for $125,000 at 8% interest with a monthly payments of $917. Your total payments over the life of the loan will come to $330,194, and $205,194 of that amount will be interest. If you pay just $100 extra each month, your total loan payments will be $265,050. You will save $65,144 in interest and retire your mortgage in 19 years!

Is it in your best interest to pay off your mortgage early? It depends. Your decision should be based on your budget, your long-range plans (how long you plan to live in your home), and your income bracket. Consult your tax accountant to find out if an early payoff is an option for you.

Mortgage Fears

It is not unusual for home buyers to feel that the lender is being very picky during the loan approval process. They have provided all kinds of information, and then the lender asks for more. If this process is getting you down, you are not alone. It is important to remember that, in one sense, none of this is personal!

Some lenders have more stringent requirements than others, but every lender requires a substantial amount of documentation on a mortgage loan. They must verify employment, credit history, and recent financial transactions involving your liquid assets. If your Visa payment was late, they may ask for a letter explaining why. If you are self-employed, they will ask for tax returns from at least three years and probably a year-to-date profit and loss statement. It is not that they don't trust you; their regulations require them to document everything. And while the loan officer may know that you are a good risk, the underwriters must be able to defend the loan to a federal bank examiner or auditor.

Mortgage Myths

Nationwide surveys indicate that a large number of potential home buyers count themselves out of the market because of widely-held myths about home financing.

Some of the most popular myths include: 1) home buyers need large down payments (more than is actually the case); 2) the loan process works against people under age 35; 3) owning a home is more expensive than renting; and 4) minorities have no chance of getting a mortgage.

Many qualified first-time buyers were unaware of special programs designed especially to make a home affordable to them. The surveys found that many people view the mortgage process as "difficult, stressful, and incomprehensible."

The home loan industry is always looking for new ways to dispel these myths because lenders want more business, not less. The alternatives to traditional 20% down, thirty-year fixed mortgages is astonishing. Mortgage brokers are experienced in explaining today's financing and debunking the myths.

Mortgage Terms

UNDERSTANDING SHORTER TERM MORTGAGES

Lenders now offer mortgages that are blends of short-term ARMs and 30-year fixed-rate loans with a lower fixed-rate of interest for a period of five, seven or ten years. Be sure that you understand what happens at the end of the initial term before you sign on the dotted line for such a loan.
Many of these loans revert to a 1-year adjustable rate loan at the end of the initial term and can be adjusted once a year based on an index tied to the cost of money. You should know how much over the index your rate will be set and the limit or cap on how much your payments can increase. A "balloon" note requires the entire balance to be paid to the lender after the initial period of the loan ends. Most of these loans require the lender to guarantee to refinance the note at that point if payments have been timely. The lender should spell out how the re-finance rate will be determined and what costs will be involved. These loans can help you buy a more expensive house than you could afford with a 30-year fixed rate mortgage; just be sure that you understand the terms so that you can assess the potential risks.

New Loans

If you are considering applying for a mortgage to purchase a new home or to refinance your present home, don't delay. Despite fluctuation in interest rates, lenders are still swamped with new loan applications, many from refinancers.

You should gather all the necessary paperwork before you apply, and get your loan application in as soon as possible. At a minimum, this information will consist of proof of your earnings, as well as a clear picture of your total monthly expenses. If you are self-employed, or have long-term obligations, such as alimony or child support, the preparation time and the amount of paperwork increases.
Despite the need to move rather quickly for a mortgage in today's market, you should "make haste carefully". Shop carefully for your loan by comparing all costs and terms. With the number of lenders vying for your business, new and better deals are always appearing, but you can't just compare newspaper ads.

Owner Financing

If you are selling a house in which you have a lot of equity, and you don't need that equity to buy a new home, an owner-financing agreement may benefit you and your buyers.
Seller-financing arrangements usually involve the buyers securing the largest portion of their purchase money from a mortgage company and getting a smaller second loan from the sellers. For example, they may finance 75% from a lender, put in 15% from savings, and ask the sellers to finance the remaining 10%. The terms and interest rates on seller carry-backs are negotiated on a case-by-case basis. Sellers should ensure that the note protects them to the fullest. They may be able to negotiate a note that provides a better return on their money than 1-to-5 year CD's or treasury notes. Use common sense when considering such a loan, and verify the buyers' income, credit history, and job stability before making your final decision.

Purchase Offers

When you have decided on a mortgage lender, you begin the loan process by filling out a loan application. You should be fully prepared to go over your current financial situation and credit history with the loan officer.

Have a record of all of your current bank accounts, including the name and address of bank(s), type of account(s), and approximate balance(s). Be prepared to provide details about outstanding loans or credit accounts, such as student or car loans and major credit card accounts. You will also need information about your assets, such as car title, stocks and bonds, and life insurance policies. If you foresee any credit problems, discuss them with the loan officer for advice on how to keep them from interfering with approval of the mortgage. That person can usually give you a prompt opinion about your chances for obtaining a mortgage.

Year 1 After just a week on the market, your Realtor has brought you a terrific offer to purchase your house--it is less than the asking price, but more than you expected. The buyers were reasonable and well qualified. After talking with your agent, you decide to accept the offer.

After the agent leaves, you start thinking about what you have just done and feel terrible. You wonder if you acted too quickly--maybe you could have gotten more! You fear that the buyers will let your garden go to seed and pull down all the beautiful wallpaper that you just put up.
These fears are such a common phenomena that they have been given a name--"seller's remorse"! It is perfectly normal to feel this way, especially if you are selling a home where you have lived for many years and which holds many memories. "Seller's remorse" is almost always temporary. It is quickly replaced by the excitement of moving into your new home!

Puzzling Points

Question: Which offers you the best deal, a low interest rate mortgage with "points" or a higher interest rate loan with no "points"?

Answer: It depends. Consider a 30-year, fixed-rate mortgage for $100,000 at 8 3/4% interest and no points. Monthly principal and interest payments would $787. To qualify for an 8 1/4% loan, you have to pay three points, or $3,000. Payments on this loan would be $751, a savings of $36 per month. How can you determine which loan is best?

First, calculate how long you will have to live in the home in order to recoup the $3,000 that you paid in points. Divide $3,000 by your monthly "savings" of $36, then divide that answer (approximately 83) by 12 months per year for the number of years it will take to recoup the points (approximately 7).

If you are fairly certain you will live in your new home for seven years or more, then the loan with points is the better value. Other factors may influence your decision, however, such as how much cash you have for closing and your monthly budget. Such calculations will give you the data you need to make a decision.

Qualifying For A Loan

There's a lot of talk about home loan pre-qualification by mortgage brokers and real estate agents. There is a difference between loan pre-qualification and pre-approval. Pre-qualification, which in today's marketplace is usually done by mortgage brokers, means working with the buyer to determine how much they can afford and which loans are the most likely to be available to them. Loan pre-qualification can save a buyer time and money, and can even be a bargaining tool with a seller, however, it is not the same as loan "pre-approval". The mortgage broker can often get the buyer a pre-qualification letter

Pre-approval means that the lender has definitely committed to lending the buyer money once the house itself is approved. Since it is a much stronger pledge, it is a much more valuable negotiating tool. Only a lender can give pre-approval, but your Realtor may be able to push through pre-approval from underwriters with as little as a phone call. So when you hear someone talking about "pre-approval" make sure that it is lender pre-approval, and know that your Realtor can help.

Qualifying Guidelines

You have found the perfect home in the Overland Park area, but finding the perfect financing has become elusive. After you completed the application process, your lender has turned you down, and you are upset. Can anything be done to turn around this setback?

It depends on why you were turned down. If your income is too low to satisfy one mortgage company, there might be another company with more liberal qualifying guidelines. If you have had credit problems, some lenders may be more willing than others to help you clear them up in a manner that satisfies their underwriters. If your loan runs into problems, sit down with the loan officer and your Realtor to investigate the possibility of using a different lender. The first company may be able to "assign" the package to a competitor, enabling you to use your same credit report and appraisal. You will need the cooperation of your sellers, too. While loan rejections are disappointing, they can have happy endings.

Re-Financing

Interest rates fluctuate as changes occur in the general economy. If you purchased your home when interest rates were higher, you may want to consider re-financing your loan at a lower rate.

You will have to apply for the new mortgage and have your current income eligibility assessed. Depending on how long you have had your present loan, a current appraisal may be required. There are closing costs, such as attorney, title fees, recording and notary fees, and appraisal charges.

The biggest factor in your decision should be the length of time you plan to remain in your home. If you will be there for only a year or two, it may not pay to re-finance. If you will be in your home longer, re-financing could provide you with lower mortgage payments. Your Realtor can help you work out the numbers and can refer you to reputable lenders.

Shopping for the Best

The most important thing to look for when you are shopping for a mortgage is the interest rate, right? Not necessarily. There are many other factors to consider, including the lender's charges for making the loan, the terms under which the loan will be approved, and the lender's reputation for timely completion of loan applications to meet purchase agreement deadlines.

When Realtors are involved in sales transactions, they don't tell buyers which mortgage companies to use. They can provide the names of established lenders in the Overland Park area who have provided good service to their customers. They can give general information about the different mortgage options that are available today. Using a low interest rate as the main criteria for choosing a mortgage could cost you money--and perhaps the home you want--if the company cannot deliver on its' promises.

The Language of Financing

When you meet with a lender to apply for financing, you may feel as if you are in a foreign country as the loan officer talks points, Regulation Z margins, PMI, and ARMs.

You are not alone if you feel left behind by loan terminology. Like many professionals, lenders use a highly specialized language. Don't hesitate to ask for a translation! This is especially true if you are investigating some of the more complicated loans with rates that can be adjusted periodically. As you consider the various loan options, find out what the interest rate will be and at what point the lender will commit to that rate. If the loan has an adjustable rate, be sure that you understand how often and by how much your payments can go up or down. Find out if the loan can be assumed by a future buyer. The lender isn't trying to confuse you. The mortgage process is complicated, so just keep asking questions until you understand.

The Margin on an ARM

Let's suppose that you have a one-year ARM with a 2.5 margin. Your initial rate was 7.5%, and during the first year of the loan, the index of 1-year Treasury notes was at 6.25%. The rate for the second year of your loan would be adjusted to 8.75%. With a margin of 2.75, it would increase to 9%. Some lenders offer lower initial rates with higher margins. In this case, the subsequent rates could be higher after the first year, than if you chose a higher initial rate with a lower margin. If you are confused by the various mortgage offers, ask a professional mortgage broker to sit down with you and show you how it works. Today the rates and different financial possibilities change so frequently that it is a good idea to talk to a mortgage broker--they usually know where the best rates can be found.

The Mortgage Shop

The Seller May Pay

You have finally saved enough for a down payment on your first home, with a little left over to buy the furniture you will need. Then you hear about additional closing costs you weren't anticipating which seem like a real setback.

One way to cover such a shortage is to make the sellers an offer that calls for them to credit you for some of the closing costs. As a rule, the sellers may pay a maximum of 3 percent of the sales price if the buyer is putting five percent down. If the buyer is making a down payment of 10 percent or more, the seller can contribute up to 6 percent of the sales price to cover the buyer's closing costs. Some items must be paid by the buyers, such as prepaid taxes and the first month's mortgage payment. Sellers may also contribute to paying the appraisal, points, title insurance, settlement attorney fees, state or local transfer taxes and similar items. Keep in mind that if the credit is included in the price of the house, the appraiser will have to justify the amount, based on sales prices of similar homes in the neighborhood.

They Said "Yes"!

Applying for a mortgage loan brings out the paranoia in everyone, even those who are most compulsive and consistent about paying their bills on time. Remember that the lender wants your business and will do everything possible to help finalize your home purchase.

There will be nothing to worry about if you have paid your bills more or less on time. If you have a record of late payments but no serious credit problems, you may have to provide the lender with a written explanation of why certain payments were late. The loan approval may depend on whether or not the excuses are reasonable. Your lender can probably help you work things out if your problems are not serious. If your credit problems are serious, it will help to sit down with a lender even before you begin house hunting.

Understanding the Bottom Line

An important part of buying a house is sitting down with your Realtor or a mortgage lender to get a clear idea of how much you can afford. They will add up all of your monthly expenses, the mortgage payment, insurance, real estate taxes, homeowners or condo association fees--and the grand total can throw you into shock.

The important thing to remember is that the grand total isn't really the bottom line. When you add your tax savings to the equation, you may be pleasantly surprised. During the early years of your loan, almost all of the mortgage can be deducted from your state and federal income tax. The same is true of your real estate taxes. If you use part of your house as a home office, you may be able to qualify for additional tax savings. In some areas, homes with ground floor apartments are popular for offsetting part of the mortgage and offering even more tax savings. When you make calculations about your monthly costs that include the tax savings, you may find that owning your own home is less expensive than renting a house or apartment of comparable size.

Watch Your ARM's Length

Most buyers know that first-year interest on Adjustable Rate Mortgages (ARMs) is lower than on available fixed-rate mortgages. This makes ARMs easier to qualify for, but they require that borrowers have some understanding about how such loans work because there are significant details associated with the low first-year rate.

First, check to see how long the low rates offered on the ARMs are guaranteed. After that period of time, the rates can go up two points a year to a typical "cap" of six points over the life of the loan.
Lenders will usually require borrowers to qualify for a mortgage loan that is several percentage points above the actual initial rate charged on the ARM. This is intended to keep borrowers from becoming overburdened by debt.Some lenders may charge special fees or caps which can increase the cost of the loan. If you think that an ARM may work for you, it is a good idea to shop around.

What is a Balloon Mortgage?

In loan terminology a "balloon" is the unpaid loan balance that must be paid in full on a specified due date. Federal savings and loan associations are permitted to make balloon mortgages with as little as five percent down and monthly payments that are smaller than the amount needed to fully amortize the debt. On the due date, which may be only a few years after the loan was made, the balance must be paid off or the loan must be renegotiated. Balloon borrowers must be cautious and plan carefully to avoid overlooking balloon payment obligations. It is easy to be lulled into complacency by the easy monthly payment terms.

Today's complex economics have produced a wide variety of options for potential borrowers, who are often surprised by how much house they can afford to buy. Loan approval is ultimately in the lender's hands, but your Realtor can help you to determine your real buying power.

When Interest Rates Rise...

... many people fall out of the house buying market. This is a mistake. Many of the best mortgages deals become available when lenders are competing for new business and sellers are competing within a smaller buyer pool. You just have to know how to keep the costs down in order to counter the higher interest rates.

One of the best tricks is the buy-down. In a buy-down, a fee is paid at the closing to get a lower interest rate. In a soft market, an anxious seller may be lured into to paying all or part of the buy-down. Another approach is to get the seller to pay some of closing costs, thus lowering the amount of cash a buyer needs to close. Frequently the seller's costs can be used as a write-off by the buyer (Check with your tax advisor.)

If the market is softening due to rising or higher rates, the price itself becomes an area where a buyer may be able to save a lot of money on a house through some hard negotiating. Lower prices mean lower loan amounts, so don't be discouraged by higher rates--use them to your advantage.

Who Pays the Points?

When home buyers shop for financing, they must consider two important factors--the interest rate and how many points! Each point is equal to one percent of the mortgage amount. If you are selling a home, the buyers may ask you to share the points with them.

The buyer usually pays the points. But if the offer is attractive and will give you the amount you want, paying one or more points might be a good idea. When a contract is presented, your Realtor will go over the price and terms to help you calculate the net price you will receive. If the offer is isn't strong enough or has risky contingencies, you might make a counter offer to increase your profit on the sale by eliminating the points from your selling costs or by increasing the price to help you absorb additional costs you will pay. In some cases, buyers with limited cash may need some assistance from the sellers to make the transaction work. Your Realtor will help you look at the total picture and the buyer's overall qualifications, so that you can make a decision based on the bottom line.

Your Mortgage

You get the mortgage, move in, make the payments, and pay it off eventually, right? Most homeowners overlook the mortgage payment as a financial tool for money management. Smart homeowners know that by properly adding to their monthly payments, even by a small amount, they can substantially reduce the term of their loan, not to mention the total interest they will pay. In fact, prepaying one full year of a standard mortgage can save thousands of dollars in interest. The key is to do it properly and to find the right lender for whom prepayment is not a problem.

More progressive lenders allow the option to add money to the monthly payment which goes directly to the principal. How much should you add? It's largely a personal decision, and it depends on your cash flow. But be mindful of the fact that the mortgage interest rate is probably the lowest interest loan you will find, so don't short yourself with prepayment only to run up credit card debt!