BASIC MORTGAGE INFORMATION
(Please be advised that the information presented here is generalized. Your specific mortgage situation may differ. Please consult your tax advisor for more information.)
How Large of a Mortgage Will You Qualify For?
You can usually qualify for a mortgage loan of two to two and one-half times your household's income. For example, if your family has an income of $40,000 per year, you can usually qualify for a mortgage of $80,000 to $100,000.
Some lenders use other factors to determine the size of a mortgage you are eligible for. In general, lenders prefer that your housing expenses (mortgage, tax payments, insurance and special assessments) do not exceed 25% of your gross monthly income. Other financial obligations (monthly payments extending more than 10 months) should not exceed more than 36% of your gross monthly income.
Lenders need to research your credit history to see how well you have repaid loans in the past. Also, the lender will inquire about your employment history.
What's the Difference Between a Fixed Rate and an Adjustable Rate?
- Fixed Rate - With a fixed rate mortgage your monthly payment will always be the same for the life of the loan. The benefit is that you always know what your principal and interest costs are.
- Adjustable Rate Mortgage - In comparison, an adjustable rate mortgage (ARM) is a loan that will fluctuate your payment and interest rate during the life of the loan. Most ARMs start off with a set interest rate and principal payment for the first year and then adjust annually. The interest rate on your loan is set to reflect changes in the index interest rate. As the index interest rate changes, your payment will be adjusted annually to reflect those changes.
Both types of loans have their pros and cons. For example, a fixed rate mortgage is appealing because you always know what your payment will be. On the other hand, when interest rates are high, choosing the adjustable rate mortgage is favored because it is probable that the interest rate will drop in the future, resulting in smaller monthly payments. However, with an adjustable rate mortgage you run the risk of ending up with a higher payment should the interest rate soar during the life of the loan.
Adjustable rate mortgages can be advantageous because they generally offer a lower initial interest rate than a fixed rate loan, but an increase in the interest rate will result in a higher monthly payment, unlike the fixed rate loan.
What are Some of the Different Types of Mortgage Programs?
There are several types of adjustable rate and fixed rate mortgage loans. Here are some of the more common loans:
- 30-Year Fixed Rate Mortgage This is a conventional mortgage which provides for a fixed interest rate and level payments for the 30-year life of the loan.
- 15-Year Fixed Rate Mortgage The 15-year loan is a conventional mortgage in which the borrower will pay fixed monthly payments for the life of the loan. With a 15-year loan, payments are higher than a 30-year loan, but the loan is paid off much faster.
- 1, 3, 5, 7, 10 Adjustable Rate Mortgages These types of mortgage programs allow you to carry a fixed interest rate for a specified amount of time. Once that time is up, you will assume an adjustable rate for remaining life of the loan. For example, if you choose a 3 year adjustable rate mortgage, you would have a fixed interest rate for the first three years of the loan and an adjustable rate for the remaining years.
- 10/1, 7/1, 5/1, 3/1 Treasury ARMs These loans provide for a fixed interest rate for a specified amount of time. After that you pay a variable interest rate with annual adjustments. For example, if you selected a 10/1 Treasury ARM loan, you would have a fixed interest rate and fixed monthly payments for the first 10 years of the loan. The remaining life of the loan would assume a variable rate annually.
- 3-Year, 1-Year, 6-Month Treasury ARMs This type of loan applies adjustments to the interest rate payments in various ways. For example, if you selected the 6-month option, your interest rate would adjust every six months. In comparison, if you selected the 3-year option, your interest rate would adjust every 36 months.
- Jumbo Loan Programs These mortgages allow you to borrow more than an amount set by the Federal National Mortgage Association. As of January 1, 1999 any loan over $240,000 is considered a Jumbo Loan.
- Conventional Loan Programs Any loan that allows you to borrow within the amount set by the Federal National Mortgage Association. Currently, loans under $240,000.
Which Mortgage is Best?
There are several types of mortgage plans available that are appropriate for different needs. If you are more comfortable with a steady payment, then you will want to choose a fixed rate loan. You may select the common 30 year fixed rate mortgage. This type of loan is beneficial if you plan on living in your home for several years.
On the other hand, if you expect to keep the house for only a short period of time or prefer an adjustable rate mortgage, you will want to investigate other loan options. There are many mortgage programs available to fit your needs. Consult your real estate professional for more information.
How Much Money Will You Need to Close the Transaction?
Click here for a list of sample closing costs.
