Question 1

What is an ARM?

Accepted Answer

Beyond being an essential part of the human body, ARM is a mortgage acronym for Adjustable Rate Mortgage. The interest rate is typically fixed for a brief initial period, commonly for the first 3, 5, or 7 years of the loan. After this period, the rate adjusts to the prevailing market rate as frequently as specified in the contract, often on an annual basis. Borrowers typically select an ARM when they believe interest rates will decrease. Since an ARM generally provides a lower starting interest rate, those choosing this option usually want to benefit from the initially reduced rate but plan to refinance when the fixed period ends, or if rates continue to fall, they'll benefit from the rate adjustments as rates decline.

Question 2

What is a balloon?

Accepted Answer

A balloon is a short-term loan that's amortized over an extended period to provide the borrower with a lower payment. For instance, a $100,000 loan might be structured as a 5-year balloon with a 30-year amortization. If the monthly payment is $500, the borrower would pay $500 each month for the first 59 months, and the remaining loan balance becomes due in full on the due date for month 60. Balloon mortgages are typically used in strategies where the borrower plans to own a property for only a short time or refinance in the near future.

Question 3

What is the most stable type of mortgage loan?

Accepted Answer

The Fixed Rate Mortgage is by far the most stable mortgage type available. These loans are most frequently offered in 30 and 15-year terms. The primary advantage of these loans is that the principal and interest payment remains constant throughout the life of the loan, eliminating any surprises. This loan type is favored by most people who intend to remain in their home for an extended period.

Question 4

How can I make sure that I am not paying unnecessary closing costs?

Accepted Answer

All lenders must disclose the costs to you in writing by law, both when you submit your application and at closing. During application, they'll provide you with a Good Faith Estimate of settlement costs, and at closing, they'll provide a HUD-1 statement of settlement costs. Request that your lender walk you through this documentation and clarify where the money is allocated for each line item. Typical costs include appraisal fees, title insurance fees, title search fees, and flood certification fees.

Question 5

When's the best time to buy a house?

Accepted Answer

The best time to purchase a house is when you're prepared. While housing prices do fluctuate, they have traditionally appreciated over time. Even in markets experiencing modest increases in housing prices, there are substantial tax benefits to homeownership. There are also significant quality of life considerations involved. Knowing that you're the owner of your own home provides tremendous satisfaction. If you have children, the stability of homeownership and providing them with a backyard to enjoy is invaluable.

Question 6

Should I pay off all my debts and bills before applying for a mortgage?

Accepted Answer

Not necessarily. Before you proceed to pay off student loans, a new car loan, or other obligations, consult with your lender. Paying off debts may be unwise if it exhausts your savings or decreases your down payment. Either scenario creates the impression that you're living beyond your means. Conversely, eliminating some debt may be advisable if you need to reduce your total debt-to-income ratio. A practical approach is to get prequalified for the loan. Most lenders will provide guidance on improving your financial situation before you formally apply for the loan.

Question 7

Is a big down payment really important?

Accepted Answer

That depends on your circumstances. There's a broad range of loan products available today that make homeownership accessible to nearly everyone, even without a down payment. However, you may choose not to use them. Historically, buyers who purchase without a down payment are significantly more likely to default on their mortgages. The reasoning is straightforward - an owner who has invested more in a home will work harder to maintain it because they have more at stake. Higher default rates result in higher interest rates. Therefore, if you have little to no down payment, you'll likely pay a higher interest rate than someone with a substantial down payment. Conventional mortgages typically require a down payment of 20% or more. Many buyers, particularly first-time homebuyers, begin with a 5% down payment. The highest interest rates are generally charged by lenders when there's no down payment.

Question 8

How important are debt ratios?

Accepted Answer

Debt ratios serve as general guidelines rather than strict rules. Many conventional mortgage lenders prefer to see a 20% down payment with a house payment that doesn't exceed 28% of gross income. They also prefer that total monthly obligations remain under 36% of gross income. However, these are only guidelines. Mortgage lenders make exceptions to these guidelines regularly based on the buyer's overall financial position and credit history. Don't allow a higher debt ratio to prevent you from purchasing the home you desire.

Question 9

How much can I save by refinancing?

Accepted Answer

Savings differ by situation, but many homeowners target a rate reduction of 0.5%-1% or more, which can translate to savings of hundreds of dollars each month. Obtaining a personalized quote is the most effective way to determine your actual savings.

Question 10

What is a mortgage broker?

Accepted Answer

In basic terms, the broker isn't a lender. He or she may be employed by a company with a bank-like name, but they actually function as independent sales representatives for various banks and financial institutions who will ultimately provide the loan and handle payment servicing. The mortgage broker doesn't represent any single financial institution; instead, they serve as your representative when searching for a home loan. Mortgage brokers work entirely on commission and receive no compensation if the loan doesn't close. It's in their best interest to secure your approval and obtain terms that are beneficial and affordable for you. In comparison, your local bank can only provide loans strictly according to the current terms their institution offers. Bank loan officers are typically compensated through a combination of salary and commission.

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