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| Financing and Mortgage |
— Estimating Buyer’s Fees
Whether it’s called loan-origination or loan-service fee, fees can be up to 3 percent of the loan amount and can include the following:
CREDIT UNIONS?
Many people shopping for home loans forget to inquire at credit unions. There are two major differences between a traditional bank and a credit union. One difference is that credit unions are member owned, meaning that if you have an account at a credit union, you’re part owner in the enterprise. Being a member can translate into better service since you are more than a customer. The other difference is that credit unions are not-for-profit, which explains why mortgages and interest rates tend to be notably better. Becoming a member is easier than typically believed; you can use the credit union search tool at www.joinacu.org to find a local branch.
HOME FINANCING OPTIONS?
— Fixed-Rate
A fixed-rated mortgage comes with an interest rate that remains the same for the life of the loan. The life or term of a mortgage is 30 years by industry standards, but 15- and 20-year term loans are also available.
Shorter-term loans come with cheaper interest rates. A 15-year mortgage’s interest rate is typically one-quarter to one-half percent lower than a 30-year mortgage. Both the cheaper rate and the shorter term mean you’ll pay less for the life of the loan than you would if you borrowed the same amount of money with a long-term loan.
Monthly payments of a shorter-term loan, however, are generally higher than the same loan for a long term because the larger payments of the short-term loan are necessary to repay the debt sooner.
A long-term loan with smaller monthly payments can be easier to budget, but if you have a stable salary that allows you to afford the larger monthly outlay, the shorter-term loan could be to your advantage. Whatever term you choose, fixed-rate mortgages protect you from the risk of rising interest rates. Of course, since you are locked in to a given rate, you could end up with a rate higher than the going rate, should rates fall.
— Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) come with interest rates that adjust up or down depending on current economic trends and are based on a money market index. The one-year U.S. Treasury bill commonly is used because its yield is similar to the 30-year U.S. Treasury bill used to set rates on 30-year fixed-rate mortgages. ARMs also might be tied to other indexes, including certificates of deposit (CDs) or the London Inter-Bank Offer Rate (LIBOR) rates, among other regularly published indexes.
To come up with the ARM rate, the lender will add a “margin,” usually two to four percentage points, to the index. Initially, the ARM rate is lower than the fixed rate, from about one-quarter point to two points or more, depending on the economy. The date when the first adjustment occurs (from six months to many years) and how often the rate adjusts depend on the terms of the loan. After the first adjustment occurs, subsequent adjustments can occur every six months, once a year or for longer periods. The adjustment period is disclosed in the specific loan.
ARMs generally have limits or “caps” on how high it can adjust during each period as well as for the life of the loan. The caps protect you from drastic market changes, but ARMs don’t offer the stability of a fixed-rate loan. ARMs’ lower initial rate, however, can help you qualify for a larger loan or start you off with smaller payments than you’d have to pay for the same mortgage with a higher fixed rate. If index rates fall with an ARM, so does your monthly mortgage.
Whether it’s called loan-origination or loan-service fee, fees can be up to 3 percent of the loan amount and can include the following:
- Loan application fee
- Lender’s credit report
- Lender’s processing fees
- Lender’s documentation preparation fees
- Lender’s appraisal fees
- Prepaid interest on loan (prepaid per day until the end of the month in which the closing occurs)
- Lender’s insurance escrow (can be up to 20 percent of the cost of a one year homeowners insurance policy)
- Lender’s tax escrow (depending on the time of year you close this can be up to 50 percent of the yearly property taxes)
- Lender’s tax escrow service fee (fees to set up the tax escrow)
- Private mortgage insurance (PMI)
- Title insurance cost for lender’s policy (depending on what part of the country you live, a portion or the full amount paid by the seller)
- Special endorsements to the title (depending on the property chosen, the lender may require that the buyer pay special endorsements, such as an environmental lien or location)
- House inspection fees (any that remain unpaid)
- Title/escrow company closing fee
- Recording fees (for the deed or the mortgage)
- Local city, town, village, county and state transfer taxes (variable by location)
- Flood certification fee (determines whether the home is in a flood plain)
- Buyer attorney’s fee
- Association transfer fee
- Condo move-in fees
- Co-op apartment fees (may be required to transfer the shares of stock in the property to the buyer)
- Credit checks by the condo or co-op board
CREDIT UNIONS?
Many people shopping for home loans forget to inquire at credit unions. There are two major differences between a traditional bank and a credit union. One difference is that credit unions are member owned, meaning that if you have an account at a credit union, you’re part owner in the enterprise. Being a member can translate into better service since you are more than a customer. The other difference is that credit unions are not-for-profit, which explains why mortgages and interest rates tend to be notably better. Becoming a member is easier than typically believed; you can use the credit union search tool at www.joinacu.org to find a local branch.
HOME FINANCING OPTIONS?
— Fixed-Rate
A fixed-rated mortgage comes with an interest rate that remains the same for the life of the loan. The life or term of a mortgage is 30 years by industry standards, but 15- and 20-year term loans are also available.
Shorter-term loans come with cheaper interest rates. A 15-year mortgage’s interest rate is typically one-quarter to one-half percent lower than a 30-year mortgage. Both the cheaper rate and the shorter term mean you’ll pay less for the life of the loan than you would if you borrowed the same amount of money with a long-term loan.
Monthly payments of a shorter-term loan, however, are generally higher than the same loan for a long term because the larger payments of the short-term loan are necessary to repay the debt sooner.
A long-term loan with smaller monthly payments can be easier to budget, but if you have a stable salary that allows you to afford the larger monthly outlay, the shorter-term loan could be to your advantage. Whatever term you choose, fixed-rate mortgages protect you from the risk of rising interest rates. Of course, since you are locked in to a given rate, you could end up with a rate higher than the going rate, should rates fall.
— Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) come with interest rates that adjust up or down depending on current economic trends and are based on a money market index. The one-year U.S. Treasury bill commonly is used because its yield is similar to the 30-year U.S. Treasury bill used to set rates on 30-year fixed-rate mortgages. ARMs also might be tied to other indexes, including certificates of deposit (CDs) or the London Inter-Bank Offer Rate (LIBOR) rates, among other regularly published indexes.
To come up with the ARM rate, the lender will add a “margin,” usually two to four percentage points, to the index. Initially, the ARM rate is lower than the fixed rate, from about one-quarter point to two points or more, depending on the economy. The date when the first adjustment occurs (from six months to many years) and how often the rate adjusts depend on the terms of the loan. After the first adjustment occurs, subsequent adjustments can occur every six months, once a year or for longer periods. The adjustment period is disclosed in the specific loan.
ARMs generally have limits or “caps” on how high it can adjust during each period as well as for the life of the loan. The caps protect you from drastic market changes, but ARMs don’t offer the stability of a fixed-rate loan. ARMs’ lower initial rate, however, can help you qualify for a larger loan or start you off with smaller payments than you’d have to pay for the same mortgage with a higher fixed rate. If index rates fall with an ARM, so does your monthly mortgage.
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