Mortgage 101
Know the fundamentals
From a "Realtor Magazine" article.
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How much money do I have to come up with to buy
a home?
That depends on a number of factors,
including the cost of the house and the type of mortgage
you get. In general, you need to come up with enough
money to cover three costs: earnest money -- the deposit
you make on the home when you submit your offer, to
prove to the seller that you are serious about wanting
to buy the house; the down payment -- a percentage of
the cost of the home that you must pay when you go to
settlement; and closing costs -- the costs associated
with processing the paperwork to buy a house. |
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When you make an offer
on a home, your real estate broker will put your earnest
money into an escrow account. If the offer is accepted,
your earnest money will be applied to the down payment
of the closing costs. If your offer is not accepted,
your money will be returned to you. The amount of your
earnest money varies. The more money you can put into
your down payment, the lower your mortgage payments
will be. Some types of loans require 10-20% of the purchase
price.
Closing costs -- which you will pay at settlement --
average 3-4% of the price of your home. These costs
cover various fees and lender charges and other processing
expenses. When you apply for your loan, your lender
will give you an estimate of the closing costs, so you
won't be caught by surprise.
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How do I know
which mortgage is best for me?
There are many types of mortgages,
and the more you know about them before you start,
the better: Most people use a fixed-rate mortgage.
In a fixed rate mortgage, your interest stays
the same for the term of the mortgage, which is
normally 30 years. The advantage of a fixed rate
is that you always know exactly how much each
payment will be and you can plan for it. |
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Another kind is an
adjustable rate mortgage (ARM). With this kind of mortgage,
your interest rate and monthly payment usually start
lower than a fixed mortgage. Your rate can go up or
down as often as twice a year with this type of mortgage.
The adjustment is tied to a financial index, such as
the U.S. Treasury Securities index. The advantage of
an ARM is that you may be able to afford a more expensive
home because your initial interest rate is lower. Talk
to your real estate broker about the various kinds of
loans before you begin shopping for a mortgage.
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What will my
mortgage cover?
Most loans have four parts: principal
(the repayment of the amount you actually borrowed);
interest (payment to the lender for the money
you've borrowed); homeowners insurance (a monthly
amount to insure the property against loss from
fire, smoke, theft and other hazards required
by most lenders) and property taxes (the annual
city/county taxes assesed on your property, divided
by the number of mortgage payments you make in
a year). |
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Most loans
are for 30 years, although 15 year loans are available,
too. During the life of a loan, you'll pay far more
in interest than you will in principal -- sometimes
two or three times more! Because of the way the loans
are structured, in the first years you'll be paying
mostly interest in your monthly payments, paying mostly
principal in the final years.
What do I need when I apply for a
mortgage?
You should have:
- Social security numbers for both you and your spouse,
if both of you are applying for the loan;
- Copies of your checking and savings account statements
for the past six months;
- Evidence of any other assets like stocks or bonds;
- A recent paycheck stub detailing your earnings;
- A list of all credit card accounts and the approximate
monthly amounts owed on each;
- A list of account numbers and balances due on outstanding
loans such as car loans, student loans, etc.;
- Copies of your last two years income tax statements;
- The name and address of someone who can verify your
employment. Depending on your lender, you may be asked
for more information.
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