How to Cross the Mortgage Minefield
article from Kentucky.com
Decided to buy a house? Now the challenge becomes finding an affordable mortgage.
What's best for you? Conventional? No money down? Adjusted-rate mortgage? Interest only?
In this aggressive mortgage market, the question can be overwhelming. And the dozens of offers likely to clutter your e-mail inbox on a weekly basis probably only add to the confusion.
"The first thing is to understand what you need and what you want -- explore the various options for mortgages with multiple lenders before you go and fall in love with a house," said Doug Duncan, senior vice president and chief economist for the Mortgage Bankers Association.
"You should have looked at your credit report to know it's accurate, you should know what you owe and who you owe it to, and you should know the status of your monthly free cash and savings before you go to the lender.
"The key, then, is to talk to multiple lenders because they serve different parts of the market," Duncan said. "Shopping will always help you ensure that you are getting consistent stories. Then you can negotiate. When I've bought homes, I've always talked to at least three lenders and I've always gotten a better deal."
In today's market, someone with strong credit should look for a mortgage that requires a down payment as low as 3 percent, doesn't have up-front charges and carries an interest rate no higher than 6.5 percent. However, it's likely that interest rates will continue to rise above this week's national average of 6.35 percent.
In March, the Federal Reserve raised rates for the 15th time since the summer of 2004. The federal funds rate -- what banks charge each other for overnight loans -- moved up a quarter point to 4.75 percent.
The federal funds rate is at its highest level in five years, and some economists estimate it will continue a slow uptick that could reach 5.5 percent by the end of the year.
The federal funds rate helps dictate consumer loan rates for mortgages, home equity lines of credit and credit card bills.
When shopping for a mortgage, it's important to take advantage of the Truth-in-Lending Act disclosures; they allow consumers to shop around to compare various lenders' combinations of rates and fees.
Under the law, borrowers are able to weigh competing lenders' full packages of terms in writing before they choose -- factors such as the base interest rate on the loan, the disclosed finance charges and the annual percentage rate.
It's important to know about the many options available to people purchasing a home.
Consider the choices, both traditional and exotic:
• 30-year fixed rate: The monthly payment and interest rate are the same for 30 years.
• 15-year fixed rate: The monthly payment and interest rate are the same for 15 years.
• 5-year balloon mortgage: The monthly payment and interest rate are the same for five years. At the end of the fifth year, the loan is due in full. The borrowers must refinance into a new loan program if they are staying in the home, or pay the loan balance in full.
• Adjustable-rate mortgages: The ARM payment moves up and down as interest rates rise and fall. Lenders give borrowers low rates at the beginning, but the homeowners bear the risk that if rates rise, their payments will climb.
• 2/28 or 3/27 ARMs: A 30-year mortgage in which borrowers start with a low fixed interest rate for two or three years, then the rate adjusts annually for the next 27 or 28 years.
• 3/1-year adjustable rate: The monthly payment and interest rate are the same for three years. Beginning in the fourth year, the monthly payment and interest rate might change every year for the rest of the loan period.
• Interest only: Borrowers pay interest but no principal in the beginning years of the loan; that keeps monthly mortgage payments low.
• Miss-a-payment: Borrowers are allowed to skip up to two mortgage payments a year and up to 10 payments over the life of the loan without affecting their credit rating.
• Piggyback: The loan combines a traditional first mortgage and a home-equity loan or line of credit to avoid private mortgage insurance.
• Payment option: Borrowers have four payment options each month.
There are some good tips about home mortgages in this article
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