Everything You Should Know About a Mortgage But Were Afraid To Ask

On a recent trip to Greece, I was very surprised that everywhere we went we would see homes that were only half-built and looked abandoned. When I asked if the economy was really that bad to justify all these abandoned homes, the response shocked me. These homes weren’t abandoned and in-fact they were all being built. I found out that in Greece as in many other countries that they don’t have home mortgages. When you want a home, you buy the land and then as you get extra money, you build a little more. Eventually, sometimes 10-20 years later you have a completed home.

For me, this moment was an epiphany as I just assumed all countries had a system in place for financing a home and that all counties would want to incent home ownership. A home purchase is usually the largest expense that we make and, for the most part, it’s consumer spending that keeps our economy flowing. Upon my return from Europe, I realized that the United States, a country of only 316 million people, has the largest economy in the world due in large part to our home mortgage system and our ability to access inexpensive long-term money.

Now that I have set the stage, let’s talk about all the home mortgage questions that we get and see if I can answer them. I was surprised to read that 31% of buyers don’t think it’s possible to get a mortgage for less than 5% down; 34% don’t know what the term “annual percentage rate” (APR) means and 75% of buyers don’t know how an ARM loan works. We often see clients more focused on negotiating a lower price on the home and ignoring the importance of finding the right loan. We are not mortgage brokers or loan officers but we have compiled and answered our most frequently-asked questions.

1. How much money do I have to put down?—It depends on what type of loan you get and if you want to pay mortgage insurance which is an insurance policy protecting the lending bank in case you default on the loan. There are three loans that have very little to no down payment requirements:

  • USDA loan: This is a rural loan but they define rural as being any towns with populations less than 35,000. In Jackson County that includes almost all the city’s except Medford. It will fund 100% of your home purchase and has a fixed percentage rate. To qualify, you have to make enough to pay the mortgage but not too much or you’re disqualified. For the most part, you cannot make more that 115% of the median income for your area.
  • VA loan: They can cover as much as 100% of the loan. The catch of course is you have to be a veteran, reservist or on active duty.
  • FHA loan: FHA has been around since the 1930’s as a government loan, helping buyers buy homes with only 3.5% down. The catch is mortgage insurance is included in the monthly payments so this loan maybe more expensive that a VA or USDA loan.
  • Conventional Loans: You don’t have to get a government loan for a low down payment! You can get a conventional loan from any bank or mortgage lender and pay as low as 5% down.

2. How do I come up with the down payment?—Good question! If you don’t have a down payment we would suggest you start looking at 100% loans. There are other creative ways of getting a down payment. If you are a first-time home buyer and have an IRA or SEP, you can borrow from it. Unfortunately, you can’t use a 401K. Many loans also allow a “gift” from a family member which you can use for the down. Lastly, there is the old-fashioned way, save.

3. How large of a loan can I qualify for?—There are lots of factors in determining how much you can qualify for but your credit score and your debt-to-income ratio are the two largest factors. The higher the credit score, the more you can borrow but you must have a debt-to-income ratio of 43% or less. Simply figure out the mortgage payment on the house you want to buy, go to bankrate.com for a mortgage calculator, and see if that payment added to your current fixed debt is less that 43% of your income.

4. What is APR and how does it relate to my interest rate?—Your interest rate doesn’t reflect the true cost of your mortgage but the “Annual Percentage Rate” or APR, does. The APR includes various aspects of the loan including interest rate, points, origination fee and underwriting fees, which in theory makes it higher than your interest rate. When comparing the cost of two loans, use the APR, not the interest rate.

5. Should I lock-in my interest rate?—Before locking-in a rate, it is important to understand there may be fees associated with an interest rate lock. Bear in mind, should rates decline during the period between application and closing, you will not be able to take advantage of those lower rates. It’s somewhat of a gamble but if you go to bankrate.com, they do a pretty good job of predicting where the interest rate is going and that may help you in making your decision. Bankrate.com’s interest rate predictor is called the “Mortgage Rate Trend Index” and can be found at the lower left corner of the home page. Also, rate locks expire and if your closing is delayed, you could lose your lock.

6. Can I get the bank to loan the cost of the home and extra monies to renovate it?–Yes, you can get a FHA 203(K) rehab loan which is an all-in-one mortgage loan and remodel loan. These loans aren’t meant for upgrading your kitchen with granite counters but can help pay for a new roof or a heating system. There is also a HomePath rehab loan available on Fannie Mae or Freddie Mac-owned properties.

7. Are interest rates going up?—Mortgage rates have remained at the lowest levels in history, primarily because of the Federal Reserve buying bonds and mortgage-backed securities. The Federal Reserve has started tapering that bond purchase and even the news of tapering has increased the rates by almost 1%. Bottom line, as the economy slowly improves, interest rates will slowly increase.