What You Need To Know About Mortgages?

The vast majority of houses sold in the United States require the buyer to secure a mortgage for a large portion of the home's price. Very few home buyers are either willing or able to purchase a house without getting a mortgage. One would think, therefore, that since so many people either presently pay a mortgage, have previously paid a mortgage, or require a mortgage to purchase a house, that there would be more knowledge and understanding by the public about the subject of mortgages, how they work, what the options are, etc.

During the "housing bubble," many lenders were often indiscriminately approving people for mortgages. These lenders were granting mortgages at some times for even more than the value of the home. They were also rather lenient about credit, and very liberal in terms of valuations. Probably in large part due to the housing crisis in the last few years, lenders have taken a far more conservative approach.

Most lenders today require excellent credit to be approved for a mortgage. The lowest mortgage rates are generally approved only for individuals with credit scores approaching 750, and, in most cases, lenders will not even consider an individual with a credit score lower than 650. Obviously, this has tightened the mortgage market, and has indirectly been another factor in bringing down home prices.

Years ago, many lenders would require far lower down payments than they presently do. Many buyers were then even able to purchase houses with no out of pocket expenditure, and some lending institutions even loaned over 100% of the houses selling price. Today, the vast majority of lenders expect home buyers to pay approximately 20% of the price of the house, and will only loan up to about 80% of the price that the lender values the house at.

Many home buyers are confused by what they will be paying for the loan. There are many factors involved, and the rates fluctuate. Some institutions will, however, lock in a loan rate for a certain short time period (generally ranging from 30 to 90 days). In addition, some loan rates are quoted with no points, and some require points. Home buyers should understand what a "point" represents. In the mortgage industry, a "point" represents a percentage. Therefore, if a loan is quoted with one point, it means that the home buyer must prepay to the lending institution one percent of the amount of the loan. Therefore, for example, if the amount of the mortgage is $500,000, one point means that the buyer must prepay $5,000 to the lending institution.

A mortgage may be either a fixed rate or an adjustable rate loan. A fixed rate means that the buyer will be paying the same interest rate during the term of the loan. An adjustable rate, or variable rate loan, will lock in a rate for only a specified time, and then will change. Variable rate loans are generally "pegged" to some official index, such as the Treasury Bill, Treasury Note, or Treasury Bond index, or some other index that the lending institution specifies. Lending institutions have often offered low introductory rates for a short period, and then those rates rose when the term for readjustment arrived. Adjustable rate loans may lock in the initial rate for any specified term, but is generally anywhere from six months to five years. Therefore, if an individual plans on only living in the house purchased for a relatively short period, and, for example, a five-year adjustable mortgage had a significantly lower interest rate, it might make sense for the buyer to opt for that type of loan. I strongly recommend that buyers carefully discuss their options with a trusted financial professional, such as a Certified Public Account, or Certified Financial Professional.

Both buyers and sellers must agree to a realistic price based on comparative market values, or the lending institution will not "comp" the house, and the buyer will have to come up with significantly more personal funds to purchase a house. Other areas that need to be considered are securing a professionally examined and prepared Home Inspection, prior to agreeing to purchase any house.

These items are only a brief and cursory view of the many factors impacting mortgages. Home buyers should study and fully understand mortgages, their ramifications and their options, prior to purchase. A home buyer should always ask himself, "Do I feel comfortable with a monthly payment, which includes mortgage (interest, principal, escrow), taxes, utilities and maintenance (including a reserve for contingencies). Unfortunately, many buyers purchase emotionally rather than logically!