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By John R. Blakefield
Buying a home for the first time can be a little rattling, as it is a huge financial investment and responsibility that will stay with you for years. If you are not familiar with how to buy a home and get a mortgage, then use this information to get a little insight as to what a mortgage is, and how one is obtained.
By understanding the basics of a mortgage, you are more likely to get a better deal and mortgage that best fits your financial profile.
Question 1: What is mortgage and where do you get one?
Answer 1: A mortgage is a conveyance of or lien against property that is terminated upon complete payment according to pre-determined terms. More simply, a mortgage represents the money you borrow from a lender in order to purchase a house. You must pay interest on the money borrowed in return for having borrowed the money in the first place.
You can find mortgage lenders everywhere, as the mortgage industry has greatly increased as there are more opportunities for people to buy property. More and more money is being circulated through this market because of two reasons. One, investors recognize the opportunity for a high return on investment through mortgages. And two, the government is pushing for the ability for every American to be able to live the ‘American Dream’ and purchase a house.
Mortgage lenders can be private investors or companies, as well as public companies, commercial banks, and other financial institutions such as a credit union. There are mortgage officers and brokers that can aid you in finding a good mortgage from a qualified lender. You can also shop mortgages yourself by calling different institutions and asking for their rates and terms.
If you go online, there is a myriad of websites that will shop 4-5 lenders for you all at once, so you can get an idea as to the mortgage you could qualify for. Finding a good mortgage will take time and energy, especially if you shop around, which is highly suggested. Remember that terms are negotiable, so don’t take the first offer you get.
Question 2: How long does the mortgage process take?
Answer 2: The actual process of applying for a mortgage and closing takes anywhere from 30 to 90 days, depending on the mortgage lender and the situation with the property. It may differ slightly from case to case, but generally, this is how long it takes. However, you may take weeks, even months shopping for a lender that is best for your situation, depending on what it is you need to buy the house.
Those home buyers with a good financial profile may find good terms more quickly then those with poor financial profiles. Also, it depends on when the property will be available, moving times, perhaps a contingency like the sell of another property for the seller etc. It is important to create a timeline for this process by assessing both your needs as well as the mortgage lender’s needs. You so not want to cut things too short, or be without money for the close of escrow.
Question 3: What mortgage rate is better: fixed or adjustable?
Answer 3: Whether or not one mortgage rate is better than another is really up to the home buyer’s needs. The rates alone are not better than the other. If the home buyer wants a slightly higher interest rate, but steady payments every month for the life of a loan, then a fixed rate mortgage is the way to go. There will be no fluctuation of interest rate and therefore payments are constant.
If the home buyer wants to take a lower interest rate in the beginning, with the chance for the payments to be higher or lower based on the current market rate, then the adjustable rate mortgage is the way to go. Depending on the terms, the interest rate will either be higher or lower than the initial rate, depending on the current market rate every few years or so. The payments could potentially change drastically and the home buyer needs to be aware of this risk.
There are many other rate structures and mortgage lenders have gotten very creative by combining different types of mortgages and rates. Ask your mortgage lender for other options than just your basic adjustable and fixed rate mortgages. You may find something that would work better for your situation.
Question 4: What are points?
Answer 4: Points are a percentage of the principal amount of a mortgage that is paid upfront to the mortgage lender in exchange for a lower initial interest rate. For example, if your principal $200,000 and you are asked to pay 1 point, then you would pay $2,000 to the mortgage lender.
You must calculate the different scenarios with out without points, because sometimes is disadvantageous to pay points and get a lower interest rate, because you still end up paying more with the points than you would with a slightly higher interest rate with no points. Generally, points are a way for mortgage lenders to make profit very quickly and upfront. Do your homework before you agree to any terms so you don’t spend more money than you have to.
Question 5: What is the loan to value ratio (L to V Ratio)?
Answer 5: The loan to value ratio is used to determine how much money you can borrow on the property. It shows the amount borrowed on the property as a percentage of the total current market value of the property. For example, let’s say your property is worth $500,000, and you have a loan principal amount of $350,000. You would divide your loan amount ($350,000) by the current market value ($500,000) and you get 70%. The loan to value is 70%.
Mortgage lenders usually do not loan more than 80% of the current market value, and they use this in addition to your financial profile to determine how much you can actually borrow as well as pay back in full and timely manner.
There are mortgage lenders, known as sub-prime lenders who will let a home buyer borrow 100% of the current market value, as well as a little more to help with closing costs. There are also many government programs and other options that allow home buyers to purchase property with little to know down. Investigate these options to see if they would allow you to get into a home if your financial profile is not so good.
There are options for everyone, so do some research and get all of your questions answered so you are educated and prepared when moving into the mortgage process.
About the Author: John R Blakefield is a mortgage and real estate specialist. For more information, articles, news, tools and valuable resources on home mortgages or investment loans, refinancing, debt solutions, visit this site: scourtheweb.com/mortgage/.
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