BASIC MORTGAGE INFORMATION
(Please be advised that the information presented here is
generalized. Your specific mortgage situation may differ. Please
consult your tax advisor for more information.)
How Large of a Mortgage Will You Qualify For?
You can usually qualify for a mortgage loan of two to two and
one-half times your household's income. For example, if your family
has an income of $40,000 per year, you can usually qualify for a
mortgage of $80,000 to $100,000.
Some lenders use other factors to determine the size of a mortgage
you are eligible for. In general, lenders prefer that your housing
expenses (mortgage, tax payments, insurance and special
assessments) do not exceed 25% of your gross monthly income. Other
financial obligations (monthly payments extending more than 10
months) should not exceed more than 36% of your gross monthly
Lenders need to research your credit history to see how well you
have repaid loans in the past. Also, the lender will inquire about
your employment history.
What's the Difference Between a Fixed Rate and an Adjustable Rate?
Fixed Rate - With a fixed rate mortgage your monthly
payment will always be the same for the life of the loan. The
benefit is that you always know what your principal and interest
Both types of loans have their pros and cons. For example, a fixed
rate mortgage is appealing because you always know what your
payment will be. On the other hand, when interest rates are high,
choosing the adjustable rate mortgage is favored because it is
probable that the interest rate will drop in the future, resulting
in smaller monthly payments. However, with an adjustable rate
mortgage you run the risk of ending up with a higher payment should
the interest rate soar during the life of the loan.
Adjustable Rate Mortgage - In comparison, an
adjustable rate mortgage (ARM) is a loan that will fluctuate your
payment and interest rate during the life of the loan. Most ARMs
start off with a set interest rate and principal payment for the
first year and then adjust annually. The interest rate on your loan
is set to reflect changes in the index interest rate. As the index
interest rate changes, your payment will be adjusted annually to
reflect those changes.
Adjustable rate mortgages can be advantageous because they
generally offer a lower initial interest rate than a fixed rate
loan, but an increase in the interest rate will result in a higher
monthly payment, unlike the fixed rate loan.
What are Some of the Different Types of Mortgage Programs?
There are several types of adjustable rate and fixed rate mortgage
loans. Here are some of the more common loans:
30-Year Fixed Rate Mortgage
This is a conventional mortgage which provides for a fixed interest
rate and level payments for the 30-year life of the loan.
15-Year Fixed Rate Mortgage
The 15-year loan is a conventional mortgage in which the borrower
will pay fixed monthly payments for the life of the loan. With a
15-year loan, payments are higher than a 30-year loan, but the loan
is paid off much faster.
1, 3, 5, 7, 10 Adjustable Rate Mortgages
These types of mortgage programs allow you to carry a fixed
interest rate for a specified amount of time. Once that time is
up, you will assume an adjustable rate for remaining life of the
loan. For example, if you choose a 3 year adjustable rate mortgage,
you would have a fixed interest rate for the first three years of
the loan and an adjustable rate for the remaining years.
10/1, 7/1, 5/1, 3/1 Treasury ARMs
These loans provide for a fixed interest rate for a specified
amount of time. After that you pay a variable interest rate with
annual adjustments. For example, if you selected a 10/1 Treasury
ARM loan, you would have a fixed interest rate and fixed monthly
payments for the first 10 years of the loan. The remaining life of
the loan would assume a variable rate annually.
3-Year, 1-Year, 6-Month Treasury ARMs
This type of loan applies adjustments to the interest rate payments
in various ways. For example, if you selected the 6-month option,
your interest rate would adjust every six months. In comparison, if
you selected the 3-year option, your interest rate would adjust
every 36 months.
Jumbo Loan Programs
These mortgages allow you to borrow more than an amount set by the
Federal National Mortgage Association. As of January 1, 1999 any
loan over $240,000 is considered a Jumbo Loan.
Conventional Loan Programs
Any loan that allows you to borrow within the amount set by the
Federal National Mortgage Association. Currently, loans under
Which Mortgage is Best?
There are several types of mortgage plans available that are
appropriate for different needs. If you are more comfortable with a
steady payment, then you will want to choose a fixed rate loan. You
may select the common 30 year fixed rate mortgage. This type of
loan is beneficial if you plan on living in your home for several
On the other hand, if you expect to keep the house for only a short
period of time or prefer an adjustable rate mortgage, you will want
to investigate other loan options. There are many mortgage programs
available to fit your needs. Consult your real estate professional
for more information.
How Much Money Will You Need to Close the Transaction?
Click here for a list of sample closing costs.