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Archive for home mortgage

Payment-Option ARM

May 14, 2009 at 6:20 pm · Filed under Home Loan and tagged: , , ,

A payment option ARM is an adjustable rate mortgage that allows you to choose among several payment options each month.  The options typically include:

  • a traditional payment of principal and interest
  • an interest-only payment
  • a minimum payment

When it comes to ARMs the interest rate on a payment-option is typically very low for the first 1 to 3 months.  After which time the rate usually rises to a rate closer to that of other mortgage loans.  Your monthly payment during the first year are based on the intitial  low rate, meaning that if you only make the minimum payment, it may not cover the interest due. The unpaid interest is added to the amount you owe on the mortgage, resulting in a higher balance. Otherwise known as negative amortization.

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How Much Mortgage can You Afford

April 25, 2009 at 11:48 am · Filed under Home Loan and tagged: , , , ,

How Much Mortgage Can I Afford?

Keep in mind that just because you qualify for that amount, it does not mean you can afford to be comfortable with those monthly payments. You need to consider your particular circumstances and your future financial needs and goals.

How can I calculate how much mortgage I can afford?

As a rule of thumb, many people estimate they are able to afford a mortgage of 2 to 3 times their household income. For example, if you annual income is $30,000, you might be able to afford a mortgage of $60,000 to $75,000:

$30,0000 X 2 = $60, 000
$30,000 X 2.5 = $75,000
$30,000 X 3 = $90,000

Keep in mind that just because you qualify for that amount does not mean you can afford or be comfortable with those monthly payments. You need to consider your own circumstances and your future financial needs and goals.

What do lenders look at when deciding whether or not to finance a mortgage?

Lenders look at a debt-to-income (DTI) ratio when they consider your application for a mortgage loan. A DTI ratio is your monthly expenses compared to your monthly gross income.
Lenders consider monthly housing expenses as a percentage of income and total monthly debt as a percentage of income. Both ratios are important factors in determining whether the lender will make the loan.

What do lenders generally require?

Lenders usually require the PITI (principle, interest, taxes, and insurance), or your housing expenses, to be less than or equal to 25% to 28% of monthly gross income. Lenders call this the “front-end” ratio. In other words, if your monthly gross income is $10,000 or $120,000 annually, your mortgage payment should be $2,800 or less.
$10,000 X 28% = $2,800 – maximum monthly housing costs

Lenders usually require housing expenses plus long-term debt to less than or equal to 33% or 36% of monthly gross income. Lenders call this the “back-end ratio.” In other words, if your monthly gross income is $10,000, the combination of your mortgage, $2,800, and other long-term debt should be no more than $3,600:

$10,000 X 36% = $3,600 – maximum total debt

If your debt-to-income exceeds these ratios, talk to your lender about your options.

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Can I Always Refinance My Mortgage

March 15, 2009 at 11:50 am · Filed under Home Loan and tagged: , , , , ,

Many people take risk when getting a home loan thinking that they can refinance in the future when the fact of the matter is they may not be able to refinance. If some of the following were to occur your plan to refinance may not be possible.

  1. If you took a chance on an adjustable rate mortgage and the interest rate rises it may be very costly to refinance.
  2. If your home stops appreciating in value, your original home loan amount may exceed the value of the home.
  3. If you have problems with your credit you may damage your credit history to the point where you no longer qualify for the good interest rates.

Use caution when buying any mortgage product and don’t always think the future predictions the lender makes is going to be reality.  Telling you that you can refinance at a later date is a prediction, many things could happen that could get in the way.  Take a walk through your neighborhood and just see the foreclosure notices on the doors.

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What You Should Ask the Lender

March 12, 2009 at 5:52 pm · Filed under Home Loan and tagged: , , , ,

When applying for a home mortgage there are some tips to getting the best deal and not getting burned. 

  • If the home mortgage product permits negative amortization?  (Which means the loan balance can increase monthly.)
  • If the lender you are talking to suggests an option ARM you should ask what the minimum monthly payment on the loan will be and if you make a payment will the balance rise, fall, or stay the same.  You should also ask what effect will choosing minimum monthly payments have on how much of my home I actually own? What effect will choosing interest-only payments have on my loan balance and my home equity? Lastly, when I start paying down the principle, as required, how would the dollar amount of my payments compare to that of a conventional mortgage lasting the same number of years?

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Did You Know?

March 2, 2009 at 7:11 pm · Filed under Home Loan and tagged: , , , , , , , , ,

Many people believe that if you have a c0conventional home loan your principle balance will fall every month because the product requires you to pay down both the principle and interest each month.

That, however, is not always the situation with some of today’s nontraditional mortgage loans such as option ARMs and interest only loans with teaser rates.  In situations like these your balance may not fall and in some cases it may become larger, even though you are making all the required payments. This is referred to as negative amortization.  This can occur if you choose to make the min monthly payment that typically only cover a part of the monthly interest owed and none of the principle for a certain length of time.  The unpaid interest is then added to your principle balance resulting in your loan balance increasing and over time could exceed what you originally intended to borrow.

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Questions to Ask Lenders

February 27, 2009 at 9:10 pm · Filed under Home Loan and tagged: , , , ,

What you should ask a lender when looking for a home loan:

  • Which of your products offer the lowest interest rate?
  • Will my interest rate be variable or fixed?
  • If the interest rate can change, when will it change and what is the high and low?
  • If the lender is offering a “teaser” introductory rate, ask when the rate expires and how will the new rate change the monthly payment?
  • Would I qualify for a better interest rate if I went for a standard full-documentation loan rather than a low-doc, or no-doc loan?

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