Shopping for your loan is probably the most important step in your home-buying process. Mortgage brokers and lenders have a wide variety of mortgage products. The type of loan product and your interest rate will not only influence your total settlement costs but will determine the amount of your monthly mortgage payment.
You may be eligible for a loan insured by the Federal Housing Administration (FHA), guaranteed by the Department of Veterans Affairs (VA), or offered by the Rural Housing Service (RHS). These programs usually require a smaller down payment. Ask your lender or mortgage broker about these programs. You should shop and compare quotes from different loan originators because each may offer different rates and loan terms.
If you are a first time home buyer, ask your real estate agent/broker and loan originator about the availability of local or state programs such as reductions in transfer taxes, special income deductions, or state homestead exemption discounts.
Types of mortgages
Two of the most common types of mortgage loans are fixed-rate and adjustable-rate mortgages. The interest rate on a fixed-rate mortgage will remain the same for the entire life of your loan while the interest rate on an adjustable-rate mortgage (ARM) may adjust at regular intervals and may be tied to an economic index, such as a rate for Treasury securities. When the interest rate on an ARM adjusts it may cause your payment to increase.
Some ARM mortgages allow the borrower to pay either the “interest only” or less than the “interest only.” In both options, none of the mortgage payment is applied towards the loan balance (principal). In a less than “interest only” option, the unpaid interest is added to your loan balance and you can owe more than the amount you initially borrowed, even if you make all your payments on time. This is called negative amortization. If you are a first-time borrower and your mortgage could result in negative amortization, your lender is required to make sure you get homeownership counseling before you borrow the money.
When the loan balance increases to the maximum amount the loan is “recast” and your loan payment may double or even triple. When faced with “payment shock,” you may discover to0 late that the loan payments no longer fit within your budget and that the loan is difficult to refinance.
Information obtained from Bankers Trust’s Shopping for Your Home Loan Settlement Cost Booklet, provided by Lori Slings, Bankers Trust, 3820 Eighth Street S.W., Altoona, (515) 245-5624, lslings@ bankerstrust.com, NMLS ID: 406021 BankersTrust.com.