Real Estate Mortgage Hints for Homebuyers

Homebuyers may only make one or two real estate purchases in their lifetime. Even so, it is very important for them know about real estate mortgages for homebuyers before starting the process. Homebuyers may often be surprised because it is so easy to make assumptions that are not necessarily true.

Credit Rating influences Interest Rates

Homebuyers should know their credit rating in advance. They should see the range of interest rates lenders are offering when they are ready to buy real estate. If the homebuyers do not think a lender offered a low enough interest rate, they should check with other lenders.

If homebuyers do not have a good credit rating, they should not let a lender take advantage of that fact by charging an excessive interest rate. The homebuyers may even want to work on improving their credit rating before purchasing real estate. They may check into getting a FHA or HUD home mortgage loan.

Fixed Interest Rates -

Homebuyers should know about what APR (annual percentage rate) their lender will offer on their real estate loan. The fixed interest rate is the easiest to figure because this interest rate never changes during the entire time the homebuyer has the real estate loan. Calculators found on some websites can easily amortize (show a payment plan for) a fixed interest rate loan. The homebuyers can see how much principle and interest they pay with each loan payment.

Variable Interest Rates -

If the homebuyers want a variable interest rate, they should make sure there is a limit on how high the lender can raise the interest rate throughout the span of the real estate loan. The homebuyer should figure what the total payment on the real estate loan might be if the interest rate goes up to its highest amount. Would they be able to afford the amount of the mortgage payments at that interest rate?

Interest-only Loans -

This is what BRIAN D. MONTGOMERY, Assistant Secretary for Housing - Federal Housing Commissioner, HUD had to say on April 5, 2006 about homebuyers turning to interest-only mortgage loans to finance their homes:

"Without a viable FHA alternative, many homebuyers turned to high-cost financing and nontraditional loan products to afford their first homes. While low initial monthly payments seemed like a good thing, the reset rates on some interest-only loans are substantial and many families are unable to keep pace when the payments increase. In addition, prepayment penalties make refinancing cost-prohibitive."

Some words that experienced loan recipients do not especially like are high reset rates, interest-only loans, prepayment penalties and balloon payments.

Cautions before Figuring Interest

Homebuyers should be aware that there are always costs involved in the buying and selling of real estate other than just the price of the real estate. The lender will add these costs to the homebuyers' loan and this increases the total amount of the real estate loan. Therefore, the homebuyers should figure the interest rate on this total amount rather than just the original asking price of the real estate.

Closing Fees -

First time homebuyers often do not know that there are these other costs involved in the purchase of real estate. The lender is not trying to trick the homebuyer; this is a common practice. If however, the homebuyers think that the lender is overcharging them, they should not hesitate to shop around. Some of these costs may be a survey fee, an appraisal fee, a fee to pull a credit report, an application fee, a document preparation fee, a flood certification fee, a fee for title insurance, inspection fees. Sometimes these fees can add up to thousands of dollars and the buyer usually does not know exactly what they are going to be until the closing day. The homebuyers can ask the lender for an estimate of these costs (Good Faith Estimate). The buyer and the seller can make agreements between themselves as to whether the buyer or the seller pays some of these fees. All interested parties should discuss these decisions before the closing day.

Points -

Also known as "discount points', are used by lenders to get upfront money on the real estate loan transaction. One point equals 1% of the mortgage loan. One point on a $150000 real estate loan would be $1500. The homebuyer should know before closing day if "discount points" are associated with the real estate loan. The benefit to the buyer is supposed to be that the buyer will receive a better interest rate from the lender if the buyer and/or the seller pay these "discount points" up front.

Escrow Accounts

The lender may have said that the mortgage payment would be $500 per month for the life of the loan because the loan has a fixed interest rate. In a few weeks, a mortgage payment book may come in the mail. The payments are $650 per month. The mortgage company also sends a letter. It states that the mortgage company will be seeking homeowners insurance on the mortgaged home. This insurance will probably be higher than insurance the homeowner can obtain. Either way the mortgage company will oversee the payment of the insurance and the property taxes. The mortgage company will hold the money in something called an escrow account until the payments are due.

Some mortgage companies prefer to have these escrow accounts. The homeowner should obtain their own homeowners insurance and notify the mortgage company what insurance company they have chosen. The mortgage company should then pay the insurance company the homeowner has chosen to insure their home. This is not an increase in the mortgage. It is only a different way of paying for insurance and taxes.

Websites to Check

Check the website for the United States Department of Housing and Urban Development (HUD) for more information on borrowing money for home mortgages. The Federal Deposit Insurance Corporation (FDIC) can answer questions about where to get your free yearly credit report, how to improve your credit, and more questions about money. Bankrate.com has great calculators for figuring mortgage payments and amortization schedules.

Reference:

Montgomery, Brian D., Assistant Secretary for Housing - Federal Housing Commissioner, HUD. "Transforming the Federal Housing Administration for the 21 st Century." Hearing before the United States House Committee on Financial Services, Subcommittee on Housing and Community Opportunity, United States House of Representatives. April 5. 2006.