Mortgage 101

Mortgage Points

What does it mean when you pay “points” on a loan? Is paying points a good idea? What does a point cost? Mortgage points are probably one of the most misunderstood concepts in mortgage lending so here’s what they are.

Points are simply prepaid interest! That’s right, it means that you’re paying some of the interest on the loan in advance. Like anything else, if you pay part of it in advance, you’ll pay less over time so if you are willing to pay part of the interest up front, the lender will lower your interest rate for the term of the loan.

A “point” will cost you 1% of your mortgage balance. So, if you have a $100,000 mortgage, a mortgage point will cost you $1,000 and it will reduce the interest rate charged on your loan. How much will it reduce the rate? That’s a much more complicated question in that it depends on the lender, the loan type, whether rates are generally high or low at the time and even what’s been going on in the mortgage bond market the past few days. Basically, it’s a number that you’ll have to get when you are seriously close to decided on locking the rate on your loan.

With that in mind, what makes more sense for you? More points and a lower rate? Or fewer points and higher rate? To decide, you need to consider whether you can afford to make the upfront payment now and whether you will hold the mortgage long enough to benefit from an upfront interest rate reduction. The longer you plan to have your mortgage, the more it makes sense to pay for points now because you’ll have a long time to benefit from the lower rate. You really need a great loan officer to help determine and calculate the options so you can make a good decision!

Points also work both ways, meaning that if you didn’t have enough funds to pay the closing costs on the purchase of your new home, you could simply let the bank pay you some “points” and in turn you agree to pay a little higher interest rate! This is how “zero cost mortgage loans” work as the lender uses those point to pay the closing costs of the loan. It’s kind of like getting cash rebate up front!

FHA Loans

The Federal Housing Administration (FHA) is a special program under the jurisdiction of the Department of Housing and Urban Development (HUD). FHA was established in the 1930′s to improve housing standards and conditions, as well as provide an adequate home financing system through insurance of mortgages. In other words, FHA was the original mortgage insurance for US families! With the mortgage insurance provided through FHA, families that would otherwise be excluded from the housing market were finally able to buy homes.

FHA loan are currently one of the primary loan programs used by a growing majority of buyer purchasing homes under $400,000. The reasons are varied but include low down payment requirements, liberal credit policies and killer interest rates! In fact, most FHA buyers can get the same interest rate as conventional loans programs that they don’t even qualify for!

How does an FHA mortgage work? FHA insures the lender against loss in the event that you default on your loan. Fundamentally, through this special insurance on the mortgage itself, FHA encourages lenders to make loans that they might otherwise view as too risky.

FHA began operations in the depths of the depression. At that time, many lenders had stopped making new loans altogether because of the large number that were in default. As the US worked its way out of the depression, the FHA began to focus more exclusively on helping low-and-moderate-income population become homeowners. In most cases, low- and moderate-income earners have challenges with buying a house either due to shaky credit or problems saving a down payment. For these people, turning to FHA mortgages allows them to buy their homes.

How do you qualify for FHA help? Well, first of all, you must be buying a home for your own occupancy. This program is not for you if you are looking to buy a property for rental. Secondly, you need to qualify in terms of income and credit.

Frankly, renting your home eats up your money and doesn’t return equity into your hands. Owning your home does. This is where the FHA can give regular people a boost up, and into the housing market.

The FHA will insure both existing and newly built homes. In fact, insured loans can be used to finance the purchase of one to four family housing, which means that you can buy a property to live in and rent out the other parts!

The FHA helps homeowners into the market in more than one way. With the FHA you can buy with as little as a 3.5 percent down payment. That can save you a lot of time spent saving up in order to get into the housing market. Most conventional mortgages require down payments of 5 percent or more of the purchase price of the home.

However, as good as the program is, FHA mortgage insurance is not free. You will pay an up-front insurance premium (which may be financed or rolled into your mortgage amount) at the time of purchase. In addition, you may have to pay monthly premiums that are not financed, but instead are added to the regular mortgage payment.

The FHA does protect you from some predatory lending practices. FHA rules impose limits on some of the fees that lenders may charge in making a loan. For example, the loan origination fee charged by the lender for the administrative cost of processing the loan may not exceed one percent of the amount of the mortgage.

While this program can be very useful, it is limited to certain people; you will have to qualify. To make sure that its programs serve low- and moderate-income people, FHA sets limits on the dollar value of the mortgage loan. These figures vary over time and by place, depending on the cost of living and other factors.

Any person able to meet the cash investment, the mortgage payments, and credit requirements can apply for an FHA mortgage but you can only have one FHA loan at a time!

VA Loans

If you are among the 34 million veterans and service personnel who are eligible for a Veteran Loan, you may find that a VA loan gives you the resources needed to buy or refinance the home of your dreams, while ensuring you get the best rates. Veteran home loans can save you a great deal of money by giving you an excellent rate, with no monthly mortgage insurance (even with no down payment). Plus, it is easier to qualify for a VA (Veterans’ Affairs) military loan as compared to a conventional mortgage. It’s worth the time to look into!

If saving money on interest isn’t enough, there are other benefits to a VA loan if you are a veteran:
If you get a VA loan, there is zero down payment required when purchasing a home.
With a VA loan, even if you have bad credit, you can get the same low interest rates for veteran home loans that are available to those with great credit

Even with a Loan-to-Value of 100%, there is no monthly Mortgage Insurance required for a VA home loan. This alone can save you considerable money every month. The VA mortgage loan is guaranteed with no money down for any loan up to $417,000. All you have to do is qualify for the size of mortgage that fits within your budget.

So, how do you get a VA loan? You will need a certificate of eligibility to qualify. Whether you are a first time user of the VA loan system or you have used your eligibility in the past, you must have your certificate. We can help you get your certificate of eligibility thru a fast and efficient on-line system so give us a call today!

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