Financing

Choosing the Right Mortgage Loan

Selecting the correct mortgage loan is not easy, as there is a wide selection of different mortgages available.

You should narrow the field by evaluating your personal circumstance and answering the following questions:

Do you prefer a fixed or fluctuating payment structure?
How quickly can you, or do you intend to pay off the mortgage loan?
How flexible are you with payments today, or in the future?
How long do you intend to live in the house?

Below is a list of some of the more common mortgage types.

1. Fixed-rate mortgages

a) 15 year
b) 20 year
c) 30 year

2. Adjustable-rate mortgages (ARMs)

a) Cost of Funds-Indexed
b) CD - Indexed
c) Treasury- Indexed
d) Once only adjustable

3. Balloon mortgages

4. Government - Insured loans

a) Federal Housing Administration (FHA) loans
b) Department of Veterans Affairs (VA) loans
c) Rural Housing Service (RHS) loans

Suggestion

Contact at least three financial institutions to discuss your options. Although securing a mortgage is generally easy, it is important that you have all the information to determine the best type and plan for you.

What is Your Credit Rating?

Anyone who has ever had a bank account, a mortgage, a credit card, a car loan, an account with a retail store etc. will almost definitely have a credit rating.

Most information in your credit rating comes from companies you have credit with such as the banks, department stores, finance companies, etc. Also your credit rating can come from certain public records such as lawsuits, tax liens, judgments and bankruptcies.

In accordance with Federal Law, accurate negative information, such as late payment or an account turned over to a Collection Agency can remain on your credit report for seven years.

If you have been denied credit, insurance, a job or a rental dwelling opportunity because of information contained in your credit report, you are entitled to a complimentary copy of your report within 60 days. If after checking, you believe the information to be incorrect you may file a brief statement explaining why. Inaccurate information on your credit may be removed but no one can have accurate, current or verifiable information removed from your record.

Credit reports are usually divided into five sections:

Your credit history
By who your history has been reviewed by
Information you have given to the Credit information company
Specific Identification information on you
Explanatory notes and comments

Different states have different conditions that guide credit reporting. These states include California, Colorado, Conneticut, Maryland, Massachusetts and Washington.

Two leading Consumer Credit Companies are:

Experian 800-422-4279
Equifax 800-685-1111

What are Discount Points?

Whether buying or selling a home, the word "discount points" can strike fear in the heart of your checkbook. Why? They are a fee charged to either the buyer, the seller, or both, by mortgage lenders.

In the 1940s, when "points" were originally created, they served a narrow and specific purpose. When the Federal Housing Administration first began offering "FHA" loans, interest rates were set lower than rates offered on "conventional" loans. To compensate for the lower rates, lenders created a system in which one discount point was equal to 1/8% interest on a mortgage, or one percent of the loan amount.

For example, if interest on FHA loans was 5 3/4%, when 6% could be charged on a conventional loan, the lender would be short two-eighths of one percent interest on that loan. To compensate for the difference, an up-front fee of two discount points (equal to 2/8 of 1%) was charged to make up the difference.

Today, discount points are charged on almost all mortgage loans, including FHA, VA and Conventional. The purpose of charging points today is to increase the lenders "yield" on the mortgage.

Each point still equals 1% of the mortgage amount. Because a point increases the lenders' yield in small increments, 1/8%, it is used to compensate for daily fluctuations in the money market, without the need for daily interest rate changes. Without points, interest rates would be on a constant roller-coaster ride attempting to find a market level acceptable to lenders.

Because points are used by lenders to adjust for daily fluctuations in money markets, quotations should be obtained when buying or selling a home. Points can then be "locked-in" for a period of time when obtaining a loan.

Who pays the discount points? Payment is often negotiable between buyers and sellers, but must be paid by the sellers on some loans. Your real estate agent can explain points in more detail.