Mortgage Hunt

Home Buying Basics

2010-12-24T09:28:00.000-08:00

A home purchase may be your largest financial transaction to date, so it's important to make the right decisions and to keep an eye on the details. With the assistance of your Real Estate Agent and Mortgage Consultant, it should be an efficient, pleasant, and ultimately rewarding experience.

Count On Real Estate Agent to:

Preview available homes to weed out those that are overpriced, or undesirable in some other way.
Present the homes that suit your needs as you've defined them.
Help you determine the difference between a "good buy" and a property which, because of its nature (neighborhood, market appeal, etc.), might have to be discounted if you decide to sell in the future.
Negotiate the best deal for you. With a Pre-Qualification letter, Real Estate Agent will be able to demonstrate that you are a qualified and capable borrower. This will strongly influence the Seller, and may make the difference between the Seller accepting your offer or someone else's -- even if your offer is lower!

Count on your Mortgage Broker and Mortgage Consultant to:

Assist you in selecting the best loan to meet your personal situation and goals. (This single decision can save you thousands of dollars throughout the years!)
Keep you informed of your loan status throughout the entire process.
Keep your Real Estate Agent informed of our loan progress.
Get the appropriate loan for you at the best rates and fees. This will save you significant money "up front" and throughout the years to come.

Count on Yourself to:

Keep your Real Estate Agent informed of any questions or concerns as they develop.
Keep the process moving by providing documentation and decisions as soon as reasonably possible. By doing so, many of the details are taken care of early in the process so you can comfortably concentrate on any last-minute details or events that require your attention.
Enjoy purchasing your home, but do remain objective throughout -- to make the business decisions that are best for you.
Make sure you are pre-approved as early as possible. This will put the power of financing behind you so you can concentrate on selecting your home.

Mortgage Cost

2008-06-05T09:54:00.000-07:00

What is the true cost to own a mortgage?
How big is interest rate in that total cost?
Which cost factor people care about most?
What other elements about interest rate must be looked into?
What are the different ways interest rate is calculated and how does it affect me?
Does mortgage term affect interest rate?

Most of the borrowers think that interest rate is the only cost of owning a mortgage. There may be other factors that one should also consider. How interest rate is calculated? Is interest rate fixed or variable? What are prepayment penalties? What is the closing cost? It may not be actually true in all cases. People buy more houses during lower interest rate periods and stay away during high interest rate times.

Mortgages are usually available from 6 months to 5 year period but in a very few cases mortgages are available for longer or shorter periods. When getting a mortgage for shorter period, interest rates are usually lower than those charged for mortgages for longer terms because lenders want some cushioning against the risk extended over longer term. Things can be predicted more precisely for shorter periods than for longer periods. This principle affects all financial matters. One should balance savings in interest cost of short term mortgages with fluctuations of interest after term is over, worries of getting another mortgage after short term, peace of mind and how long you will stay in your house? In order to deal with this dilemma, there are other products available like “portable mortgage” (can be taken from one property to another), “convertible mortgage” (buyers have right to convert their mortgage to longer term if rates hike) etc. Be vigilant especially during the periods of fluctuating interest rates.

Calculation of interest rate is very important factor. One should pay special attention to the number of times interest is calculated on your mortgage in a year. The more often interest is calculated during the year, the greater is the cost to own that mortgage because it benefits lender more. For example:

8% calculated monthly means effective annual interest rate of 8.30%.
8% calculated semi-annually means effective annual interest rate of 8.16%.
8% calculated annually means effective annual interest rate of 8%.

Also make sure that clause reads not in advance in the interest calculation section which actually means that payments are made “not in advance”, at the end of the period rather than at the beginning.

Prepayment Considerations

2008-06-05T09:50:00.000-07:00

What is the maximum that can usually be prepaid?
What is the minimum that must be prepaid?
What are the cumulative and non-cumulative prepayment privileges?
Should a prepayment follow amortization schedule?
What about the frequency of prepayment?
When can a mortgage be prepaid?
If prepayment is allowed once a year; who decides the date: borrower or lender?
When does the prepayment privilege begin?
What is the usual penalty when prepaying open portion of the closed mortgage?
What is the usual penalty when prepaying closed portion of closed mortgage?

Usually lenders allow borrowers at their option to prepay up to 10% or 15% annually of the original or currently outstanding balance. If it is based on original amount then it favours borrower.

It costs lenders money to process the payment so they often fix a minimum prepayment amount that must be paid in order to utilize the prepayment privilege. Depending upon the lender and amount borrowed, it can be any amount.

Prepayment privilege is usually non-cumulative which means that if borrower is allowed 10% ($10,000) of the borrowed amount ($100,000) annually, but he paid only $8000 in a year, he can not carry remaining unpaid amount to next year to add to next year’s prepayment limit of $10,000. They cannot prepay $12,000 next year.

Some lenders allow borrowers to make prepayment anytime of the year and some restrict borrowers to follow either the regular mortgage payment schedule or a particular date for prepayment. This actually could mean that even if you have all of a sudden some extra cash on hand which you want to prepay to lower your interest cost but lender might have imposed a clause that you either pay it in a particular month or along with the next mortgage payment.

Different lenders allow different number of prepayments that can be made during the year. It can range from one only a year to unlimited number of times a year provided that the maximum allowed amount rule is followed. The more prepayments a borrower can make, the better off the borrower is.

Some lenders restrict that prepayment can only be made on a particular day of the month. This means that even if the mortgage is fully open and borrower sold the house before the prepayment date, he can not pay off his loan until that prepayment date is reached which means he can lose thousands of dollars depending upon how far is the prepayment date from the date house is sold off.

If only one prepayment a year is allowed it is better that borrower decides that date. If lender controls the date, it can cost tens of thousands of dollars extra.

Prepayment privilege does not necessarily begin immediately after the money is advanced to borrower. In some cases it can begin after couple of years have elapsed. Borrower must be smart enough to make right judgment. If he thinks that he will have some extra cash shortly after he signs the contract, he should not allow this type of clause or he should get mortgage from other lender or of different terms. If I have even $5000 extra and I have to wait at least a year before I can make my prepayment then I am losing lots of money on paying interest.

Penalty is usually defined in the prepayment clause section of the loan and borrowers should fully understand these clauses before he signs the contract. Mortgage period is usually very long and borrowers may have to move away or he loses his job or some other financial difficulties may arise. It is always a good idea to consider it very carefully what if I have to break the mortgage because of unforeseen issues. If you don’t care for yourself then who will.

Perfect Mortgage Considerations

2008-05-03T14:48:00.000-07:00

Is there a perfect mortgage for all?
What are the different ways to pay for buying the house?
What is the most important factor when getting a mortgage?
Do different lenders offer the same package with same interest rates and other options?
What is the first thing most people think about when looking for a mortgage?
Should one shop around for a mortgage or get it from a lender offering the lowest interest rate loan?
What other costs to consider in addition to mortgage payments?
Should I consult other friends or relatives who bought houses?Should I also consider same questions when refinancing?

There is no perfect mortgage for all. One mortgage may suit one buyer but not other. We all have different needs, different situations, different incomes, and different payment options. One mortgage can not suit all. We must understand our needs before we shop for a mortgage.

There are basically two ways to finance your home; your money or someone else’s money. There is no other option. One should not think that it is best to buy with your own money if you have that much. Sometimes it is better to finance your home because you may be able to claim mortgage costs/interest against your business income when you are using your home for your business as well or you can invest your money your money somewhere else to make better returns. It is your money, therefore use it wisely. Consult with your accountant or investment adviser before using your money to purchase a home.

The most important thing people look at when shopping for a mortgage is interest rate. And that makes sense because no one should pay more than necessary. If interest rates are same, is there more to a mortgage than interest rates? Yes, yes, yes! Mortgage packages vary significantly from lender to lender, with no two lenders offering identical packages of features and options. Mortgage selection process is confusing and difficult. Therefore, always shop. All lenders promote their packages as best for the borrower. Yet with large amounts of money involved today, a small mistake can cost fortunes. Usually look for combination of the following factors when getting a mortgage:

Liberalized prepayment options
Options and features that offer most flexibility when renewing the loan or selling the house
Lowest possible interest cost with fewest hidden charges
Mortgage package best reflects your particular circumstances
Closing costs
Time frame for which interest rate is offered
Payment options/flexibility when you are unable to make few payments because of inevitable circumstances
Sum total of your annual mortgage payments against your annual income
Consider property taxes, utilities, property maintenance expenses as well as insurance costs in addition to mortgage payments
Options available on maturity
Strengths and weaknesses of long and short term martgages

It is always a good idea to make a checklist of important items before shopping around for a mortgage because no one can remember all important things to consider in front of mortgage advisor. Mistake will be costly, because of the amount involved. After you have found the package that best suits your needs, you must make sure that all those things promised are actually in the contract before you actually sign it. Never trust mortgage advisor or anyone else even if they belong to trust worthy agency or institution. Don’t rush, be patient and take as long as it takes.

Also consider speaking with family or friends who recently financed their home. They may offer a tip or two that can help you. Welcome information even from colleagues or strangers and weigh all the tips against your own research and personal circumstances. Never lose your research work. Always keep it somewhere for you future reference because you may need some of it when refinancing. Refinancing is as difficult as getting mortgage first time with the only difference that you already have the property in your hands. Always keep your payment records and keep your credit history clean otherwise refinancing may cost you more.

Reverse Mortgage

2008-05-01T10:36:00.000-07:00

What is a Reverse Mortgage?
Are interest Rates Fixes or Variable?
What are the pro's and con's of Reverse Mortgages?

A reverse mortgage is a home loan that you do not have to pay back for as long as you live in your home. It can be paid to you in a lump sum, as a regular monthly income, or at the times and amounts that you want. The loan and interest are repaid only when you sell your home, permanently move away or die.

Most reverse mortgages have a variable interest rate, based on the Treasury bill, or the LIBOR rate. Some new reverse mortgages will have the option for a fixed rate, this will be available in the future. A reverse mortgage is a way to access your homes equity and turn that equity into cash. The best part is that you do not have to make payments to repay the loan.

Pro's

No payments
No income qualification
Flexibility in payments
Payments tax free (consult your tax advisor) -
Retained home equity may still appreciate
Your heirs will never be liable for the loan
You can stay in your home, as long as you pay insurance and maintain the home
You can pay off existing debt and improve your cash flow
You can use the funds for just about everything
You retain the title to your home -Reverse mortgage can be integrated with other assets to enhance tax effectiveness (consult your tax advisor)

Con's

Upfront costs may be higher than traditional loans
Should not do a reverse mortgage if you plan on selling your home in 5yrs or less
Should not do a reverse mortgage if your health is a concern
Home equity can reduce over time
May leave less assets to heir's

Portable Mortgages

2008-05-01T10:23:00.000-07:00

What are portable mortgages?
What are pros and cons of such mortgages?
Under what circumstances portable mortgage is very beneficial?

Convertible Mortgages

2008-05-01T10:20:00.000-07:00

What are convertible mortgages?
How can one benefit from having a convertible mortgages?
What are proc and cons of such mortgages?

Open Vs Closed Mortgages

2008-05-01T10:12:00.000-07:00

What is the difference between open and closed mortgages?
Which one is best for me?
Is open mortgage ever beneficial?
Which closed mortgage one should choose?
If I did not know about Open/Closed mortgage terms and signed application, what are the penalties that can be imposed upon me?

Before signing a mortgage contract, one must be familiar with term Open/Closed Mortgage. Mortgage can either be fully Open or fully Closed or something in between the two ends.

Term Open Mortgage actually means how much of the principal can be paid either in part or full at any time or at a given schedule with or with penalty specified in the contract.

Term Closed Mortgage means borrower has no right at all to prepay the mortgage and all mortgages are virtually closed until and unless prepayment clause is specified right in the mortgage. But one should keep in mind that all mortgages become fully open automatically upon their maturity and can be paid off partially or fully without having to pay any penalty.

You must read the Open mortgage clause yourself; don't rely upon mortgage advisor or any other person involved because they don't work for you. Even if lender mentions that policy includes one of the prepayment features is not good enough; dig into it yourself.

There are three possibilities:

Fully open (no penalty or notice required): This is the best type one can get but borrower should know that it carries higher interest rate than fully closed mortgage (additional 0.5% or more). Entire pricipal can be paid off partially/fully any time without any penalty and no notice is required either.
Fully closed (lender has all control): Worst of all types in which borrower has no right at all to prepay any portion of principal. In this situation, lender controls everything and if he allows to be prepaid and with whatever conditions those must be honored by borrower. Borrower is completely at the mercy of lender. This type of mortgage should not be signed even if the interest rate is little lower than that of fully open mortgage because circumstances usually change every few years and you may have to relocate or buy something else or you can not pay the mortgage at all because of the financial crunch. Always look ahead of now.
Mix of open and closed (open portion can have no penalties and/or notice required or predetermined penalty and/or notice required): Usually fully open is best of all but if that is not possible then one should get the mortgage that allows as much prepayment as possible without any conditions/penalties attached. That means if you can get fully open with some predetermined penalty/notice, that is still better than any portion of it closed.

Donations Cancelled

2008-05-01T10:01:00.000-07:00

Your donations support this important site. Even though you have decided to cancel donating at this time, you may review your decision later to support. Please continue to take advantage of the site content even if you never want to donate. I will understand that everyone is faced with different circumstances. Thank you very much for visting this site. May you always be safe and cautious.

Development of this site depends 95% upon the donations of people like you. I spend enormous time researching the subject of mortgages and loans and update this site frequently in order to pass on best advice possible to the people who want to make wise decision regarding the single most biggest invetment of their lives.

Preapproved Mortgages

2008-05-01T10:00:00.000-07:00

Should I wait till last moment to shop for mortgage?
Should I always get my mortgage preapproved?
What need is there for preapproval if mortgages these days can be approved in couple of days?
What are the pros and cons of preapproval?
Do I have to work as hard for refinancing as I did for my first mortgage?

Waiting till last moment can have disastrous consequences. Let’s just assume that without pre-approval you found a house after so much search and now you signed an offer conditional upon mortgage approval. Because of lack of enough time to find a suitable mortgage that fits your needs. In a hurry you have to get whatever is being offered or you lose the house if financing could not be arranged on time. Same is the situation with a person who needs to refinance his existing loan with the only difference that you already have a home for which you need to refinance.

Never wait till last moment. Why wait so long and make mistakes that may not ruin your life today or you may not see the trouble now because of excitement of getting your first steps into your own home but they will definitely come to haunt you in the long run and you may not be able to keep your dreams of your own home alive for so long. You may not feel the urgency to get pre-approved mortgage because you think that these days mortgages are very easily approved in just couple of days. Yes that is true you can wait till last moment and still be able to get a mortgage in a few days but at what cost? You may get higher interest rates or closing costs, no early payments option, high penalties for missing a payment and so many other unfavourable terms and conditions that can tag along hurriedly done mortgage. And any of the single bad items mentioned above may kill your dreams or at least make your life miserable because such a huge investment is at stake.

Pre-approved mortgages have their pros and cons. With a mortgage in your hand you know what you can afford and that gives you the leisure of searching a right house and seller may find it a plus that you already have a mortgage and therefore be willing to sell you at favourable terms. But you should also consider the time frame after which pre-approved mortgage expires. Usual time frame is up to 90 days. Once you have the pre-approval don’t just stay calm. You can have more than one pre-approval from different lenders and choose one that suits you most. It is also one of the draw backs of pre-approved mortgages that people usually feel very relaxed that they have secured a mortgage and next step is only looking for a house.

Should one always get a mortgage pre-approved? Yes, yes, yes. Why not? Usually pre-approved mortgages lock the rates for you for a certain time frame and if rates go up you still get the previously committed rate when interest rates are on rise. But let’s analyse a situation when interest rates are going down and when you actually are ready to sign a mortgage; you my find the market rates lower than when you signed the pre-approval. Still not bad because in this situation you can either look around for another mortgage deal because pre-approval does not tie your hands. It is up to you whether you want to use that or negotiate another deal. At that time you may negotiate the new rate with the same lender or any other lender you like. Also inquire from lender whether time starts from the date of application or date of approval of pre-approved application. That may give you few more days of peace and tranquility.

I have seen people breaking up just because they signed a bad car loan or signed a loan they could not afford later. So why make such foolish mistakes. There is no need to rush into a bigger home either because of social circle pressure or just because you want to look a rich person. First home you buy should be very realistic and after managing that home successfully you may have built enough equity that you can use to buy a bigger and better home later.

Always Shop for Mortgage!!!!!

2008-04-30T11:42:00.001-07:00

People are probably quite skeptical about the need to shop for mortgage. Booking a right mortgage has become increasingly difficult because of explosion of different features these days. Just by reading the mortgage brochure, average Canadian will be amazed at the new concepts available in the marketplace. Investing your time in searching for suitable mortgage will pay off handsomely.

Right mortgage not only saves money and time but also promises flexibility, anxiety reduction, certainty, better control of finances and early pay-off. Key to success for borrowers is to familiarize yourself with the mortgage features currently available, rank them according to your own unique needs and seek the lender offering greatest number of those products.

Happily booked a mortgage for my new home

Jumping into my new home with smiles and laughter

Caring only for interest rates as all do

Ignoring all key features that tag along

Assuming all mortgages are same but for minor differences

Shopping for Debt! Crazy! Crazy! Crazy!!!!!!!!!

How can I ever lose? what can I ever gain?

Crippled by financial crunch

Sold the house a little too early

Surprised by $4000 prepayment penalty

Shed nothing but tears! Tears! Tears!

Promised to myself to always shop

Matching features to my needs and limits

Using all information available around

Staying worry-free all the time!!!!!!!

Glossary

2008-04-24T10:35:00.000-07:00

TERMS TO KNOW:

Amortization: The length of time it would take to fully repay the loan.

Appraisal: An expert opinion on the value of a property.

Annual Percentage Rate: This is not the note rate applied for, but rather is a government mandated formula that shows the cost of the loan in a yearly rate by using the note rate plus certain other upfront costs.

ARM Loan: Adjustable Rate Mortgage. Mortgage characterized by an interest rate that can adjust up or down at certain intervals based on a current index (commonly the 1 year T-Bill) plus a preset margin.

Balloon: Mortgage characterized by level fixed payments for a predetermined time frame followed by either a refinance or adjustment in interest rate.

Capital Gains: The tax paid upon certain types of real estate transactions. Contact accountant for specifics (see links for details).

Cash to Close: The amount needed from the borrower at closing. Consists of down payment, closing costs and prepaid items. This amount needs to be in the form of a cashier check made payable to the buyer.

Closing Date: Date stated on the purchase agreement that buyer and seller agree to finalize or close the transaction.

Closing Costs: Various costs of setting up and funding the transaction - including closing fee, title insurance, appraisal fees, underwriting fee, mortgage registration tax etc.

Condo/Town Home: Property types that usually have the following characteristics: they are attached, have a homeowners association and dues, the outside maintenance is taken care of by the association, and common areas and amenities available to all owners in the association.

Conventional Financing: Standard, non-government financing.

Credit Bureaus: Agencies that provide compilations of your credit history.

Credit Report: Report provided by the credit bureaus which shows the history, current status, and profile of an individual.

Credit Scores: The number generated by the credit bureaus which is a numerical representation of the subjects credit profile, range is from 300 on the low side to 850 being the highest score possible.

Debt Ratios: Ratio of debt to pretax income, often expressed as a front (housing payment only) or back (all debt) ratios. Ex- $5000 monthly income, $1400 housing payment, $1700 total debt would equal ratios of 28%/34%.

Discount Points: One point equals one percent of the loan amount. Points are used to lower the interest rate. One point does not equate into lowering the interest rate one percent. Generally lowering the interest rate 1/8 will cost about 1/2 point, although this can vary based on daily pricing. Typically is tax deductible. (see Links for accountant advice)

Down Payment: Difference between loan amount and purchase price.

Earnest Money: Deposit toward down payment submitted with a purchase agreement as evidence of the buyers commitment .

Escrows: The portion of the monthly payment that is not applied to principal or interest, but rather is used to pay mortgage insurance, homeowners insurance and property taxes.

Fixed Loan: Most common type of financing. Terms ranging from 10 to 30 years. Interest rate and P&I payment remains constant throughout life of loan.

Floating: Not locking in a rate, but rather choosing to float the interest rate as the market moves up or down.

Flood Certification: Required document on all loans. Confirms if the property is in or out of a FEMA designated flood zone.

Funds held in Escrow: Generally only applies to new construction. Monies held from the seller to provide payment for repairs or non completed items.

Good Faith Estimate: Document prepared by lender which estimates and delineates the various fees and closing costs associated with the home purchase.

Government Financing: Financing provided from government.

HELOC: Home Equity Line of Credit. Second mortgage product, generally characterized by interest only payments and the ability to draw, pay back, and redraw.

Home Inspection: Not required by lender. This is a private inspection done by the buyers choice to confirm that the property is in acceptable condition.

Homeowners Association Dues: Amount paid by owner of a townhome or condo to cover various amenities or services provided by the homeowners association (examples -- common areas, hazard insurance, garbage, mowing, snow removal).

Homeowners/hazard Insurance: Insurance which covers damage or loss to the property. The premium is usually paid into an escrow account held by the mortgage company, which then pays the insurance company once a year.

HUD-I (Settlement statement): Document prepared by title company at closing which shows where all of the money in the transaction was coming from and going to.

Interest: The lender's charge to the borrower for the use of money lent.

Loan-to-Value (LTV): Ratio of liens versus value of property or sales price. Ex. 80,000 owed on a property worth 100,000 equals an 80% LTV.

Lock-in Period: Time period that a rate is protected for during the loan process.

Locking in: Choosing to protect a particular rate and program for a specific period of time.

Mortgage Insurance (MI): Insurance which protects the LENDER against default. Generally the higher the loan-to-value the higher the monthly premium. Mortgage -- Document. This document signed at closing is the collateralization of the property to the note or loan.

NoteDocument: This document signed at closing is the promise by the signers to repay the loan.Origination Fee1% of the loan amount. Can be avoided by paying a higher rate; typically is tax deductible.

Odd Days Interest/Per Diem Interest: Collected at closing, it is money collected/refunded to borrower to synchronize the closing to the monthly payments.

Paying Points: Money paid upfront to lower the interest rate. Rule of thumb - breakeven point is (where monthly savings meets/exceeds money paid upfront) usually around 60 payments or 5 years. This means that in many cases paying points will pay off as long as you do not sell or refinance your loan before the breakeven point. (actual breakeven point may vary, please talk to us about your exact situation) Some niche programs and products may require points to be paid.

Piggy Back: A second mortgage closed at the same time as a first mortgage. Usually purpose is to avoid mortgage insurance, jumbo pricing, or for future needs.

PITI: Monthly payment. Stands for Principal, Interest, Tax escrow, Insurance (both hazard and mortgage) escrow.

Pre-Approval: Based on documented income, assets, and credit.

Pre-paids: Group of items paid at closing including monies to set up the escrow account and to pay prepaid or odd days interest.

Pre-Qualification: Based on stated income, assets and debt. Information not verified, not as useful or informative as a Pre-Approval.

Pre Payment Penalty: An option on certain loan types. A benefit in that the rate is lower on these products compared to other similar products.

Principal: Amount borrowed from the lender.

Property Taxes: Amount of tax due on a property. Usually is collected as part of the escrow portion of the monthly payment, with the lender being responsible to forward the escrowed money as the bills come due on required dates.

Purchase Agreement: Contract between buyer and seller outlining the terms of the agreement.

Rate vs. Price: Rate refers to the interest rate. Price refers to points. It is easy to become confused as both rate and points are usually referred to in 1/8 percent increments. A good rule of thumb is that often a 1/8% change in interest rate reflects a 1/2% change in points (actual rate and points may vary slightly).

Single Family Residence: Standard, one unit home, as opposed to a Condo/Town Home with a homeowners association.

Term: The Life of the mortgage; how long the mortgage hos to run until it matures.

Title Company: Company that prepares title work and is where the closing is held.

Title Insurance: Policy provided by the title company on their title work guaranteeing the accuracy and completion. Lenders Policy is required and only protects the Lender from loss, Owners Policy is available at buyers discretion and protects the owner.

Title Work: Document prepared by title company which outlines the ownership of the property and other various details.

Underwriting: Act of approving a loan application.

VA Financing: Government backed financing available only for service veterans, characterized by no down payment, no mortgage insurance, but with a funding fee.

Donations Received

2006-05-08T09:54:00.000-07:00

Thanks you very much for your donation to support this important site.

Development of this site depends 95% upon the donations of people like you. I spend enormous time researching the subject of mortgages and loans and update this site frequently in order to pass on best advice possible to the people who want to make wise decision regarding the single most biggest invetment of their lives.