The 'How To' of Home Financing

Okay, you found the home of your dreams. How are you going to finance it? Are all mortgages the same? What's an ARM? What's a "conventional" loan? Who are Fannie May, Ginnie May, Freddy Mac, and other names you've heard? What are HUD and FHA? Can you get a "HUD Home"? Do you need PMI? What is it? How about title and flood insurance? What's included in property insurance? This article attempts to answer these questions and a few more.

• Budgeting For Your Mortgage
• Components of the Loan
• Freddie Mac, Fannie Mae, and Ginnie Mae
• Housing and Urban development (HUD)
• Insurances Associated with Mortgages

Budgeting For Your Mortgage

You can save yourself a lot of wheel-spinning if you take a minute to figure out how much mortgage you can afford. The Department of Housing and Urban Development (HUD) suggests that a lender will want your monthly mortgage payment to total no more than 29% of your monthly gross income. But mortgage and payment terms must fit your budget. Where you shop and what you look for are critical issues not only for staying within your budget, but getting the most "brick for the buck".

Where to shop-- You might start by looking for a mortgage at the bank where you have your checking or savings account. But don't limit yourself. A wide variety of institutions make home mortgage loans, including savings and loan associations, commercial banks, mutual savings banks, and mortgage companies. One way to find the creditor with the most attractively priced loan is to look in your local newspaper; check to see if it publishes a shoppers guide to mortgage credit. These shoppers guides are available in many localities and can be used to identify the lenders with low rates.

But, basically, the way to find the loan with the most attractive terms is to shop around. And like car financing, mortgage financing on the Internet has become a viable alternative. Although similar sites exist and though I offer alternatives at Loans...Mortgage, I consider the following two sites the most useful.

* HSH Associates is the nation's largest publisher of mortgage and consumer loan information. They are an objective, independent source of information offering s daily mortgage statistics, weekly reports, and market trend reports for commentary, news, forecasts.
* MortgageQuotes.com offers a state by state picture of who is offering what type of loans for varying periods of time along with their current interest/fee rates.

Lenders and brokers may offer different prices for the same loan to different consumers, even if consumers have the same loan qualifications. These different prices may result because loan officers and brokers often are allowed to keep some or all of the difference between the lowest available price and any higher price that the consumer agrees to pay. This compensation arrangement helps explain why it is important for consumers to ask questions about costs and negotiate for the best deal.

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Components of the Loan

You should have in mind some of the mortgage loan components or, in other words, things to look for in a mortgage loan. For example, what types of loans are available from a given institution? What interest rate is offered? Are their points involved and how many? What is the length of the loan? Does the lender make privately or federally insured or guaranteed loans?

Federal or Conventional-- Some lenders offer mortgage loans backed by a federal agency such as the Federal Housing Administration (FHA loans) or the Department of Veterans Affairs (VA loans). Loans that are not government-insured are called "conventional" mortgages. Insured mortgages may be more attractive than conventional mortgages in some ways-- such as lower down payment requirements. But they may be more restrictive in other ways; for example, they may be available only for certain kinds of homes, or for properties whose value is below a specified price.

Length of Loan, Interest Rate, and Points-- Other factors important to your mortgage decision are the length of the loan and the down payment required by the lender. The longer the term and the larger the down payment, the smaller your monthly payments will be. On the other hand, the longer the term the more interest you will usually pay overall.

* The rate of interest is important as well. Obviously, the higher the interest rate, the higher your monthly payment. However, in some cases the amount of the down-payment will influence the interest rate that you pay-- the larger the down payment, the lower the interest rate. Similarly, your credit score from a credit check could affect the interest rate you pay. Blemishes on your credit report which might not be so bad as to stop your loan, could be sufficient to require you to pay a higher interest rate.
* Points are an amount of prepaid interest paid by the borrower to the lender at closing. A point is equal to 1 percent of the loan amount. Generally, by paying more points at closing, the borrower reduces the interest rate of the loan and thus the future monthly payments.

Adjustable or Fixed-- mortgage loans have interest rates that will stay fixed for the life of the loan (fixed-rate mortgages), that may change (adjustable-rate mortgages, or ARMs), or that represent a combination of fixed and variable rates (convertible mortgages). Most people use a fixed-rate mortgage. The advantage is that you always know exactly how much your mortgage payment will be, and you can plan for it. But fixed-rate may not be the best for you all the time.

With an Adjustable Rate Mortgage (ARM), your interest rate and monthly payments usually start lower than a fixed rate mortgage. But your rate and payment can change either up or down, as often as once or twice a year. The adjustment is tied to a financial index, such as the U.S. Treasury Securities index. The advantage of an ARM is that you may be able to afford a more expensive home because your initial interest rate will be lower.

Is an ARM right for you? That depends on your financial situation and the terms of the ARM. Don't forget, ARMs carry risks in periods of rising interest rates, but can be cheaper over a longer term if interest rates decline. The Federal Reserve Board's offers what I consider a "must read" information sheet if you are considering an ARM. I appropriately call it ARM Sticker Shock.
Don't hesitate to ask the lender how one loan differs from another, how the different features of the loan will affect the mortgage, or whether your chances to qualify would improve if you made a higher down payment.

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Freddie Mac, Fannie Mae, and Ginnie Mae

You've probably heard the three names before, but what are they and what are their differences.

Freddie Mac and Fannie Mae have the same charters, Congressional mandates, and regulatory structure. The two companies, however, have different business strategies. Competition between the two ensures that the ultimate beneficiary is the consumer in the form of lower housing costs.
Both Freddie Mac and Fannie May are a stockholder-owned corporations. The former was chartered by Congress in 1970, the latter in 1968. Both were designed to create a continuous flow of funds to mortgage lenders in support of home ownership and rental housing. They do so by purchasing mortgages from primary lenders-- banks, savings and loans, etc. with whom the consumer primarily does mortgage business.

The primary market lenders optionally sell these mortgages into what's called the secondary market -- the place where mortgages are bought and sold by different investors. Secondary market investors include various pension funds, insurance companies, securities dealers, and other financial institutions including Fannie May and Freddie Mac. When lenders sell their mortgages to these groups, they replenish their funds so they can turn around and lend more money to home buyers. By doing so, they ultimately provide homeowners and renters with lower housing costs and better access to home financing.

Fannie Mae was created by Congress in 1938 to bolster the housing industry during the Depression. At that time, Fannie Mae was part of the Federal Housing Administration (FHA) and authorized to buy only FHA-insured loans to replenish lenders' supply of money. That changed in 1968 with its privately held corporation.

Ginnie Mae, on the other hand, functions similarly to the original Fannie May. Ginnie May is a government agency within HUD. It too was created by Congress to ensure adequate funds but exclusively for government loans insured by the Federal Housing Administration (FHA) and guaranteed by the Department of Veterans Affairs (VA) and Veterans Administration.

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Housing and Urban development (HUD)

Born in 1965, HUD's mission is to provide a decent, safe, and sanitary home and suitable living environment for every American. Within the scope of this lofty goal, HUD fights for fair housing, develops affordable housing & home ownership opportunities, reduces homelessness, and promotes jobs and economic opportunity.
Within HUD is the Federal Housing Administration (FHA). FHA insures mortgage loans to help people buy or refinance their current homes with a low down payment. FHA doesn't actually make loans but insures loans so that if buyers default for some reason, the lenders will get their money. This encourages lenders to give mortgages to people who might not otherwise qualify for a loan. You may be able to get an FHA loan 3% down, or even less. You can learn about HUD's mortgage insurance programs at FHA Help. You can also learn about VA loans and applications at FAQ About VA Loans.

HUD homes-- HUD homes can be a very good deal. When someone with a HUD insured mortgage can't meet the payments, the lender fore closes on the home. HUD pays the lender what is owed and HUD takes ownership of the home. Then the home is sold at market value as quickly as possible. Read about buying a HUD home below - one might be right for you! And while at the site, check the listings of HUD homes - as well as homes being sold by other federal agencies.
You can learn more about HUD homes at Federal Mortgage Programs . There too you can also learn how to get HUD counseling for all mortgage financing questions. There are also links to VA financing as well as Department of Agriculture home ownership. Be sure to read this very well written publication.

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Insurances Associated with Mortgages

In the article, Title Insurance, Real Estate Guide Darren Ulman, says "When you buy a piece of real estate, whether it's a home, condo, or a piece of land, you must have a complete investigation of the property. This includes the title of the property.... Title insurance is designed to protect you and your property. It is not mandatory, unless your are obtaining financing. However, it is a good idea."

Private Mortgage Insurance (PMI) is paid by a conventional mortgage borrower to protect the lender in case of default. Lenders require private MI on most conventional mortgages because experience reveals a strong correlation between borrower equity and default. The less money a borrower has invested in a home, the greater the probability of default. Thus, private MI is a financial guaranty that protects lenders against loss in the event that a borrower defaults. Without that financial guaranty, lenders will typically require a down payment of at least 20 percent. There is an excellent article at about.com's banking site called Mortgage Insurance... Who Should Be Paying For It?. While at that site, be certain to see the Mortgage Banking page.

In the publication Home Owners Insurance, the Better Business Bureau (BBB) says that, "A well designed policy can protect a homeowner from losses if the home is burglarized or vandalized, or if there is a fire or natural disaster. Moreover, homeowners insurance protects personal belongings and protects the homeowner against lawsuits if someone is injured while on the owner's property." The BBB site offers a great breakdown for home owners insurance as well as tips to look for. For any home owner, this is a 'must read'.

At the FEMA site, you'll find National Flood Insurance Program. This is a superior article which includes the top 10 things every homeowner should know. For example, did you know that everyone lives in a flood zone regardless of where you live and that flood damage is not covered by homeowners policies. I definitely consider this another "must read" article.

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