One of the reasons I chose to be associated with Online Trading Academy is their mission of transforming lives worldwide through exceptional trading and investing education. No matter the profession you choose, be it farmer or rocket scientist, financial savvy is necessary to be successful. The only real estate purchase many people may make is their personal residence. That’s great but it doesn’t lessen the need for knowledge about the process. One aspect of most real estate purchases is a mortgage. You may only purchase one home but could apply for several mortgages over the years. For that reason I’ve compiled a list of basic factors about mortgages.
1) Amount of the Loan: Many people think this depends on the property, however it really is dependent on your financial situation i.e.: income, expenses, down payment, debt to income ratio and mortgage rates. The process of buying real estate should start by knowing what you can afford. This is where a lender comes in. There are tools online but they are very basic.
2) The Mortgage that is best for you:
FRM (Fixed rate mortgages) – the rate doesn’t change. You make equal payments for the life of the loan. Most common.
ARM (Adjustable rate mortgage) – rates move up and down as the financial markets change.
Hybrid ARM’s – combines the features of the fixed and adjustable rate mortgages. Has a fixed rate for an introductory period (usually three, five, seven or ten years) then converts to an ARM.
Interest Only – much lower payments but no principal is being paid. There is usually a scheduled balloon payment of the principal.
3) Interest Rate of the Mortgage: The “advertised” interest rate isn’t always what you get. Often the lower the interest rate the higher the fees/cost which can make the loan more expensive. When looking for the best rates, compare the upfront costs as well as the rates. The best way to do this is by asking for a GFE (Good Faith Estimate) and looking at the APR (annual percentage rate).
4) Cost Monthly: Something you can afford and be comfortable with. A lender will use debt to income ratios to determine what they feel you can afford. That does not always take into consideration life style choices. A lender might tell you that you can afford a payment but it could preclude you from taking a two week vacation every year, is that something you’re willing to give up? There is a term “house poor.” Make sure you take into consideration the things in your lifestyle that are important.
5) What “Term” best suits you: The term is the number of years it will take to pay off the loan. The norm has been 30 years, then came along the 15 year term, now you can find anywhere from 5 to even 50 year terms and everything in between. The shorter the term the less interest you pay overtime and the faster you gain equity.
6) Locking the interest rate: When you first apply, you will get a quote on the rate and fees, however that is not necessarily the rate when you close the loan. There will be options about when the rate can be locked (each lender is different in how far away from the close date they will allow this). There often is an option to “float” your rate (not lock till you close); there are also “float down” options for a fee.
7) Loan Cost: Different than the interest rate. Once again, a lender must give you a GFE within three business days of applying for the loan; however I suggest asking for it when you get a quote. This allows you to see what the total cost of the loan will be. The GFE must not vary by more than allowed by the provisions of the Real Estate Settlement Procedures Act.
Hope this helps you understand the process just a little better. You can learn more in our Professional Real Estate Investor courses.