Q. What are the most common types of loans?
A. The two most common loans available are the fixed rate mortgage and the adjustable rate mortgage. A fixed rate mortgage involves steady payments that reflect an interest rate that does not change, or that is "fixed" for the life of the loan. It usually comes with a 30-year or a 15-year option. With an adjustable rate mortgage (ARM) your interest rate can fluctuate over the period of the loan. Normally, the ARMs offer lower rates initially but the interest rate is still subject to increases (and decreases) relative to the market. There are different types of ARMs that can be fixed for a specified number of years such as a 3/1 ARM- a fixed lower rate for three years then an adjustable rate in subsequent years.
Q. How much debt is allowed when applying for a loan?
A. According to Blaise Coco, a knowledgeable broker, the 28/36 rule, where only 36% of your gross income is allowed for debt and housing expenses, is now part of the "old school" mentality of broker lending. The debt-to-income guideline for most brokers and lenders has loosened over the years to allow for more debt and/or more spending on housing expenses. Some brokers will allow up to 50% of your monthly gross income to be allocated to debt payments and housing expenses.
Q. What options do first time home buyers have with little to put down?
A. First time home buyers now have many options when buying a house. A prospective first-time buyer should research grants available through city hall. These grants can total up to $15,000 at times depending on the need of the applicant. If a first-time home buyer has good credit, normally they can qualify for 100% financing. Buyers can also look into FHA loans or even veteran's loans if applicable.
Q. If the appraised value is below the asking price, how much will the loan cover?
A. Whichever is lower between the purchase price and the appraisal price the lender or broker will cover 100%. If however the purchase price exceeds the amount of the appraisal price, the borrower will have to come up with the difference. Normally, purchase and appraisal price will be in accordance with each other.
Q. When should someone consider a balloon mortgage?
A. A balloon mortgage is sometimes used when the purchaser does not plan on staying long in the house, thus planning to sell or refinance before the lump sum becomes due. This type of loan is also popular in commercial lending practices.
Q. When is it beneficial to pay points up front?
A. Points are a one-time fee paid up front at the closing. One point equals 1% of the amount borrowed. Two points paid are about the average. Normally if the borrower is looking at a long-term commitment, paying points is advisable. Points up front may lessen the total interest rate in the long-haul. For example, paying two points, or say $6000, at closing is less than a .5% increase in interest over 30 years in a loan with no points paid. However, if the buyer plans on moving within 3 to 5 years it might be advisable to get a no-points-down loan.
Q. Explain the prepayment penalty.
A. The prepayment penalty is common to those with less than average credit. Normally, there is a 3 to 5 year period where the buyer can not refinance or pay off the loan without a penalty. After the specified amount of time, the home owner can sell or refinance at will. The penalty usually equals a percentage of the balance or a specified amount of monthly payments.