Yale Roth M.A., M.Ed

Posts Tagged ‘first time home buyers’

This mortgage question I got this morning and I thought I would blog the answer as many homeowners and first time home buyers may be interested.

Is there such a mortgage product as a 30 year fixed interest only mortgage?

The answer is “no.”

Interest only mortgages are only used with adjustable rate mortgages also known as ARMs. 

There used to be a mortgage product called a 10/20 interest only which meant the mortgage rate was fixed for 30 years however the interest only option was only applicable for the first 10 years.

So there is the 3 year, 5 year, 7 year and 10 year adjustable rate mortgage.  Now if the homeowner or first time home buyer qualifies, they can add an interest only feature to the mortgage.

That means that the mortgage interest rate is fixed for the fixed period – either 3, 5, 7 or 10 years, then the mortgage rate will adjust.

The homeowner or first time home buyer has the option of making interest only payments for the first 10 years.

After 10 years the mortgage will begin to amortize over a 20 year period.

In theory, the mortgage must be satisfied by the 30 year year term.

For example, let’s say the homeowner or first time home buyer takes out a 5 year interest only mortgage.

The mortgage rate will be fixed for 5 years, after which time it can change.  Even if it does change, the homeowner or first time home buyer can make interest only payments up to the 10th year of the mortgage.

So, let’s say the original mortgage amount was $200,000 and the homeowner or first time home buyer just made interest only payment for the first 10 years.

After that point, the mortgage would begin to amortize over a 20 year term at the $200,000 balance so the mortgage would be paid off in 30 years.

All interest only mortgages have 30 year terms; however, the interest only feature only applies for the first 10 years of the mortgage.

In conclusion, there is no mortgage product called the 30 year fixed interest only.  There are adjustable rate mortgages with interest only features that allow the homeowner or first time home buyer to make interest only payments for the first 10 years, after which time the mortgage will amortize over the remaining 20 years so that it’s paid in full after 30 years.

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Does It Make Sense To Pay Discount Points On An Adjustable Rate Mortgage?

Paying discount points to get a lower mortgage rate is a question I get from time to time.  Most homeowners and first time home buyers treat discount points or “points” like the plague.

Most homeowners and first time home buyers don’t realize what points are and how they can benefit the borrower.

However, the mortgage question is “Does it make sense to pay discount points to get a lower mortgage rate for an adjustable rate mortgage?”

Before I answer the mortgage question, I want to define what discount points are and why some homeowners or first time home buyers will pay them.

Discount points represent 1% of the loan amount and are used to buy the mortgage rate down.

Discount points – not origination points – are prepaid mortgage interest that  the homeowner or first time home buyer is paying upfront at closing to get a lower mortgage rate knowing that over time the homeowner or first time home buyer will save movey with the  lower mortgage rate.

Paying discount points can be useful and can save the homeowner or first time home buyer money over time.  Time is the critical factor here because the homeowner or first time home buyer has to keep the mortgage long enough to recover the upfront costs (or points.)

That’s why it DOESN’T make sense to pay discount points to get a lower mortgage rate if you’re in a an adjustable rate mortgage, also known as a ARM.

The reason is because the mortgage rate in the adjustable rate mortgage is fixed for a certain amount of time, then adjusts.

So the problem is that the mortgage rate can change or adjust before the homeowner or first time homebuyer recovers their upfront points.

In conclusion, homewoners and first time home buyers – it doesn’t make sense to pay discount points to get a lower mortgage ratre if you’re applying for an adjustable rate mortgage.

You have to do the math to calculate the recovery period, but in all liklihood – you will not have enough time to recover your upfront discount points  before the mortgage rate adajusts.

The way to calculate this is to compare the mortgage payment for two different mortgage rates.

Take the difference in mortgage payment and divide it into the difference in lender fees – with discount points and without discount points.  This will tell the homeowner or first time home buyer how long it’ll take to recoup the upfront discount points.

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First Time Home Buyer? Can Your Mortgage Aount Be Greater Than Your Purchase Price?

This is a mortgage question or a mortgage misunderstanding I get when I talk to first time home buyers a lot of times.

The first time home buyer will tell me that they are buying a new home and the purchase price – let’s say – is $200,000.

They want to borrow – say $250,000 – for home renovations.  I say, “WAIT, STOP THERE.”

ALERT.  If you’re purchasing a new home and are applying for a conventional mortgage, you cannot borrow more money than the home purchase price or home value, whichever is lower.  The home value will be determined by the home appraisal.

Depending on the mortgage company, you may be able to find 100% financing (although it’s going to be difficult in the current mortgage market) or if you’re a veteran, you are eligible for 100% financing; otherwise, you’ll need to put down 3.5% to qualify for a FHA mortgage.

Now, first time home buyer,  there is another option.

If the home you want to buy needs to be renovated, you can apply for a FHA 203(k) mortgage, which is essentially a renovation loan.  Please note that the mortgage rates will be slightly higher for the FHA 203(k) mortgage.

So, you can borrow enough to purchase the home, plus get additional money to fix it up.  Awesome.

FHA 203(k) mortgages are only available if you plan on living in the home – that is, it’s your primary residence.  You’re not eligible for the FHA 203(k) or FHA 203 (b) mortgage (which is the traditional FHA mortgage), on a home that you won’t be living in as your primary residence.  That is, you can only get a FHA mortgage on a primary residence.

In conclusion, first time home buyer, your mortgage amount cannot be higher than your purchase price or home appraised value (whichever is lower).  Some down payment is required, unless you’re a veteran.

Otherwise, if the home needs some renovation you can apply for a FHA 203(k) mortgage which would provide you the money to buy the home plus the money to renovate it!

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• First Time Home Buyer? – Do You Want To Buy A Home In Short Sale?

For first time home buyers, buying a home can be a daunting process – even more so than buying a car, which I dread!

What now is complicating matters are the number of homes for sale that are being sold “short.”

Before I answer the mortgage question “Do you want to buy a home in short sale?” I’ll define what a short sale is.

A short sale is when a homeowner is selling their home for a price that is less than their current mortgage balance, or what they currently owe.

So for example, if you owe $200,000 on your mortgage but can only sell your home for $150,000, what happens to the $50,000 balance that you owe on the mortgage?  You don’t have an  extra $50,000 sitting around to fulfill your obligation to your mortgage company.

What happens to the $50,000 is that the mortgage company that you owe the money to will take a loss, so you are selling your home “short” of what you owe on the mortgage.

Now, as a first time home buyer, do you want to buy a home from a seller who is selling the home short?

There are 2 answers to this mortgage and first time home buyer question.

The first answer is that if you like the home and you can afford the mortgage, then “yes, ” by all means, put an offer on the home.  The fact that the seller owes more than what they’re selling the home to you for is irrelevant to you.  You like the home and want to live in it.

The second answer, however, relates to you obtaining a mortgage and your mortgage rate.

When you apply for a mortgage to buy the home, you are not able to lock the mortgage rate in until you get a clear settlement date.

What does this mean?

It means, first time home buyers, that when you make an offer on a home that is being sold short, both the seller AND the lender that is taking the loss have to agree on your purchase price.

So, you can make the offer for – let’s say – $200,000 and the seller agrees to the offer and sign the contract.  However, the lender that is taking the loss, has to agree as well.  This can take some time for them to come back with an answer – usually between 30 and 90 days, depending on the lender.

When you’re buying a home that ISN’T being sold short, you’re just dealing with the seller.  You sign a contract and have a settlement date.  Since you have a settlement date scheduled, you can lock your mortgage rate in as mortgage rates are locked for specific periods of time, like 30, 45, or 60 days.

However, when buying a short sale, you need to have the seller’s lender agree to the purchase price so you can establish a settlement date.  This way you know your mortgage rate lock period.

So in conclusion, first time home buyers, “do you want to buy a home in short sale?”

Yes, if you like the home!  You just want to wait until the seller’s lender signs off or agrees to the purchase price before you lock your mortgage rate.

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First Time Home Buyer? How To Get A Mortgage.

I get this mortgage question a lot from first time home buyers especially.

Here’s the answer.

There are a number of ways to get a mortgage.  (By the way, you aren’t treated any differently by the lender if you are a first time home buyer.)

The first way is to apply through your local bank. You would talk to a bank loan officer, take a loan application and provide them with the paperwork they need to get a credit decision.

The second way to get a mortgage, first time home buyers, is to ask someone you trust for a referral. That is, ask them where they got their mortgage.

The third way is to go online to get a mortgage. The process online is similar to face to face interaction. The only difference is that you’re dealing with a loan officer over the telephone instead of face to face.

Some people want to do business face to face, especially first time home buyers. However, do your due diligence when getting a mortgage.

Shop around. Contact your local bank. Get a mortgage rate quote and find out what the bank fees are.

Search online. There are many discount and reputable mortgage companies that advertise online that offer mortgage rates and costs that are markedly lower than the retail bank.

So the best way to get a mortgage would be to check your local bricks and mortar bank, ask someone you trust for a referral on where to get a mortgage, and search online.

There isn’t one best way to get a mortgage, as there are many options you have and as a first time home buyer, you want to know how to shop for a mortgage.

Remember, however, that the easiest and best way to get a mortgage isn’t the same thing as shopping for a mortgage.

Shopping for a mortgage requires some upfront reseach and work on your part. As a first time home buyer, you should especially do your research. If you do it correctly, you can end up saving a ton of money!

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First time home buyers – this is a important mortgage question I get: “What’s more important, my mortgage payment or mortgage interest rate?”

While the interest rate is really important as it’s the cost of the money you’re borrowing to buy your home, your mortgage payment is more important factor that you need to consider.

Here’s why.

It doesn’t matter how low your mortgage rate is, if you can’t afford the mortgage payment, you won’t be able to afford to live in the home.

So focus mainly on the mortgage payment.  What I mean, first time home buyers,  is the principal, interest taxes and insurance (PITI).

Here’s how it works, when you make a mortgage payment, some of your payment is applied to the principal balance and some of the payment goes to paying interest.

The loan term or amortization together with thte mortgage interest rate will determine how much of the mortgage payment will go to principal and and how much goes to interest.

On a 30 year fixed loan, for instance, in the early years of the loan, a larger portion of the mortgage payment goes to interest and less to principal.  As the loan is paid through time, a larger portion of the payment goes to reducing the principal balance and less to interest.

On a shorter term loan, like a 15 year fixed or 10 year fixed mortgage, a greater portion of the payment is applied to principal reduction and less goes to interest.

So, first time home buyers, when you’re buying your first home, determine how much you want to allocate to your mortgage payment.

Go to a mortgage calculator and enter the loan amount and see the principal and interest payment.

Next, if you don’t know what the annual property taxes are on the home you want to buy, estimate that they are 1.5% of the estimated purchase price.  Take that figure and divide it by 12 and add it to the principal and interest portion of the payment.

In addition, calculate the dwelling or hazard insurance portion of the mortgage payment by estimating .5% of the purchase price.  Divide this figure by 12 and add to the principal, interest and tax portion.

This will give you the PITI or principal, interest, taxes and insurance.

Focus on this figure first.  If the PITI payment is affordable, great!  If not, then you need to reduce the loan amount.

A reduction in interest rate isn’t going to lower the payment substantially.

If you’re looking at a shorter term loan and the PITI mortgage payment is too high, then consider a longer term loan – like a 30 year fixed mortgage.

In conclusion, if you’re a first time home buyer, focus first on your proposed mortgage payment, including the monthly tax and insurance installment.  The mortgage rate is secondary.  After going to a mortgage calculator and nailed down a mortgage payment range, then look at the various interest rates to see what makes most sense.

Related Posts:

• First Time Home Buyer? – Do You Want To Buy A Home In Short Sale?
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