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Permanent Link: http://ufdc.ufl.edu/IR00002624/00001
 Material Information
Title: Questions To Ask Before Choosing A Mortgage
Physical Description: Fact Sheet
Creator: Peart, Virginia
Publisher: University of Florida Cooperative Extension Service, Institute of Food and Agriculture Sciences, EDIS
Place of Publication: Gainesville, Fla.
Publication Date: 1995
 Notes
Acquisition: Collected for University of Florida's Institutional Repository by the UFIR Self-Submittal tool. Submitted by Melanie Mercer.
Publication Status: Published
General Note: "Publication date: September 1995."
General Note: "HE 3225"
 Record Information
Source Institution: University of Florida Institutional Repository
Holding Location: University of Florida
Rights Management: All rights reserved by the submitter.
System ID: IR00002624:00001


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FactSheetHE3225 TheInstituteofFoodandAgriculturalSciencesisanequalopportunity/affirmativeactionemployerauthorizedtoprovideresearch,educational informationandotherservicesonlytoindividualsandinstitutionsthatfunctionwithoutregardtorace,color,sex,age,handicap,ornational origin.Forinformationonobtainingotherextensionpublications,cntactyourcountyCooperativeExtensionServiceoffice. FloridaCooperativeExtensionService/InstituteofFoodandAgriculturalSciences/UniversityofFlorida/ChristineTaylorStephens,DeanQuestionstoAskBeforeChoosingaMortgage1 VirginiaPeart,Ph.D.2Failingtoshopcomparativelyamonglocal mortgagesourcescanbecostly.Forexample,the differencebetweenan8-percentand9-percentsimple interestrateona$60,000fixedratemortgagewill save$35permonthand$12,600over30years.A differenceofthreediscountpointswillsave$1,800in closingcosts. Tomakeagooddecisionaboutthe``best mortgage''foryou,youneedbasicknowledgeof currentmortgagealternatives.But,thatknowledge aloneisnotenough.Youalsoneedtofindand analyzeavailableoptions.Allmortgagesofthesame typearenotexactlyalike.MORTGAGESOURCESTraditionalhomemortgagelenderssavings andloans,banks,mortgagefinancecompanies,and FarmersHomeAdministrationofficesarethe mostreadilyavailablesourcesofmortgageloans. Moreandmorecreditunionsofferthesame kindsofmortgageinstruments,rates,andtermsasare availablefromtraditionalmortgagelenders,butthey tendtofavor15-yearinsteadof30-yearloans.SEARCHMETHODSHerearesomeideasonhowyoumightlocate yourmortgageoptionsandnarrowthelisttoafew prospects: Somenewspaperspublishaweeklymortgagerate reportintheSundaypaper.Ifalllocallenders donotchoosetoparticipate,thelistisnot complete.Still,ithelpsifyoufollowratetrends andweedoutsomechoicestoprovideyouwitha basisforcomparison. Checkmortgageadvertisementsinnewspapers anddirect-mailpromotions.Adsshouldbe interpretedcarefullyandnotbecomethesole basisforaselectiondecision.Theydonotusually containenoughinformationforafaircomparison. Localrealtorsareoftenanexcellentsourceof currentinformationaboutmortgageratesand terms.Mostagenciessurvey(byphone)allmajor lendersintowneveryweekortwoasaserviceto theirclientele(andthebuyersoftheirclients' homes).Hereagain,theinformationgatheredis probablynotenoughtomakeagoodchoice. 1.ThisdocumentisFactSheetHE3225,aseriesoftheHomeEconomicsDepartment,FloridaCooperativeExtensionService,InstituteofFood andAgriculturalSciences,UniversityofFlorida.Publicationdate:September1995.OriginallypublishedasFactSheetHB-11inJuly1993. AdaptedforuseinFloridafrom``QuestionstoAskBeforeChoosingaMortgage''byWandaW.Shelby,FamilyResourceManagement,and EleanorJ.Walls,HousingSpecialist,ArkansasCooperativeExtensionService.ReviewedbyLauraFuller,HeadofMortgageDepartment, AssistantVicePresident,SunBankofGainesville,Florida.Reviewed:September1995. 2.VirginiaPeart,associateprofessor,Housing,HomeEconomicsDepartment,CooperativeExtensionService,InstituteofFoodandAgricultural Sciences,UniversityofFlorida,GainesvilleFL32611.

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QuestionstoAskBeforeChoosingaMortgage Page2Ifyoucannotgetacomprehensivemortgage report,investthetimetocallseveralfinancial institutionsfortheirratesandbasiccreditterms.Call varioustypesoflenders,includingsavingsandloans, banks,mortgagecompanies,yourcreditunion(if applicable),andanyotheravailabletypeoflender.MORTGAGEAFFORDABILITYThemaximumamountofyourincomethatmay bespentonyourhomemortgageissetbythelender orspecifiedinthemortgageinstrument.Thisis calculatedwhenyouapplyforaloantoseeifyou qualifyforaparticularmortgage. Whenyoucomparemortgagealternatives,itmay behelpfultoestimatetheiraffordabilitybeforeyou apply.Lendersusuallyfollowthesebasicguidelines todeterminehowlargeamortgagetogrant. Yourtotalmonthlyhousingexpense(principal, interest,taxes,andinsurance)shouldnotexceed 29percentofyourstablemonthlyincome. Yourtotalmonthlydebtshouldnotexceed41 percentofyourstablemonthlyincome. Itisalsohelpfultoseehowvariousinterestrates affectthemonthlypaymentamount.Youcanbuyan inexpensivepaperbackbookofamortizationtablesto findthemonthlyprincipalandinterestpayment amountsforthemortgagesyouareconsidering.The paymenttable canalsobeusedtocalculatean estimate. Table1. PAYMENTTABLE (Monthlypaymentforeach1,000borrowed) Interest Rate 15years 25years 30years 7.0% $8.98 $7.07 $6.65 8.0 $9.56 $7.72 $7.34 9.0 $10.15 $8.39 $8.05 10.0 $10.75 $9.09 $8.78MORTGAGEANALYSISTOOLSOnceyouhavecompletedthemortgagesearch, narrowyourlisttothetwoorthreemostappealing mortgagesandmakeathoroughinvestigationand analysis.Answerstothefollowingquestionsareyour toolsformakingacomparativemortgageanalysis theonlywaytoreduceyourriskandincreaseyour opportunityforsavings.QUESTIONSFORALL TYPESOFMORTGAGES Whatisthesimpleinterestrateandnumberof discountpoints? Whatotherrate/pointcombinationsareavailable? Discountpointsareaformofinterestwhichis paidupfrontatclosing.Eachpointequals1 percentoftheloanamount. Mostlendersofferachoiceofinterestratesand discountpointsthelowertheinterestrate,the morepointscharged(onepointequals approximately1/4of1percentoftheinterest rate). Asageneralrule,thelongeryouplantostayin yourhome,thegreatertheadvantageofpaying morepointstogetalowerinterestrate. Anadditionalconsiderationisthat(fornewloans only,notrefinancing)pointsarefullytax deductibleintheyearpaid(unlesstheyare financed). Whatistheannualpercentagerate(APR)? TheAPRtakesintoaccountallcostsoffinancing includingtheinterest,discountpoints, mortgageinsurance,etc.andamortizesthem overthefulltermoftheloan.Thisgivesyouan easywaytocomparemortgages,ifyoukeepthat loanuntilyoupayitoff.Ifyoudon'tintendto stayinthehomethatlong,theAPRbecomes biasedandisnotthebestbasisforcomparison. Willyoulockintheinterestrateuntilclosing? Theloanapprovalprocesstypicallytakesfrom threetoeightweekslongerifapplications havebackedup.Ifnot``lockedin,''themortgage

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QuestionstoAskBeforeChoosingaMortgage Page3interestratecouldchange(upwardordownward) beforeclosing. Somelenderswilllockinratesatnochargefor 45to60days;otherschargeafee.Someallow youtolockinbytelephoneatanytimeduring loanprocessing.Thisisadvantageouswhen marketratesfall. Whatistherequireddownpayment? Whatwillmortgageinsurancecost? Mostmortgagesrequirea20-percentdown paymentunlessyoupayformortgageinsuranceto protectthelenderincaseyoudefault.Getting mortgageinsurancecanreduceyourdown paymenttoaslittleas5percentofthehome's appraisedvalue.However,manycompaniesno longerinsurelowdownpaymentloansinFlorida becauseofcurrenteconomicconditions. Privatemortgageinsuranceusuallyrequiresyou topayafirst-yearpremium(upto1percentof theloanamount).Afterthat,youpayasmaller percentageeachyearuntilyourloanbalanceis reducedto80percentofyourhome'svalue.At thatpointyourinsurancepaymentsandcoverage shouldstop. ForFederalHousingAdministration(FHA) loans,youarechargedafixedinsurancepremium (between2percentand4percentoftheloan amount),dependingonthelengthofthe mortgagetermandwhetherthepremiumispaid upfrontorfinanced. Isthereanapplicationfee? Istheapplicationfeerefundable? Somelendershavenoapplicationfee.Others maychargeasmuchas$250andmayormaynot refunditiftheloanisnotapprovedorifyou decidenottotaketheloan. Whataretheclosingcosts? Theclosingcostscantotal2to4percentofthe loanamount.Mostlenderscangiveyouaform whichestimatesclosingcostsforyourpotential loan.Thisestimatemayincludetheorigination fees(formakingtheloan)andtitlechangesand items(suchasinsuranceandtaxes)whichmustbe paidatclosing.Theremaybeadditional expensesthatarenotlistedontheform,and someofthefeesmaybepaidbyeithertheseller orbuyer.Askthelenderaboutanyother possibleclosingcosts,inadditiontothoseonthe standardform. Ingeneral,theactualclosinganddocument preparationsmaybeconductedbyanattorneyor atitleinsurancecompany(usuallyatno additionalchargeiftitleinsuranceispurchased). Arethereanyprepaymentpenalties? Today,mostmortgagesdonotchargepenalties forprepaymentofprincipal.Thisisimportantif youlaterdecidetosellyourhomeorifyouwant tomakeextrapaymentstoshortentheloanterm. However,loanswithprepaymentpenaltiesmay havelowerfinancecosts.Suchaloanmaybea goodchoiceifyoudonotintendtopre-payor sellthehomewithinthepenaltyperiod. Istheloanassumable? Anassumableloancanbepassedontothebuyer ofyourhomeifyousell.Itmayormaynot guaranteethesameinterestrate.Eitherway,the closingcostsonanassumedloanarelessthanfor anewloan,sothatcharacteristicofaloanmay helpyousellyourhomeinthefuture. Today,fixedratemortgagesarerarelyassumable. Theyhavea``due-on-sale''clause.However,most adjustableratemortgagesareassumable. Istherealatepaymentcharge? Mostlenderschargealatepaymentfee,butthey varyinhowmuchischargedandwhenthefeeis imposed.QUESTIONSFORADJUSTABLE RATEMORTGAGES(ARMS) Istheinitialinterestratediscounted? Whenandhowwilltheinterestrateeverchange? Somelenders(andbuilders)mayofferverylow initialinterestratestoattractborrowers.Atthe endofatimespan(usuallyoneyear)theinterest

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QuestionstoAskBeforeChoosingaMortgage Page4rateisraisedtoitsnormallevelaccordingtothe loanagreement'sformula. Unlessyouintendtohavethemortgageforonly ashorttime,itisbettertomakecomparisons basedonthe``formula''interestrateratherthan theinitialrate.But,ifyouplantosellsoon,the savingsfromtheinitialdiscountedinterestrate canmeansubstantialsavingsforyou. Howoftencantheinterestrateandpayment amountchange? Ingeneral,theshortertherateadjustmentperiod, thelowertheinterestrateandviceversa. Frequentadjustmentsareadvantageouswhen ratesarefallingbutofferlessprotectionwhen ratesrise. Whatisanadjustmentindexandwhenisitused? Theinterestrateofanadjustableratemortgage followsapublishedmarket``index.''Indexes baseduponU.S.Treasurysecuritiesreflecttrue economicconditions.Indexesbasedupon``cost offunds''tofinancialinstitutionsnationwide reflectwhatfinancialinstitutionsmustpayto attractdeposits. Ingeneral,indexestiedtolong-termindicators (suchasthree-yearandfive-yearsecurities)are lessvolatilethanthosetiedtoshort-term indicators(suchasthree-monthTreasurybills). Longtermisadvantageouswhenratesarerising; shorttermisbetterwhenratesarefalling. Whatisthemargin? Themarginorspreadabovetheindexdetermines whatyourmortgageinterestratewillbeateach adjustmentdate.Thesmallerthemargin,the closeryourinterestrateistotheindexrateand thelessyoupay.Rememberthatthesame marginovertwodifferentindexesmayproduce twodifferentinterestratesiftheindexesare different. Arethereperiodicandlife-of-loanratecaps? Ratecapslimithowmuchtheinterestratecan riseorfallattheadjustmentdatesandoverthe lifeoftheloan.Ingeneral,thelowertherate caps,thesmallertheriskbutthehigherthe startinginterestrate.MostARMstodayhave5percentto7-percentlifetimeratecapsand1percentto2-percentannualratecaps. Itisagoodideatofigureout(oraskthelender toprovide)whathappenstothemonthlypayment amountif:(a)ratesrisetotheupperlimitsofthe caps(the``worstcasescenario'')and(b)ifrates drop2or3percent.Thisprovidesaclearpicture oftheriskandtherealisticopportunityfor savingsifratesfall. Aretherepaymentcaps? Isnegativeamortizationpossible? Ifinterestratesrise,paymentcaps(limitsonyour monthlypayment)canchangewhentheinterest ratechanges,causingyourdebttogrowinsteadof shrink.Loanswhichallowyourdebttogrow (negativeamortization)are low ratebecauseof theirhighrisk.However,loanswithpayment capscanbestructuredwithratecapstoavoid negativeamortization.