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Home buying is a big move in anyone's life. Read on to learn the terminology of the trade so that you can get the best deal on your home purchase.
An article published in USA Today on February 3,
2005 revealed that the benchmark 30-year fixed-rate mortgage slipped to its lowest point since October 2004, falling to 5.6 percent,
according to a national survey of large lenders.
Anyone who has purchased a house has, at times, felt overwhelmed by the process of acquiring a home loan, using mortgage calculators, or finding a real estate agent. If you're ready to buy a house, the following tips, terms, and definitions can clear up some of the confusion that could cause problems during your new home purchase.
Giving Credit
If you're ready to purchase a home, a good way to start the process is by examining your financial situation. It will be the driving factor in determining the type of home you can afford. Begin by contacting the three major credit bureaus (Experian, TransUnion, and Equifax) to be sure your credit history is free of outdated or false information. In most cases, an inaccurate credit report can't be fixed overnight. You'll want to be sure that your credit reports are accurate before you shop for a mortgage.
If you're ready to purchase a home, a good way to start the process is by examining your financial situation. It will be the driving factor in determining the type of home you can afford. Begin by contacting the three major credit bureaus (Experian, TransUnion, and Equifax) to be sure your credit history is free of outdated or false information. In most cases, an inaccurate credit report can't be fixed overnight. You'll want to be sure that your credit reports are accurate before you shop for a mortgage.
Hidden Costs of a Home Purchase
Before you officially make a home purchase, a lender will often ask for an appraisal of the house and property to determine its value. While the national average for a standard residential property appraisal is around $350, fees do vary by region from approximately $250-$500 for standard properties. This fee is usually split between the buyer and seller. Home inspection, which is different than an appraisal, may also be required. Home inspection can be done cheaply depending on where you live and the experience of the inspector, but the average is $100 per hour. Sometimes lenders charge a fee to apply for a home loan, get pre-approved for a loan, or run a credit report. Finally, mortgage insurance can be necessary if you put down less than 20 percent of the purchase price.
Before you officially make a home purchase, a lender will often ask for an appraisal of the house and property to determine its value. While the national average for a standard residential property appraisal is around $350, fees do vary by region from approximately $250-$500 for standard properties. This fee is usually split between the buyer and seller. Home inspection, which is different than an appraisal, may also be required. Home inspection can be done cheaply depending on where you live and the experience of the inspector, but the average is $100 per hour. Sometimes lenders charge a fee to apply for a home loan, get pre-approved for a loan, or run a credit report. Finally, mortgage insurance can be necessary if you put down less than 20 percent of the purchase price.
How Much Is Too Much?
Mortgage calculators offer an easy way to determine how much home you can afford. To use a mortgage calculator, you enter information about how much you want to borrow, how long you need to repay the loan, the corresponding or prevailing interest rate, and the day you want to start repaying the loan. Using these numbers, the calculator automatically figures out your expected mortgage payment. Don't forget about homeowners insurance, title insurance, and property taxes. These charges are often added to your monthly payment and can add hundreds of dollars to your mortgage payment each month.
Mortgage calculators offer an easy way to determine how much home you can afford. To use a mortgage calculator, you enter information about how much you want to borrow, how long you need to repay the loan, the corresponding or prevailing interest rate, and the day you want to start repaying the loan. Using these numbers, the calculator automatically figures out your expected mortgage payment. Don't forget about homeowners insurance, title insurance, and property taxes. These charges are often added to your monthly payment and can add hundreds of dollars to your mortgage payment each month.
A Defining Moment of a Home Purchase
The following terms are among the most common you'll hear when you apply for a home loan. Knowing what the terms mean and how they relate to your home purchase should make the process less complicated.
The following terms are among the most common you'll hear when you apply for a home loan. Knowing what the terms mean and how they relate to your home purchase should make the process less complicated.
- Annual Percentage Rate:The value created according to a government formula intended to reflect the true annual cost of borrowing, expressed as a percentage. This includes any fees or prepaid interest involved in obtaining a loan.
- Down Payment: The portion of the home purchase price that is paid in cash and is not part of the home loan.
- Equity: The difference between fair market value of a property and the amount that is still owed on its mortgage and other liens.
- Escrow:Money, property, a deed, or a bond placed into the custody of a third party for delivery to a grantee (seller) only after specific conditions have been met.
- Insurance:A form of protection against a specific loss over a period of time that is secured by the payment of a regularly scheduled premium.
- Interest:The fee charged for the use of a sum of money.
Loan Sweet Loan
There are many different types of loans available to borrowers, and each has specific benefits that should be understood and weighed against alternatives before a decision is made. While a Realtor® might help you make sense of a home purchase, it is best to consult a lender when exploring home loan options. Let's take a look at a few common mortgage types.
There are many different types of loans available to borrowers, and each has specific benefits that should be understood and weighed against alternatives before a decision is made. While a Realtor® might help you make sense of a home purchase, it is best to consult a lender when exploring home loan options. Let's take a look at a few common mortgage types.
Fixed Rate Mortgage:If you see your home purchase as a short-term investment, a fixed rate mortgage might be the best
home loan for you. A fixed rate mortgage is among the most recognizable types of home loans. These traditional loans have a "fixed interest rate"
over the life of the home loan. Your monthly mortgage payment for interest and principal never changes, but your escrow expenses, such as property
taxes and insurance, often will. Currently the average rate for a fixed rate mortgage is about 5.1 percent. Check with your lender for specific rates in your area.
Adjustable Rate Mortgage (ARM):
Adjustable rate mortgages are controlled by short-term interest rates set by the Federal Reserve Board. This rate fluctuates over the course of time.
While adjustable rate mortgages typically start at a lower interest rate (which of course translates to a lower monthly payment), the interest rates
and payments can fluctuate wildly depending on the state of the market.
More Financing Options
- A balloon mortgage is the preferred option for anyone who wants a lower interest rate but is uncomfortable with adjustable rate mortgages.
- Jumbo Loan: Jumbo loans are larger than average loans.
- Hybrid ARM: Hybrid ARMs function much the same way as standard ARMs except that they let you lock in a rate for up to 10 years before it adjusts to the market rate.
Final Thoughts
A variety of financial institutions and state government lenders can help you finance a home purchase. Shopping for a home loan is no different than shopping for any other large purchase. Find a real estate agent you can trust and ask for the names of a few lenders that they have worked with in the past. Finally, check your local paper or the internet for the various lender interest rates in your area. Contact as many lenders as possible to see who can offer you the best mortgage and rates. Sometimes interest rates and terms vary from one lender to the next. You can definitely save on mortgage fees and other hidden costs if you shop around for the best lender.
A variety of financial institutions and state government lenders can help you finance a home purchase. Shopping for a home loan is no different than shopping for any other large purchase. Find a real estate agent you can trust and ask for the names of a few lenders that they have worked with in the past. Finally, check your local paper or the internet for the various lender interest rates in your area. Contact as many lenders as possible to see who can offer you the best mortgage and rates. Sometimes interest rates and terms vary from one lender to the next. You can definitely save on mortgage fees and other hidden costs if you shop around for the best lender.
Sources
- American Bar Association:
http://www.abanet.org/publiced/practical/homefinance_lender.html - U.S. Department of Housing and Urban Development:
http://www.hud.gov/buying/index.cfm - www.feeappraiser.com
Edward Castro has extensive experience as a creative media writer. His client portfolio has included such notables as Hewlett-Packard, Sony Computer Entertainment, Shockwave, AtomFilms, GameBlast and Mervyn's California. In his current position, Ed is developing the marketing strategy of an Internet start-up company specializing in Japanese trade goods.