The Real Estate Mortgage.........
Do I have to PLEDGE my
First Born Child to Get One?
REinfo4me.com
Sometimes it would seem that way!
The real estate mortgage process can be very confusing.
Some basic knowledge will help you along your way.
There are so many loan products out there, that it is impossible to cover them all.
I will attempt to give you a run down on some of the most common, especially those of interest to the first time buyer.
There are some "no doc" loans out there but, they will cost you in higher interest rates.
You will need to get together certain documents for just about any loan.
All buyers should make sure they have the following before applying for a real estate mortgage:
Tax returns for the last two years.
Your last three months of bank statements.
Your social security numbers (with proof).
Your two most recent pay stubs.
Verification of employment, usually done by the lender.
Original divorce decree if applicable.
Account balances in all savings and retirement accounts.
If you are self employed, be prepared with profit and loss statements as well as company tax returns from your accountant.
It is extremely important that your taxes are in order!
The lender will check your returns with the IRS.
If you are having tax problems, or have tax liens against you, these must be cleared up first, or your application will run into big trouble.
If you need help, click on the link:
Once you have your finances and documentation in order, you will need to decide what kind of real estate mortgage to apply for.
Do you want a fixed rate loan or, are you willing to go for an adjustable rate mortgage (ARM)?
Fixed Rate: Means that your payments and interest rate will remain the same throughout the term of the loan.
This is good if you want to know where you stand each month and also if you are intending staying in your home more than five to seven years.
Fixed rate interest is usually higher than the start rate for an ARM.
Adjustable Rate (ARM): This type of real estate mortgage has , by it's very nature, an adjustable repayment schedule.
ARM interest rates are normally lower to start with.
This means that you could qualify for a higher loan amount than with a fixed rate loan.
ARM's are normally good if you want to stay in your home for less than seven years.
The break even point between a fixed and an ARM is currently about seven years.
This means that if you continue with your ARM and don't refinance, after seven years you will end up paying more for your purchase over the life of the mortgage.
A good ARM will normally have a fixed rate for the first two years and then start to adjust upwards.
The interest rate you pay is tied to certain real estate and cost of money indexes.
The index for your real estate mortgage is stated by the lender at the time of your application.
There are also interest only and negative amortization real estate loans out there.
Interest Only: As the name states, you are paying interest only and nothing is going towards your loan balance.
These type of loans again are usually adjustable and have a lower start rate than fixed rate mortgages.
Negative Amortization: This is a risky one in a down real estate market.
The start rate is extremely low, typically an interest rate of one or two percent.
Instead of building equity in your home, this type of real estate mortgage, with below market financing, will make up the difference in the cost of money loaned to you, by adding to your loan balance!
You could very easily end up owing more than your home is worth especially in a declining value real estate market.
It's a gamble! Are you willing to bet that inflation will push the value of your home more than the negative amortization adds to your principal balance?
The only real reason to go for this type of financing is to get more of a loan than you could normally qualify for.
Now that you have decided what type of real estate mortgage is best for your circumstances, you have to decide on the term (how long) of the loan.
40 Year: The life of this real estate loan is relatively new. The advantage is that it gives you smaller monthly payments, but you will not build up your equity very fast and you will pay a lot more in interest.
30 Year: This is the loan your parents probably have or had. It is the most common and the principal balance is amortized (spaced out) over the thirty year time frame.
15 Year: This term is becoming more popular as it pays down the loan balance over fifteen years, saving you a bunch in interest. It also normally has a lower interest rate by about a half percent than the 30 year term.
5/25 Year: This is a hybrid loan term. The first five years are at a fixed rate, then the loan converts for the remainder of the term to a new interest rate, usually an ARM.
As you can see, you have to choose what type of loan repayment AND what term of loan to go for.
You will be stretching your dollar for the first year, at least until you get the full advantage of your interest payment tax deduction.
Yes, interest paid on a real estate loan for your residence or for one vacation home is fully tax deductible! This may change in years to come, but this is the way it has historically been. Check with your tax professional.
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