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Understanding Mortgages

You may have found that everyone seems to have a tidbit of sage wisdom to share when they learn that you're looking for a mortgage, but not all "conventional wisdom" may be up to speed with the times. It's important to have good information. This is a big decision, and not knowing all of your options could greatly impact both your buying power and financing for your new home.

Let's debunk the top 3 most common mortgage misconceptions you may encounter as you consider your options for purchasing and financing a home:

Misconception #1: Credit Ratings

"Poor credit scores stay with you forever."

Actually, credit scores change each month. A late payment in the previous month can seriously affect your score, but if you make all subsequent payments on time, each month your score should improve. There are many factors that affect your credit score, so bring your questions to your loan officer when you're getting ready to finance a home.

Misconception #2: Mortgage Costs

"Lenders get you with 'up-front' fees."

Most reputable lenders will provide you with a free pre-qualification while you're shopping for your home. Typical acceptable up-front fees are the property appraisal and the credit report. It's okay to ask your loan officer about what fees to expect during the process, how much they will be and when they'll be due.

Misconception #3: Housing Affordability

"A 20% down payment is needed to buy a home."

Not at all. There are loan programs that allow 0% to 3.5% down payments. Through loan products backed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and the United States Department of Agriculture (USDA-RD), a wide range of possibilities may be available even if you may not have a lot of money saved. Many State Housing Agencies allow borrowers to receive cash assistance for down payments, and even "Conventional" mortgage loans can have low down payment options. If you only have a little saved so far, ask about what options may be available to you.

It can all seem overwhelming but it doesn't have to be. Through the years there have been plenty of changes to the offerings and laws surrounding the mortgage industry so an experience that your friend had years back may not apply to what it's like to get a mortgage today.  If your helpful neighbor or knowledgeable Uncle Fred are insisting on something that doesn't match up with what you've been hearing elsewhere, bring your question to the professionals.


Understanding Mortgages

You hand over your pay stubs, your tax returns, bank statements, photo identification and anything else that's been requested. Images of a frowning person with an enormous "Denied" stamp plague your dreams as you wait for news. Minutes feel like hours, hours like days, days like... okay we get the picture. It can be nerve-racking not knowing what's happening behind the scenes once you've submitted a mortgage application.

In truth, qualifying for a mortgage is a matter of matching up your income and your debts with equations so that your mortgage lender sees that you'll be likely to pay back your loan. The most important factors are usually these:

Housing Ratio

Housing Ratio equals Housing Payment, or principal, interest, taxes and insurance, divided by Gross Monthly IncomeThis is your total monthly housing payment as a percentage of your gross monthly income. Your total housing payment consists of principal, interest, property taxes, hazard insurance, mortgage insurance (if applicable) and any condo, co-op or Home Owners Association fees.

Debt Ratio

Total Debt Ratio equals Housing Payment, or P.I.T.I., plus Recurring Monthly Debt, divided by Gross Monthly IncomeThis is your total monthly housing payment plus recurring monthly debts as a percentage of your gross monthly income. Other debts include all other payments such as cars, credit cards, student loans, personal loans, retirement savings loans, etc.

How High Can They Go?

It varies by loan program and other factors, but the approximate range for your debt ratio is from approximately 33% to 43%.

Example:

If your total gross income is $5,000 per month, your total housing payment plus recurring monthly debt payments should not exceed approximately $1,650 for 33% ratio or $2,150 for a 43% ratio.

What's Right for Me?

The truth is, everyone is different. Some people are comfortable using a higher percentage of their income, and others are not. Family size, other expenses and lifestyle can all have an impact. These are topics you review with your loan officer during pre-qualification, so bring your questions. The goal is to find a payment and purchase price that will be comfortable for you.

For information purposes only and is not a commitment to lend. Programs, rates, terms and conditions are subject to change at any time. Availability dependent upon approved credit and documentation, acceptable appraisal, and market conditions. Not all programs available in all areas. Residential Mortgage Services, Inc. is a Maine Corporation headquartered at 24 Christopher Toppi Drive, South Portland, ME 04106. NMLS #1760; www.nmlsconsumeraccess.org; Visit http://www.rmsmortgage.com/about/state-licensing for list of state licenses. Equal Housing Opportunity.


Understanding Mortgages

Did You Know?

Improving your credit score may save you money on your home financing. That’s because higher FICO® (Fair Isaac Credit Organization) scores typically result in better interest rates. There are also industry and lender level guidelines relative to a borrower’s credit ratings and history that help determine your qualification for certain loan programs, your capacity to repay the loan and your interest rate.

FICO Score BreakdownHow FICO® Credit Scores Work

"FICO® scores" are the credit scores most lenders use to determine your credit risk. You have three FICO® scores, one for each of the three credit bureaus—Experian®, Equifax® and TransUnion®. Each credit score is based on information the credit bureau keeps on file about you. As this information changes, your credit scores will change as well.

  • When you apply for credit, lenders want to know what risk they would take on by lending you money.
  • Your 3 FICO® credit scores affect how much lenders will offer you at a given time.
  • Taking steps to improve your FICO® scores may help you to qualify for better rates from lenders.

FICO Score chart

*APR = Annual Percentage Rate ** Monthly payment does not include taxes or insurance

For information purposes only and is not a commitment to lend. Programs, rates, terms and conditions are subject to change at any time. Availability dependent upon approved credit and documentation, acceptable appraisal, and market conditions. Not all programs available in all areas. Residential Mortgage Services, Inc. is a Maine Corporation headquartered at 24 Christopher Toppi Drive, South Portland, ME 04106. NMLS #1760; www.nmlsconsumeraccess.org; Visit http://www.rmsmortgage.com/about/state-licensing for list of state licenses. Equal Housing Opportunity.


Understanding Mortgages

With rates trending upward after reaching historic lows, refinancing may seem like a terrible idea. Well, that all depends on what you’re trying to accomplish. Even if mortgage rates aren’t at rock bottom, they’re still quite good if you take a look at the double-digits they used to be “back in the day.” And when comparing your borrowing options between credit cards and other types of loans, refinancing may still be the preferred choice.

The specific reasons vary, but generally people refinance to save money. Perhaps it’s by obtaining a lower interest rate or by reducing the repayment term (how many years it will take to pay back) on your home loan. Maybe you’re looking to consolidate debts into a better rate than offered by credit cards. You might refinance to convert an adjustable loan rate to a fixed loan rate.

There are fees involved in a refinance, so you’re going to want to take a look at three elements to make sure that you’re making a good investment decision.

Here is a quick calculation:

                                 Total Cost of the Refinance

                    --------------------------------------------------------------            =           Break Even

                         How Much You’ll Save (monthly)

 

Divide the total cost of the refinance by the amount you would save per month. This will tell you how long you’d need to live in your home in order to "break even."  If you own the house longer than this then each month after that, you’re saving money.

Determining if refinancing is the right choice for you can seem complicated, since there are many factors to consider, but that’s why it’s important to have a trusted resource for your questions. Do the math and reach out to your loan officer. They’ll be happy to help.


Understanding Mortgages

There seems to be an invisible line dividing people into two camps when it comes to the question of getting a “fixed rate” or “adjustable rate” mortgage (often referred to as ARM). Imagine if you will, Camp Fixed Rate trading gazes from their cabin porch with Camp Adjustable Rate across the way, reclining beside their tent. There are pros and cons to either approach, depending on what you want to achieve with your mortgage. The most important difference is time.

First, what do these terms mean? A Fixed Rate Mortgage is a mortgage where the interest rate that you proceed with at settlement is exactly the same rate on day one as it is at the end of repayment, which could be decades later. An Adjustable Rate Mortgage, or ARM, is a mortgage where the interest rate adjusts on a schedule that you agreed to, and whatever the markets are doing at the time of the adjustment, that’s the direction that your rate will move, too.

Adjustable Rate Mortgages are initially lower than fixed-rate loans. They can be a good deal if you know you're going to stay in your home for a relatively short period of time. Using an adjustable rate mortgage does expose you to the risk that interest rates could rise, though, and drive up your monthly payments.

Fixed Rate Mortgages have higher initial interest rates but provide the peace of mind of knowing exactly what your rate will be for the entire term of your loan. With a fixed-rate mortgage there is no risk of your rate rising, even if general market interest rates rise.

Which camp is for you? Well, start by taking a good look at your budget and your tolerance for risk. Not a risk taker? Camp Fixed Rate it is. Take a look at how long you plan to stay in your home, too. Only planning on living there for a few years? Camp Adjustable Rate may be ideal while rates are historically low. Run scenarios with a Loan Officer and discuss what options are available to you. The question between the two isn’t “which one is better,” it’s “which one is better for you.”


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