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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.”


Understanding Mortgages

You’re a pretty savvy self-educator. You dedicate a little time to read up on a topic and ask questions from people in the know so you can make an informed purchase or weigh the pros and cons of a big decision. Now you decide that home ownership is worth investigating and suddenly there’s a problem… not everybody seems to agree on what’s what.

Not all mortgage companies post their interest rates on their websites, and those that do often ask for some pretty personal information before providing anything in return. And what is the most important thing to focus on when choosing your mortgage company? The rate, the monthly payment, how fast a company says they can deliver an approval, how well they communicate, the number of references… something else?

 

Discussing Mortgage Rates

Let’s start with the big question: Why all the secrecy around rates?  Here’s the surprise: It isn’t secrecy at all. Starting with “what’s your rate?” is like asking what the weather is today in the United States. Not such an easy question to answer unless you have more specific information, is it? 

Mortgage rates fluctuate with the markets throughout the day, so even within a day you may see a different rate depending on what’s going on in the markets when you check. Your credit score plays a role as well. If you have a strong credit history showing that you pay your bills on time and repay your loans, you stand to see slightly better rate options than someone who defaults on their debt obligations.

 

Looking at What’s Important

Sure, rates are easy to line up in a row and spot the lowest, but there are other factors that affect your payment and loan terms. It sounds farfetched, but the lowest rate doesn’t always add up to the lowest monthly payment. There are different kinds of mortgages, each structured for different circumstances. The amount of your down payment and other factors, such as the location of your property, could affect which loan products are available for you to consider and how much comes out of your pocket.

What is most important to you? Think about how quickly you want to repay your debt, how much you want to pay per month and how much money you’re willing to put forward as down payment. Timing is an often overlooked factor that turns out to be critically important in a home purchase transaction as well.

Are you starting to see why mortgage companies want to start a meaningful conversation with you before talking about options? They could toss numbers at you all day long, but without taking a good look at your specific situation, that wouldn’t do you any favors.

You’ve got this, savvy self-educator. Loan Officers are there to help you find the best fit for your exact situation so bring your questions. Share what is most important to you and what fears you might have. Find out how your mortgage company will keep you and the other parties in the home purchase updated. Getting a mortgage is a big decision, but it doesn’t have to be a scary one.


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