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Last updated:
06/08/2008
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Mortgage Basics
Choosing the Best Loan Program
Loan programs come in many forms and come from many sources. Just as the loan
structure, like a 30 year fixed rate mortgage, can affect your interest rate and
monthly payments, the source of funding for your loan can also affect your rate
and payments. The source of funding can also affect the amount of your down
payment and closing costs.
If you have at least 3% of the loan amount to use as a down payment, you may
consider the most common type of loan, a conventional loan. These loans consist
of conforming loans, which are secured by government sponsored entities (GSE)
such as Fannie Mae and Freddie Mac, and jumbo loans, which are funded by private
investors for loan amounts higher than the limits set by the GSE's.
Conforming loans are funded by Fannie Mae (FNMA) and Freddie Mac (FHLMC). These
companies do not lend money directly to you, but work with lenders across the
country to offer mortgage loans to meet your needs. As a secondary market for
mortgage loans, they purchase mortgages from lenders and package them into
securities that can be sold to investors.
If you are looking for a large loan amount to purchase or refinance your home,
you could consider a jumbo loan, which has a higher loan amount limit than the
limits set by Fannie Mae and Freddie Mac. Because jumbo loans cannot be funded
by these two agencies, they usually carry a higher interest rate.
The federal government and other state, local and private entities have
developed programs to help you purchase a home with a low down payment. If you
are a first time homebuyer or have low to moderate income, you may be eligible
for a mortgage insured by the Department of Housing and Urban Development (HUD)
through the Federal Housing Administration (FHA). While FHA does not make or buy
loans, they insure FHA loans so that if you default on the loan, the lender will
get reimbursed. You may be able to get an FHA loan with a low down payment of
only 3% of the loan amount or less. While there are limits to the size of FHA
loans, they are generous enough to handle moderately priced homes almost
anywhere in the country.
If you are a veteran or qualify by military service or other entitlements, FHA
mortgage insurance can also be combined with a guarantee from the Veteran's
Administration. VA mortgages were created to help veterans achieve the American
dream and buy their own homes. VA loans offer low to no down payments with many
of the same benefits as an FHA loan.
If you have bad credit, you may not qualify for a conventional loan. In this
case, you could consider a subprime loan. Like other loans, subprime loans come
in many forms based on the terms, loan amount and loan to value ratio you are
looking for. In addition companies will look at your credit and give you a
credit grade, which will help them determine the best loan for your situation.
With less than perfect credit, you can expect to pay higher interest rates
because of the higher risk associated with making a loan to someone with a poor
credit history.
About Interest Rates
Research Rates
Begin by checking out current interest rates and rate movements when shopping
for a mortgage. Mortgage rates generally rise and fall along with Wall Street
securities and generally reflect the overall direction of interest rates. By
keeping an eye on mortgage market trends and key economic indicators, a borrower
has a better chance of obtaining interest rate savings.
What is APR?
A tool used to compare loans across different lenders is the Annual Percentage
Rate (APR). The Federal Truth in Lending law requires mortgage companies to
disclose the APR when they advertise a rate. It is designed to represent the
true cost of the loan to the borrower, expressed in the form of a yearly rate.
The purpose is to prevent lenders from hiding fees and upfront costs behind low
advertised interest rates.
Meeting with a Lender
You may prefer to meet with the mortgage company before house hunting to
determine in advance how much you can afford and the mortgage amount for which
you can qualify. This step is called pre-qualification and can save you time and
trouble by making certain you are looking in the correct price range.
Lock in Your Rate
A lock in, also called a rate lock or rate commitment, is a lender's promise to
hold a certain interest rate and a certain number of points for you, usually for
a specified period of time, while your loan application is processed. Depending
upon the lender, you may be able to lock in the interest rate and number of
points that you will be charged when you file your application, during
processing of the loan, when the loan is approved, or later.
If you want to know more about mortgage basics, please visit
www.bankrate.com.
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