Excellent - 750 - 850
Good - 660 - 749
Fair - 620 - 659
Poor - 350 - 619
Unless you plan on using your own money to purchase your
home, you are most likely going to want to borrow money from
a lender and spread payments to the loan out over a period
time. With the advent of the Internet and a volatile mortgage
market, there is a wide variety of loan options to choose
from. As your representative in the process of buying your
home, it is our responsibility to guide you down the best
possible path throughout the process.
CHOOSING A LOAN
Back to Top
literally hundreds of lenders offering a multitude of loan
options that makes determining the best loan for your
situation a complex endeavor. Since you may be making
payments on a loan anywhere from 15 years to 40 years
depending on the term, it is imperative that you work
closely with us in choosing the right lender and loan that
works best for you. What follows is a breakdown of the
generally available residential loan programs.
This is a home loan with an ensured interest rate that
will remain at a specific rate for the term of the loan.
About 75 percent of all home mortgages have fixed rates.
One reason for this is that most homes sold are to
buyers who plan on living in their property for many
years. When you choose the length of your repayment
(usually 15, 20 or 30 years), keep in mind that while
shorter term loans may have higher monthly payments,
they also let you pay less interest and build equity
20-year fixed-rate loan
The 20-year mortgage often offers a lower interest rate
when compared to a 30-year loan. This loan amortizes
principal and interest over a 20-year period, 10 years
less than the traditional 30-year mortgage. This may
save you a considerable amount of total interest when
paid over the life of the loan.
15-year fixed-rate loan
The advantage of a 15-year mortgage is that its interest
rate is generally lower than a 30-year or 20-year loan.
Such a short-term loan will save you a significant
amount of interest over the life of the loan. By paying
off the loan in only fifteen years, you also build up
equity in your home sooner. A 15-year loan allows you to
own your home clear of debt much quicker when compared
to longer term loans. This may be important if you are
approaching retirement or have other large expenses to
cover such as financing your children's education.
However, the monthly payments you make on a 15-year loan
will be significantly higher than those you make on a
30-year or a 20-year loan for the same loan amount.
With an adjustable-rate mortgage (ARM), the interest
rate you pay is adjusted from time to time to keep it in
line with changing market rates. This means that when
interest rates go up, your monthly loan payment may go
up as well. On the other hand, when interest rates go
down, your monthly loan payment may also go down. ARMs
are attractive because they may initially offer a lower
interest rate than fixed-rate loans. Since the monthly
payments on an ARM start out lower than those of a
fixed-rate loan of the same amount, you should be able
to qualify for a larger loan.
The chief drawback, of course, is that your monthly
payment may increase when interest rates go up. The
types of people who typically benefit from an ARM are
those that are planning to move or refinance in the near
future, people with a high likelihood of increasing
their income in later years, and people who need lower
initial interest rates on their loans to be able to buy
a home. How much your payment can increase will depend
on the terms of your loan.
Before applying for an ARM, be sure you know how high
your monthly payment can go - the so-called 'worst-case
scenario'. An ARM has two 'caps' or limits on how large
an interest rate increase is permitted: One cap sets the
most that your interest rate can go up during each
adjustment period, and the other cap sets the maximum
total amount of all interest adjustments over the life
of the loan. The rates on an ARM usually change once or
twice a year, and there is typically a lifetime rate cap
(or limit) on both the amount of each individual rate
adjustment, and the total amount the rate can change
over the whole term of the loan.
Example: If your loan starts at 5
percent, has a 2 percent per-adjustment cap, and a
lifetime adjustment cap of 4 percent, you know that
your loan might go up to 7 percent the first time
the rate changes. You also know that the rate can
never go over 9 percent over the life of the loan (5
percent start + 4 percent lifetime cap). Only you
can determine if you would feel comfortable paying
this interest rate sometime in the future.
Some ARMs offer a conversion feature which allows you to
convert from an adjustable-rate to a fixed-rate loan at
certain times during the life of your loan. Ask your
lender about this feature when researching ARMs. One
important thing to know when comparing ARMs is that the
interest rate changes on an ARM are always tied to a
financial index. A financial index is a published number
or percentage, such as the average interest rate or
yield on Treasury bills.
HELOC Loan: What is a Home
Equity Line of Credit?
A home equity line is a form of revolving credit in
which your home serves as collateral. Because the
home is likely to be a consumer's largest asset,
many homeowners use their credit lines only for
major items such as education, home improvements, or
medical bills and not for day-to-day expenses. With
a home equity line, you will be approved for a
specific amount of credit -- your credit limit --
meaning the maximum amount you can borrow at any one
time while you have the plan. Many lenders set the
credit limit on a home equity line by taking a
percentage (say 75%) of the appraised value of the
home and subtracting the balance owed on the
Appraisal of home $100,000
Percentage x 75%
Percentage of appraised value $75,000
Less existing loan - $40,000
Potential credit line = $35,000
In determining your actual credit line, the lender
will also consider your ability to repay by looking
at your income, debts, and other financial
obligations, as well as your credit history.
Home equity lines of credit often set a fixed time
during which you can borrow money, such as 10 years.
When this period is up, the plan may allow you to
renew the credit line. But in a plan that does not
allow renewals, you will not be able to borrow
additional money once the time has expired. Some
plans may call for payment in full of any
outstanding balance. Others may permit you to repay
over a fixed time, for example 10 years.
Once approved for the home equity plan, usually you
will be able to borrow up to your credit limit
whenever you want. Typically, you will be able to
draw on your line by using special checks. Under
some plans, borrowers can use a credit card or other
means to borrow money and make purchases using the
line. However, there may be limitations on how you
use the line. Some plans may require you to borrow a
minimum amount each time you draw on the line (for
example, $300) and to keep a minimum amount
outstanding. Some lenders also may require that you
take an initial advance when you first set up the
What Should You Look for When Shopping for a
If you decide to apply for a home equity line, look
for the plan that best meets your particular needs.
Look carefully at the credit agreement and examine
the terms and conditions of various plans, including
the annual percentage rate (APR) and the costs
you'll pay to establish the plan. The disclosed APR
will not reflect the closing costs and other fees
and charges, so you'll need to compare these costs,
as well as the APRs, among lenders.
Interest Rate Charges and Plan Features.
Home equity lines of credit typically involve
variable interest rates rather than fixed rates. A
variable rate must be based on a publicly available
index (such as the prime rate published in some
major daily newspaper or a U.S. Treasury bill rate).
The interest rate will change, mirroring
fluctuations in the index. To figure the interest
rate that you will pay, most lenders add a margin,
such as 2 percentage points, to the index value.
Because the cost of borrowing is tied directly to
the index rate, it is important to find out what
index and margin each lender uses, how often the
index changes, and how high it has risen in the
Sometimes lenders advertise a temporarily discounted
rate for home equity lines -- a rate that is
unusually low and often lasts only for an
introductory period, such as six months.
Variable rate plans secured by a dwelling must have
a ceiling (or cap) on how high your interest rate
can climb over the life of the plan. Some variable
rate plans limit how much your payment may increase
and also how low your interest rate may fall if
interest rates drop. Some lenders may permit you to
convert a variable rate to a fixed interest rate
during the life of the plan, or to convert all or a
portion of your line to a fixed-term installment
Agreements generally will permit the lender to
freeze or reduce your credit line under certain
circumstances. For example, some variable rate plans
may not allow you to get additional funds during any
period the interest rate reaches the cap.
Costs to Obtain a Home Equity Line.
Many of the costs in setting up a home equity line
of credit are similar to those you pay when you buy
a home. For example:
• A fee for a property appraisal, which estimates
the value of your home.
• An application fee, which may not be refundable if
you are turned down for credit.
• Up-front charges, such as one or more points (one
point equals one percent of the credit limit).
• Other closing costs, which include fees for
attorneys, title search, mortgage preparation and
filing, property and title insurance, as well as
• Certain fees during the plan. For example, some
plans impose yearly membership or maintenance fees.
• You also may be charged a transaction fee every
time you draw on the credit line.
You could find yourself paying hundreds of dollars
to establish a home equity line of credit. If you
were to draw only a small amount against your credit
line, those charges and closing costs would
substantially increase the cost of the funds
borrowed. On the other hand, the lender's risk is
lower than for other forms of credit because your
home serves as collateral. Thus, annual percentage
rates for home equity lines are generally lower than
rates for other types of credit. The interest you
save could offset the initial costs of obtaining the
line. In addition, some lenders may waive a portion
or all of the closing costs.
How Will You Repay Your Home Equity Line of
Before entering into a plan, consider how you will
pay back any money you might borrow. Some plans set
minimum payments that cover a portion of the
principal (the amount you borrow) plus accrued
interest. But, unlike the typical installment loan,
the portion that goes toward principal may not be
enough to repay the debt by the end of the term.
Other plans may allow payments of interest only
during the life of the plan, which means that you
pay nothing toward the principal. If you borrow
$10,000, you will owe that entire sum when the plan
Are Payments Flexible?
Regardless of the minimum payment required, you can
pay more than the minimum, and many lenders may give
you a choice of payment options. Consumers often
will choose to pay down the principal regularly as
they do with other loans. For example, if you use
your line to buy a boat, you may want to pay it off
as you would a typical boat loan.
Whatever your payment arrangements during the life
of the plan -- whether you pay some, a little, or
none of the principal amount of the loan -- when the
plan ends you may have to pay the entire balance
owed, all at once. You must be prepared to make this
balloon payment by refinancing it with the lender,
by obtaining a loan from another lender, or by some
other means. If you are unable to make the balloon
payment, you could lose your home.
Can My Monthly Payment Change?
With a variable rate, your monthly payments may
change. Assume, for example, that you borrow $10,000
under a plan that calls for interest-only payments.
At a 10 percent interest rate, your initial payments
would be $83 monthly. If the rate should rise over
time to 15 percent, your payments will increase to
$125 per month. Even with payments that cover
interest plus some portion of the principal, there
could be a similar increase in your monthly payment,
unless the agreement calls for keeping payments
level throughout the plan.
What if I Sell My Home?
When you sell your home, you probably will be
required to pay off your home equity line in full.
If you are likely to sell your house in the near
future, consider whether it makes sense to pay the
up-front costs of setting up an equity credit line.
Also keep in mind that leasing your home may be
prohibited under the terms of your home equity
What is an APR?
APR stands for annual percentage rate. It is the
annualized cost of credit, expressed as a
percentage. The APR calculation considers certain
fees to reflect the cost of credit in addition to
What is LTV?
LTV stands for loan-to-value, which is the ratio of
the mortgage loan amount to the property's value.
For example, if your property is worth $100,000 and
$80,000 is owed on the first mortgage, the LTV ratio
CHOOSING A LENDERS
Back to Top
Along with choosing a loan, you should consider the
variety of sources for loans as they each offer
advantages and disadvantages depending on the loan
amount, the interest rate, your down payment amount, and
much more. Major categories of mortgage lenders include:
Savings & Loans
Savings and Loan Associations (S&Ls) are the largest
traditional lenders of residential home loans. They
remain a major source of funding for home loans. S&Ls
are often called Savings Banks in the Eastern U.S.
Commercial banks offer attractive loan terms,
particularly if they evaluate their entire banking
relationship with you. Some commercial banks have their
own real estate lending departments and will service
your loan. Other commercial banks sell their loans to
Fannie Mae and Freddie Mac, two major
government-sponsored enterprises (GSEs) that specialize
in buying residential loans from lenders.
Mortgage bankers borrow money from banks or pools of
investors, underwrite the loans, and sell them to
investors for a profit. They often receive a fee from
these investors for servicing your loan. Loan servicing
includes collecting monthly payments, sending out loan
statements, and collecting late payments.
Mortgage brokers circulate, or 'shop,' a loan
application among lenders to find the most attractive
terms for the borrower. In exchange, a lender pays the
broker a fee.
You may find that the current homeowner is willing to
offer financing in exchange for selling the home. This
means that the seller becomes your lender. A common
means of financing is for the seller to accept a note. A
note requires you to make monthly payments to the seller
instead of a bank or other lender.
Since credit unions are owned by their members, they are
called cooperative financial institutions. Since they
are nonprofit institutions, credit unions may offer
attractive loan rates to their members. Like commercial
mortgage lenders, credit unions sell their loans to
Fannie Mae and Freddie Mac to maintain access to new
sources of loan funds. The National Credit Union
Administration (NCUA) regulates the credit union
When selecting a lender or broker to finance your new
home, be sure to do your homework on the company or
institution. As interest rates have continued to
decline, more and more lenders have appeared in the
industry. As rates begin to increase, more and more of
these new lenders may go out of business. Always check
to make sure your lender is qualified and has the
resources to service your note for the life of the loan.
Back to Top
Calculator: How much
house can you afford with your income? This
calculator helps and is designed for those putting less
than twenty percent down.
Mortgage Calculator: A
bi-weekly mortgage is basically the same as making one
extra mortgage payment a year. This calculator
tells you how quickly you would pay off your mortgage if
you were making the payments once every two weeks
instead of once a month.
Calculator: Allows you to
calculate several different loans at once so you can
Calculator: Adds taxes and
insurance to your mortgage payment. Useful because
this is how your lender calculates your monthly housing
costs to determine your qualifying ratios. If you
are impounding your loan, it helps you to know what your
total monthly payment will be.
After X Years: Perhaps you plan
to sell this home in five years and want to know what
your mortgage balance will be at that time.
Prepayment Calculator: This
mortgage calculator tells you when your normal payoff
would be and when it would be if you paid a specific
extra amount each month.
Analysis Calculator: Suppose
you want to pay off your mortgage in a specific period
of time. How much should you pay monthly to
accomplish your goal?
Principal or Invest the Money?: This calculator will help you make the decision on
whether it makes more sense for you financially to pay
down your mortgage or put some money away in financial
investments of various kinds..
Calculator 1: Very easy to use
and similar to what you've seen all over the web.
Calculator 2 : Also easy to use,
but different from the calculator above.
Calculator : How much
income does it take you to qualify for a particular
home? This calculator will tell you.
However, you may want to adjust the qualifying ratios to
33/38 or whatever your local lender recommends.
vs. Own: Rents have risen
considerably recently. This calculator helps to
show what your net gain may be in owning rather than
renting, taking many considerations into account.
Calculator: This calculator does pretty
much everything. It calculates payments,
debt-to-income qualifying ratios, your monthly PITI,
shows how much you will save (or not) by refinancing,
creates amortization tables, and more.
UNDERSTANDING CREDIT REPORTS
Back to Top
A credit report is a factual record of your credit
payment history maintained by a credit bureau. It's
provided to companies and individuals by credit bureaus
for purposes permitted by law, usually to grant you
More than 205 million people in the United States have a
credit card, car loan, mortgage, or student loan. Almost
every one of them has a credit file. The information in
your credit file is obtained directly from the companies
you have credit with, as well as from government
agencies such as the legal court systems. There are
three major credit bureaus in the United States:
Experian, TransUnion, and Equifax. Even though you are
in good financial shape, there is a possibility of
identity theft or just a simple error in credit
reporting that might damage your credit file. The best
way to track changes in your credit profile is to
purchase a credit monitoring service. Usually the credit
monitoring service includes a credit report and updates
for 30 days.
Your rights under the Fair Credit Reporting Act:
You have the right to receive a copy of your credit
report. The copy of your report must contain all of the
information in your file at the time of your request.
You have the right to know the name of anyone who
received your credit report in the last year for most
purposes, or in the last two years for employment
purposes. Any company that denies your application for
credit must supply the name and address of the Credit
Reporting Agency (CRA) they contacted, provided the
denial was based on information given by the CRA.
You have the right to a free copy of your credit report
when your application for credit is denied because of
information supplied by the CRA. Your request must be
made within 60 days of receiving your denial notice.
If you contest the completeness or accuracy of
information in your report, you should file a dispute
with the CRA and with the company that furnished the
information to the CRA. Both the CRA and the furnisher
of information are legally obligated to investigate your
dispute. You have a right to add a summary explanation
to your credit report if your dispute is not resolved to
Credit Reporting Agencies:
Back to Top