Q. How big of a mortgage can I afford? A. Your total monthly outflow, including mortgage and other debts, should not exceed 40 percent of your gross income. Some exceptions are sometimes made based on credit rating, job history, down payment and other factors. Q. How much is a point? A. A point is one percent of the loan amount. You will only need to pay this if you decide to lower your interest rates over the life of mortgage. If you plan to live in your home longer than five years,you may want to reduce your long term APR a point or more. This point charge is paid at the inception of the loan, usually at closing. Q. Should I get an adjustable or fixed rate mortgage? A. If you are going to stay in the house for more than five years, a fixed rate loan is probably better. If you plan to move or refinance in less than five years,an adjustable rate may be more beneficial. Q. Can I expect to know how much my loan will cost? A. When you make a loan application, you will be given a Good Faith Estimate as required by Federal Law of all fees and charges. Although it is an estimate, the amount you will pay will be very close to the estimate given. Some closing costs may vary from one geographical location to another. The attorney,appraiser,tile company and etc. set their own fees they are not standardized across the industry.Most often a knowledgable Mortgage Broker can estimate those costs from his experience. Q. Should I lock in my interest rate? A. Yes, the rate should be locked in when your loan has been approved and you have decided to proceed. This will assure that, if rates rise during the loan process, you will still be given the rate that was in effect when your loan was approved.You may opt for a 7, 14,30, or 45 day lock-in with most lending instituutions. Seek advise from a Mortgage Broker that specializes in this to see what he can do for you. Remember the Mortgage Broker represents the borrower ,not the lending company. Q. What information do I need to apply for a loan? A. You must have your tax returns with W-2s for the previous two years, your last three bank statements and two most recent paycheck stubs.You will also need to have proof of your monthly expenses,bills and etc. Shortly after the process begins you will need additional information depending on the lending institution that is pursuing your loan.A good Mortgage Broker can help you with a probable list of inquiries needed. Q. Will I get the best mortgage rate? A. Creative Mortgage shops your mortgage with nearly a hundred banks and lenders nationwide. We uncover the best possible rate for your mortgage needs.
Glossary of Mortgage Terms You NEED to Know A Simple Guide For First Time Home Buyers Fifteen Commonly Used Mortgage Terms Here are 15 of the most common terms used to describe mortgages. If you hear other terms you don't know, ask your mortgage lender what they mean. Adjustable Rate Mortgage (arm, also called Variable Rate Mortgage) A mortgage with an interest rate that is adjusted periodically to reflect changes in market conditions. Your mortgage payments are adjusted up or down as the interest rate changes. (See The Low-down on Loans on page 12 for more information). Annual Percentage Rate (APR) An interest rate that reflects the actual cost of a mortgage as a yearly rate. Because APR includes points and other costs, it's usually higher than the advertised rate. The APR allows you to compare different mortgages based on actual annual costs. Appraisal An estimate of the value of a home, made by a professional appraiser. The maximum amount of the mortgage is usually based on the appraisal. Closing Costs (Settlement Costs) All the charges associated with getting your mortgage, including the origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, charges for credit reports and other costs. Costs of closing usually add up to 3 to 6 percent of the mortgage amount. Equity The value of your home after the outstanding balance of any loans are subtracted. Escrow A special third-party account set up by the lender in which your funds are held to pay for taxes and insurance. Escrow can also refer to a third party who carries out the instructions of both the buyer and seller to handle the paperwork at the settlement. Fixed Rate mortgage A mortgage with an interest rate that stays the same (fixed) for the life of the mortgage. Monthly payments for a fixed rate mortgage are very stable. (See the Low-down on Loans for more information.) Interest The sum paid for borrowing money, which pays the lender's costs of doing business. Origination Fee The fee charged by a lender to prepare all the documents associated with your mortgage. PITI (Principal - Interest - Taxes - Insurance) Abbreviation for the separate parts of a typical monthly mortgage payment Points (Loan Discount Points) Points are prepaid interest on your mortgage, charged by the lender at the time of the closing. Each point is one percent of the loan amount (ie., 2 points on a 100,000 mortgage would be 2,000). Prepaids The expenses that are put into escrow at closing, usually including real estate taxes, insurance, and interest. Principal The amount of debt, not including interest, left on a loan; also the face amount of the mortgage. Private Mortgage Insurance (PMI) An insurance policy the borrower buys to protect the lender from non-payment of the loan. PMI policies are usually required if you make a down payment that is below 20% of the appraised value of the home. Title Insurance An insurance policy which insures you against errors in the title search, essentially guaranteeing your and your lender's financial interest in the property.
Why Fixer Houses Are A Great Strategy By Kevin C. Myers Why fixer houses? As investors, each of us must make a decision on our overall strategy: Should I buy and hold for long-term appreciation and tax advantages? Or should I buy and quickly sell to collect my profits now? Nothing says you can not do both....keep some properties for rentals and buy some for quick turnaround deals. But what are the advantages and disadvantages of each strategy? The Buy and Hold Strategy There are many variations of this basic strategy, but usually it entails buying a house or small apartment building with a small down payment (20% or less) and renting out the units. The holding period is at the discretion of the owner...it could be one year, one decade or forever. In the meantime, the owner is making payments on the underlying mortgage(s) and managing the property. During the holding period, profits are derived from positive cash flow (if any) and possibly tax advantages. But the real profits of the buy and hold strategy are dependent on price inflation--the extent to which the value of the property increases over time. And, of course, the more highly leveraged the property, the higher the return on investment. For example, let us say you own a 100,000 house with a 80,000 mortgage which you bought with a 5,000 down payment...a typical deal. Over the next five years, the house appreciates 20% or about 4% a year. The house is now worth 120,000 and the return on your 5,000 investment is 20,000 or a whopping 400% (not counting any positive cash flow or mortgage reduction). This is the power of leverage at it is finest! But what happens if the market stays flat...or worse yet...if the market goes down? Unheard of? If you are lucky and the market stays flat, you come out even...your 5,000 investment is worth 5,000, five years later. Not exactly a super-duper investment. But what if the market went down 20% and the house is worth only 80,000? You are now in a situation known as being upside-down. You owe 20,000 more than you can get for the house. You have negative equity. Not a pretty picture. The point is this. Local real estate prices generally move up and down over time, in cycles. Although the long-term trend may generally be increasing, the short-term trend may be devastatingly down. Where in the cycle did you buy and where in the cycle did you sell? To a large extent, this will determine your profit outlook in using the buy and hold strategy. And it is these external circumstances leave you, as an investor, with absolutely no control over the matter. Shake the dice and take your chances.... Consider this from Robert Bruss, real estate expert and syndicated columnist, who wrote in his September 8, 1996 column: The quick-buck real estate profits are long gone. With a few boomtown exceptions, such as Las Vegas, NV and Palo Alto and San Jose, CA, home prices in most cities are relatively stable today. Average home sale prices are appreciating about 4 percent annually on a nationwide basis, depending on whose statistics you believe, keeping pace with inflation. This get rich slowly economic environment has driven away the get-rich-quick real estate crowd. Instead, it is the quiet low-profile real estate investors who are earning substantial profits today....successful investors in single-family houses, as well as commercial properties, specialize in fixer-upper properties. Buying property in excellent condition, hoping to somehow earn a profit, is a no-win situation. The Rehab and Sell Strategy I strongly favor the rehab and sell strategy. Here's why. The essence of this investment strategy is speed...buy a fixer-upper property at a bargain price, quickly rehab and then quickly sell the property. Get in, get it fixed up and get out. A simple yet very profitable and safe strategy, regardless of external circumstances. Using this technique, profits are made when you buy at a bargain price, increased as a result of the rehab process, and converted to cash when the property is sold. The key advantage of this strategy is that you, the investor, are in control of every aspect of the deal, from start to finish. You are not dependent on price inflation or any other external factors to make profits. You know going into a deal exactly (almost) what it will cost you to fix up the property and exactly (almost) how much the property will sell for at the end. And best of all, you know exactly what your profit will be because it is included in your buying decision. Uncertainties (and therefore risks) are controlled and thereby reduced substantially. Are there negatives associated with this strategy? Sure...just like any other worthwhile endeavor, sustained success comes to those who have created an advantage for themselves. And typically that advantage is hard work and knowledge coupled with a system of doing business. A system that, once developed, can be repeated over and over again with predictable results. What would such a system consist of? Well...really, you need several systems or subsystems. Ways to consistently find and buy properties at prices well below market value. Methods to get the work done by professionals, without impacting your profits. Techniques for financing the purchase and rehab work, using little or none of your own money, if possible. And finally, selling the property quickly and for top dollar. The secret to success of any business is.... Knowledge + Hard Work + System = $ Do not be mislead. Real estate rehab is not a get-rich-quick scheme. The necessary knowledge and a system for doing business are readily available in the marketplace. But never forget the hard work ingredient. It is required and is indispensable to make the formula work. You are not afraid of hard work are you? My business mentor (everyone should have a mentor - do you?) recently said to me,Most individuals do not hear when opportunity knocks, because it is disguised as hard work! Is Owning Rental Property A Bad Strategy? Buying property and becoming a landlord...is this a bad investment strategy? Of course not. At one time, I owned 40+ rental units in three states. Even today, I own a few rentals. It is an excellent long-term investment strategy IF the timing of your purchase and sale is in harmony with your local real estate cycle. It is much like investing in the stock market. Buy when prices are low and nobody wants the stock and sell when the market is hot. What is the status of your local real estate market? The answer to this question will guide you in the timing of your rental purchases. In the meantime....Get out there and make some quick cash with the rehab and sell strategy! About the Author . . . Kevin C. Myers, MBA is President of a diversified group of companies in Albuquerque, NM. He is a real estate appraiser, a private mortgage lender, a real estate educator who lectures frequently at local colleges, and an active real estate investor. Kevin has renovated numerous investment properties during his 20+ years in real estate, specializing in single-family houses. He shares a great deal of his knowledge and experience in his book - Buy It, Fix It, Sell It: Profit! (Dearborn Publishing).
Government Publications Consumer Handbook on Adjustable Rate Mortgages - Basic features, advantages, risks, and terminology associated with adjustable rate mortgages. Explains how ARM's work, how to reduce your risk, and more. Includes a table for comparing mortgages. (11 pages) A Consumer's Guide to Mortgage Refinancings - Here's help to decide if refinancing is worth it, what the costs are, and how to tell if the time is right. Also highlights some of the fees you can expect. (4 pages) Energy Efficient Mortgage Home Owner Guide - If you're buying, selling, refinancing, or remodeling your home, you could increase your comfort and save money with a mortgage that encourages saving energy. Learn who qualifies, the process, and more. (6 pages) Guide to Single Family Home Mortgage Insurance - FHA (Government) insurance protects lenders against losses on mortgages so they can offer you more generous terms. Learn what the costs, conditions, and options are. (10 pages) Home Buyer's Vocabulary - Defines common words and terms used in the real estate world. Especially useful for the first time buyer. (12 pages) The Home Inspection & You - Defines what a professional home inspection is and answers questions about how and why you should get one before buying or selling your home. (4 pages) How to Buy a Home With a Low Down Payment - Describes private and federal options for obtaining a low down payment mortgage, how to qualify, how to determine what you can afford, and much more. (8 pages) How to Buy a Manufactured (Mobile) Home - Tips on selection and placement, warranties, site preparation, transportation, installation, and more. (15 pages) The HUD Homebuying Guide - Here are step-by-step instructions for finding and financing a HUD home. Includes charts to help you estimate mortgage payments. (9 pages) Twelve Ways to Lower Your Homeowners Insurance Costs - Insurance is a highly competitive business. Here are practical tips on how to reduce your expenses. Lists phone numbers of state insurance departments for more information. (3 pages)