 Top
10 Things To Consider On Home Loans
Become familiar with the ten most important factors
in obtaining a home loan.
by Tom Levine
July 14, 2004
Here are our Top 10 most important things to consider when shopping
for a Home Loan, Equity Line of Credit, or Refinance, courtesy of
LoanResources.Net:
- Down-Payment
- Fixed Versus Adjustable Rate
- APR
- Loan Types
- Loan Amount Qualification, Income
- Loan Amount Qualification, Expenses
- Employment and Credit History
- Points
- Sub-Prime Loans
- Short-Forms
1. Down-Payment - As a general rule of thumb, lenders will
be seeking contribution from you of around 3% to 6% of the total
loan value. This can be negotiable, and there are many loan packages
available.
2. Fixed versus Adjustable – The two most common loan products
available for home mortgages are fixed rate versus adjustable rate.
Fixed rate means that you agree on an APR (annual percentage rate)
that does not change through the life of the loan, whereas, an Adjustable
Rate Mortgage, better known as an ARM, means that rates and monthly
payments can change, often tied to the U.S. Government Treasury
Bills or some other form of “index”, with the frequency of change
dependent upon the terms of the loan.
Deciding on which way to go involves many variables. We suggest
that you start by examining the fixed rate products available on
the market. They are by far the most popular, and arguably with
the least amount of risk. After evaluating several preliminary loan
offers (quotes) for fixed rate mortgages, you can then venture into
the world of ARM’s to see if one of these products may be right
for you. But, proceed with caution, and understand all the risks,
alongside any potential benefits.
3. APR – APR, better known as the annual percentage rate,
aka: “rate”, is arguably the most important consideration you must
examine when looking for a loan. The APR includes principle, interest,
“points”, fees, PMI (Mortgage insurance), and other costs associated
with the loan. While all costs and terms are significant and affect
the bottom line, we suggest that shopping rate is a very good starting
point.
4. Loan Types: There are several standard loan products
to look for, including 30 year fixed, 15 year fixed, bi-weekly mortgages,
1 month ARM’s, 5 year fixed ARM’s, 2nd Fixed, ARM’s with a provision
to convert after 5 years, lender buydowns, and discounted mortgages.
We think the best place to start, is to obtain quotes for a 30
year fixed rate loan, and then go from there. 30 year fixed rate
loans generally produce the lowest monthly payments for fixed rate
products, and they are relatively safe. Once you know where you
stand with a 30 year fixed, after obtaining quotes from several
lending institutions, then you can consider the possibility of exploring
more exotic loan products. At this juncture, you will want to consult
with those you trust, for good, solid advice and feedback on risk
versus reward.
5. Loan Amount Qualification, Income: This can vary widely
depending on you, your lender, and many other variables. However,
as a rule of thumb, look at 2 to 2 ½ times your current household
income, as a baseline to determine how much you can afford to borrow.
6. Loan Amount Qualification, Expenses: This is another
broad category that varies from one lending institution to the next.
However, there are two general factors to look at, and they are
Housing Expenses (such as mortgage, property taxes, and insurance),
and long-term debt (which can include credit cards, auto loans,
etc.).
First, add all your expenses together. As a rule of thumb, you
will want your expenses to not exceed 33% to 36% of your gross household
income.
Second, examine your housing expenses only. As a rule of thumb,
you’ll want these expenses to not exceed 25% to 28% of your gross
household income.
7. Employment and Credit History: Lenders generally want
to take a look at your employment history so that they can see a
pattern of stability and income. Lenders generally also want to
take a look at your credit history, so that they can see a pattern
of borrowing and repayment in your past. Lenders cannot discriminate
and must use this information solely for the purpose of considering
your ability to repay a loan. Also, many loan products are available
for all kinds of customers, with varied financial backgrounds and
histories.
8. Points: Points are one of the primary fees charged on
the loan, and they represent the profit earned by the lending institution.
One point represents one percent of the total loan amount, and points
are usually tax-deductible (along with the interest paid on the
loan). They are broken down into two basic types:
Origination Points – Origination Points are the fees charged
by the lender, and represents their gross profit.
Discount Points – Discount Points are most often charged in association
with a lowered interest rate. In other words, the Discount Points
represents a dollar amount, as a fee for giving the borrower a
lowered APR (lower than what the lender might otherwise charge).
9. Sub-Prime Loans: Sub-Prime Loans consist of loan products
designed for customers with challenging credit and financial backgrounds,
or, customers that are looking to re-establish credit. They can
be significantly higher then the prime lending rate, with less favorable
terms (Often times, the loans are for the short-term, such as 2
to 3 years). However, they do offer a venue for certain individuals,
and they can allow customers to re-establish credit, or buy new
homes prior to cleaning up a credit history, etc.
For some of you, this avenue may offer exactly what you’re looking
for. It’s important to know that lenders who specialize in sub-prime
loans are out there and want to earn your business. However, we
advise that you proceed with caution. Be sure to gather sound advice
from trusted friends and professionals, and understand all the risks
versus rewards, prior to signing on the dotted line.
10. Short-Forms: The most important thing you can do as
a consumer of loan products is to shop around and get several preliminary
loan quotes for your consideration.
These are no risk, no obligation, preliminary loan offers. They
take 30 seconds to 2 minutes to complete, they require no personal
or confidential disclosure on your part, and they require no commitment
from you.
We suggest that you obtain 3 or 4 offers. You can then examine
and compare the terms, rate, fees, and all other pertinent information
about the loan product, and the lender, at your leisure and in the
comfort of your own home.
LoanResources.Net has categorized hundreds of online services that
you can explore. You can also go to any search engine and find them
from there. Look for a “privacy policy” on their website, as well
as short, simple application forms that make sense and are relatively
easy and quick for you to complete.
Also, take a quick look at the current interest rate for 30 year
fixed loans, as well as the 6 month trend graph. We have set up
a free webpage with this information, or you can find many graphs
and charts via your favorite search engine.
We’ve enjoyed providing this information to you, and we wish you
the best of luck in your pursuits. Remember to always seek out good
advice from those you trust, and never turn your back on your own
common sense.
- Tom Levine
Copyright © 2004, by LoanResources.Net
Tom Levine has been involved in insurance and finance for
over 14 years, and provides a solid, common sense approach to
solving problems and answering questions relating to consumer
loan products. You can check out Tom's website here: http://loanresources.net
, or you can email Tom at info@loanresources.net.
Disclaimer: Statements and opinions expressed in the articles,
reviews and other materials herein are those of the authors. While
every care has been taken in the compilation of this information
and every attempt made to present up-to-date and accurate information,
we cannot guarantee that inaccuracies will not occur. The author
will not be held responsible for any claim, loss, damage or inconvenience
caused as a result of any information within these pages or any
information accessed through this site.
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