Many entities, including banks, credit unions, savings and loans, insurance companies and mortgage bankers make home loans. Lenders and terms change frequently as new companies appear, old ones merge and market conditions fluctuate. To get the best deal, compare loans and fees with at least a half a dozen lenders. Because many types of home loans are standardized to comply with rules established by the Federal National Mortgage Association (Fannie Mae) and other quasi-governmental corporations that purchase loans from lenders, comparison shopping is not difficult. Be sure to ask for the same size, type, and length of mortgage -- such as a 30-year fixed term mortgage for $300,000 -- so you're comparing apples to apples.
Fortunately, mortgage rates and fees are usually published in the real estate sections of metropolitan newspapers, and are increasingly available on online mortgage websites. (Contact Margie Catton.) You can also work with a loan broker, someone who specializes in matching house buyers and appropriate mortgage lenders, normally collecting their fee from the lender.
Be sure to check out government-subsidized mortgages, which have no down payment and low down payment plans. (See What kinds of government loans are available to homebuyers? below.) Also, ask banks and other private lenders about any "first-time buyer" programs that offer low down payment plans and flexible qualifying guidelines to low- and moderate-income buyers with good credit.
Finally, don't forget private sources of mortgage money -- parents, other relatives, friends or even the seller of the house you want to buy. Borrowing money privately is usually the most cost-efficient mortgage of all.
Assuming you can afford (and qualify for) high monthly mortgage payments and have an excellent credit history, you should be able to find a low (10% to15%) down payment loan. However, you may have to pay a higher interest rate and loan fees (points) than someone making a larger down payment.
Private mortgage insurance (PMI) policies are designed to reimburse a mortgage lender up to a certain amount if you default on your loan and the foreclosure sale is less than the amount you owe the lender -- that is, the amount of your mortgage loan plus the costs of the foreclosure sale. Most lenders require PMI on loans where the borrower makes a down payment of less than 20%. Premiums are usually paid monthly and typically cost less than one-half of one percent of the mortgage loan. With the exception of some government and older loans, you can drop PMI once your equity in the house reaches 22% and you've made timely mortgage payments. Ask your lender for details on the cost of PMI and requirements for canceling it.
Under the 1997 Taxpayer Relief Act, first-time homebuyers can withdraw up to $10,000 penalty free from an individual retirement account (IRA) for a down payment to purchase a principal residence. This $10,000 is a lifetime limit -- and it must be used within 120 days of the date you receive it. The law defines a first-time homeowner as someone who hasn't owned a house for the past two years. If a couple is buying a home, both must be first-time homeowners. Ask your tax accountant for more information, or check IRS rules at http://www.irs.gov.
Another source of down payment money is a loan against your 401(k) plan. Ask your employer or plan administrator if your plan allows for loans. If it does, the maximum loan amount under the law is the one-half of your interest in the plan or $50,000, whichever is less. (If, however, you have less than $20,000 in your plan, your limit is $10,000.) Other conditions, including the maximum term, the minimum loan amount, the interest rate and applicable loan fees, are set by your employer. Any loan must be repaid in a "reasonable amount of time," although the Tax Code doesn't define reasonable. Be sure to find out what happens if you leave your job before fully repaying a loan from your 401(k) plan. If a loan becomes due immediately upon your departure, income tax penalties may apply to the outstanding balance.
Several federal, state and local government financing programs are available to homebuyers. The two main federal programs are:
It depends. Because interest rates and mortgage options change often, your choice of a fixed or adjustable rate mortgage should depend on:
When mortgage rates are low, a fixed rate mortgage is the best bet for most buyers. Over the next five, ten or thirty years, interest rates are more apt to go up than further down. Even if rates could go a little lower in the short run, an ARM's teaser rate will adjust up soon and you won't gain much. In the long run, ARMs are likely to go up, meaning most buyers will be best off to lock in a favorable fixed rate now and not take the risk of much higher rates later.
Keep in mind that lenders not only lend money to purchase homes; they also lend money to refinance homes. For example, if you take out a fixed rate loan now, and several years from now interest rates have dropped, refinancing will probably be an option. For calculators that will help you help make refinancing decisions. (Contact Margie Catton)
For more information about mortgages and how they can affect your home buying decision, please contact Donna Jones.