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MORTGAGE 101

 
Buying A New Home
Certified Mortgage Planning Specialist professionals help you correct errors on your credit report and determine which balances to restructure or pay off in order to improve your credit score.
 
Know how much you can spend and determine how much you can afford.
 
CMPS PROFESSIONALS CAN HELP YOU:
 
Finance your home based on your monthly payment comfort level
 
Determine how much cash to use as your down payment and where to get these funds.
 
Understand your before and after-tax monthly payments
 
Restructure some other debt you may have to free up more monthly cash flow that enables you to improve your home buying budget
Don’t get caught in the “pre-approval” / “pre-qualification” trap.
 
It is always better to get a full approval / loan commitment from a CMPS professional before you even start looking for a home. Many mortgage brokers and lenders will give you a “pre-approval” or “pre-qualification”, but these are often meaningless. What you really need is a bona fide commitment from a mortgage lender that you are in fact approved for financing. Many real estate transactions have been ruined because buyers, sellers and Realtors have counted on “pre-approval” letters that proved meaningless.
 
Determine whether to rent or buy a home based on timeframe, budget and local market conditions.
 
CMPS professionals help you run the numbers to determine if it is better for you to rent or buy a home based on your individual circumstances.
 
Don’t be scared by all the doom and gloom headlines.
 
Everyone talks about buying low and selling high, but hardly anyone actually does it! As long as your timeframe is greater than two years, now is probably the best real estate buying opportunity in over two decades. People will always need a place to live, and housing will remain a great long-term investment. Your CMPS professional can help you structure your home purchase transaction in ways where you could save the most money.
 
Strategies for you to consider include seller-paid closing costs, maximizing acquisition indebtedness to create tax benefits, structuring the down payment in the proper way and other useful strategies.
 
Develop a strategy for financing your closing costs, home improvements and furniture expenses.
 
A home purchase is a significant financial commitment. CMPS professionals help you understand the costs involved in home ownership and help you develop a financial strategy for dealing with these costs ahead of time.
 
Evaluate the mortgage products that will work best in your situation.
 
Remember, it is far better to find a CMPS professional who can help you implement the best strategy with competitive interest rates than for you to shop for the lowest rate with the wrong strategy.
 
Understand the 20 Terms You Must Know Before You Sign Off on Your Mortgage.
 
 
Website: Loan Information
 
 
Fast Facts
 
Know your credit score
 
Know how much you can spend
 
Don’t get caught in the “pre-approval” /”pre-qualification” trap
 
Determine whether to rent or buy a home
 
Don’t be scared by all the doom and gloom headlines
 
Develop a strategy for financing
 
Evaluate the mortgage products
 
Understand the terms you must know before signing your mortgage
 
 
Website: Mortgage101
 
 
20 Terms You Must Know
 
Twenty Terms You Must Know and Understand Before You Sign Off On Your Mortgage
 
Buying a home is a major achievement in most everyone’s life. Pride of ownership, tax breaks, equity and the ability to increase your wealth and net worth are just a few of the many benefits you’ll enjoy with your new home. Your home purchase may also be one of the largest you will ever make.
 
During the emotional excitement of buying a home, you may encounter terms with which you are unfamiliar. For some, it can be a bit embarrassing to ask what they consider too many questions. Others may make a note of their questions but simply forget to revisit them. To ensure that you have complete confidence during your home loan process, invest a moment to read this report and become familiar with the concepts and terms you’ll encounter. Knowledge is power and the more you know, the more successful your decisions will be, and the more soundly you will sleep at night having made them.
 
1. Adjustable Rate Mortgage (ARM)
 
– Also referred to as a Variable Rate Mortgage – a mortgage in which the interest rate is adjusted periodically based on a pre-selected index. For example, consider a 5/1 ARM at 6.25% with 5/2/5 caps and a margin of 2.75 over the LIBOR index:
 
A. 5/1: the “5” means that the interest rate is fixed for five years. The “1” means that the interest rate adjusts one time every year after the first five years.
 
B. 6.25% means that the interest rate is fixed at 6.25% during the first five years. This is called the “initial start rate”.
 
C. 5/2/5 caps:
 
1) The first number – “5” – means that the interest rate can adjust up to 5% over the initial start rate in the first year after the fixed period ends (year 6). This means that if the initial start rate is 6.25%, the interest rate can go up to 11.25% in year six (6.25% initial start rate + 5 = 11.25%).
 
2) The second number – “2” – means that in every year after the first adjustment in year 6, the interest rate can adjust up or down up to 2% annually.
 
3) The third number – “5” – means that the interest rate can never go up more than 5% over the initial start rate during the entire life of the mortgage. In this example, the maximum interest rate over the life of the mortgage would be 11.25% (6.25% initial start rate + 5 = 11.25%).
 
D. 2.75 margin – In this example, the margin of 2.75 over the LIBOR index means that after the first five years, the interest rate would be calculated by adding 2.75 to the LIBOR index at the time of the adjustment. LIBOR stands for “London Interbank Offered Rate”. See your CMPS professional for more info on different types of ARMs and which index is better for your situation.
 
2. Annual Percentage Rate (APR)
 
– An interest rate that reflects the cost of a mortgage as a yearly rate. This rate takes into account any points and fees (closing costs) and is based on the loan going to its full-term. APR can often be manipulated by lenders and it is often inaccurate with Adjustable Rate Mortgages. See your CMPS professionals for details.
 
3. Appraisal
 
– A written report containing an estimate of property value and the data on which the estimate is based. Appraisals are prepared by a licensed appraiser who is independent of the seller, buyer, lender and real estate agent. The appraiser inspects the subject property and compares it with other similar properties that have sold in the area to determine the fair market value. The mortgage lender bases the loan-to-value ratio on the lesser of the purchase price or appraised value on a purchase transaction. If you are refinancing a property, an issue called “seasoning” may come into play. This affects which value the lender allows you to use when determining the mortgage balance. See your CMPS professional for details.
 
4. Assumption
 
– An agreement between buyer and seller in which the buyer assumes responsibility for the seller’s existing mortgage. This agreement could potentially save the buyer money because closing costs and the current interest rates, possibly higher, do not apply. In most residential mortgage transactions, this is not an option because the seller’s existing mortgage normally has a “due on sale” clause that requires the seller to pay off the mortgage if the house is sold or if the ownership is transferred. This issue often comes into play with real estate investment strategies. See your CMPS professionals for details.
 
5. Buy-down
 
– A method of lowering the buyer’s monthly payment for a short period of time. The lender or homebuilder subsidizes the mortgage by lowering the interest rate for the first few years of a loan. This strategy can be very effective in today’s market. See your CMPS professional for details.
 
6. Closing
 
– Also referred to as settlement. The meeting at the conclusion of a real estate sale in which the property and funds are exchanged between the parties involved.
 
7. Closing Costs
 
– the total points and fees that are associated with completing a mortgage transaction or a house purchase or sale. Often, a good negotiation strategy for both the buyer and seller is for the seller to pay closing costs on behalf of the buyer. See your CMPS professional for details.
 
8. Debt-to-Income Ratio
 
– The ratio, expressed as a percentage, which results from dividing a borrower’s monthly payment obligation on long-term debts by the borrower’s gross monthly income.
 
9. Down Payment
 
– Cash paid by the buyer at closing that makes up the difference between purchase price and the mortgage amount.
 
10. Earnest Money
 
– Money given by a buyer to a seller as a deposit to commit the buyer to the future transaction. Earnest money is subtracted from closing costs.
 
11. Equity
 
– The value an owner has in real estate over and above the obligation against the property. Equity is fair market value minus the current mortgage and other liens. Real estate equity should be managed just like any other investment. See your CMPS professional for details.
 
12. Escrow
 
– Funds given to a third party which will be held to cover payments such as tax or insurance payments and earnest money deposits.
 
13. Fixed Rate Mortgage
 
– A mortgage in which the interest rate remains constant and fixed throughout the life of the loan.
 
14. Loan-to-Value Ratio
 
– The ratio between the amount of the mortgage loan and the appraised value of the property.
 
15. Market Value
 
– The price that a property could possibly bring in the marketplace.
 
16. Origination Fee
 
– A fee charged by a lender for processing a loan application. This is usually computed as a percentage of the loan and is used by some lenders as another name for “Points”.
 
17. PITI
 
– Refers to Principal, Interest, Taxes, and Insurance.
 
18. Points
 
– Prepaid interest charged by the lender. One point is equal to 1 percent of the loan amount (on a $200,000 mortgage, 1 point = $2,000).
 
19. Private Mortgage Insurance (PMI)
 
– Insurance that protects lenders against loss if a borrower defaults. This is required when the loan-to-value ratio is greater than 80 percent. The PMI payment may be tax deductible, depending on your situation, and is usually added to the monthly mortgage payment. See your CMPS professional for details.
 
20. Underwriting
 
– The decision-making process of granting a loan to a potential homebuyer.
 
Standardizing the mortgage planning process through participation with the CMPS community of experts.
 
Linda Lunsman, CMPS®
Princeton Capital,
650-566-5358 direct
408-335-1144 fax
LindaLunsman@princetoncap.com
 
 
Website: Everything you must know about Loans
 
 
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