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ListerRealEstate.comPatricia "Tricia" Lister

Mortgage 101
    Know the fundamentals

From a "Realtor Magazine" article.
 

How much money do I have to come up with to buy a home?

That depends on a number of factors, including the cost of the house and the type of mortgage you get. In general, you need to come up with enough money to cover three costs: earnest money -- the deposit you make on the home when you submit your offer, to prove to the seller that you are serious about wanting to buy the house; the down payment -- a percentage of the cost of the home that you must pay when you go to settlement; and closing costs -- the costs associated with processing the paperwork to buy a house.

When you make an offer on a home, your real estate broker will put your earnest money into an escrow account. If the offer is accepted, your earnest money will be applied to the down payment of the closing costs. If your offer is not accepted, your money will be returned to you. The amount of your earnest money varies. The more money you can put into your down payment, the lower your mortgage payments will be. Some types of loans require 10-20% of the purchase price.
Closing costs -- which you will pay at settlement -- average 3-4% of the price of your home. These costs cover various fees and lender charges and other processing expenses. When you apply for your loan, your lender will give you an estimate of the closing costs, so you won't be caught by surprise.
 

How do I know which mortgage is best for me?

There are many types of mortgages, and the more you know about them before you start, the better: Most people use a fixed-rate mortgage. In a fixed rate mortgage, your interest stays the same for the term of the mortgage, which is normally 30 years. The advantage of a fixed rate is that you always know exactly how much each payment will be and you can plan for it.

Another kind is an adjustable rate mortgage (ARM). With this kind of mortgage, your interest rate and monthly payment usually start lower than a fixed mortgage. Your rate can go up or down as often as twice a year with this type of mortgage. The adjustment is tied to a financial index, such as the U.S. Treasury Securities index. The advantage of an ARM is that you may be able to afford a more expensive home because your initial interest rate is lower. Talk to your real estate broker about the various kinds of loans before you begin shopping for a mortgage.
 

What will my mortgage cover?

Most loans have four parts: principal (the repayment of the amount you actually borrowed); interest (payment to the lender for the money you've borrowed); homeowners insurance (a monthly amount to insure the property against loss from fire, smoke, theft and other hazards required by most lenders) and property taxes (the annual city/county taxes assesed on your property, divided by the number of mortgage payments you make in a year).

Most loans are for 30 years, although 15 year loans are available, too. During the life of a loan, you'll pay far more in interest than you will in principal -- sometimes two or three times more! Because of the way the loans are structured, in the first years you'll be paying mostly interest in your monthly payments, paying mostly principal in the final years.

What do I need when I apply for a mortgage?

You should have:

  1. Social security numbers for both you and your spouse, if both of you are applying for the loan;
  2. Copies of your checking and savings account statements for the past six months;
  3. Evidence of any other assets like stocks or bonds;
  4. A recent paycheck stub detailing your earnings;
  5. A list of all credit card accounts and the approximate monthly amounts owed on each;
  6. A list of account numbers and balances due on outstanding loans such as car loans, student loans, etc.;
  7. Copies of your last two years income tax statements;
  8. The name and address of someone who can verify your employment. Depending on your lender, you may be asked for more information.

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