What is a Mortgage? -
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A mortgage represents a loan or lien on a property/house that has to be paid
over a specified period of time. Think of it as your personal guarantee that
you'll repay the money you've borrowed to buy your home. Mortgages come in many
different shapes and sizes, each with its own advantages and disadvantages. Make
sure you select the mortgage that is right for you, your future plans, and your
financial picture.
What is an
amortization schedule? -
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The month-by-month allocation of your monthly payment to the loan's interest
and principal is called an amortization schedule. With most loans you pay off
the interest on the loan before you pay off the principal (or the actual amount
you borrowed). Your lender will provide an amortization schedule to show you how
the percentage of your principal paid off increases with every payment, while
the percentage of interest decreases.
See an example of an amortization schedule [PDF
10K].
Choosing the right
mortgage -
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Once you decide on the mortgage you want, do your homework. Different lenders
offer different rates, points, and fees. Ask around and compare.
Understanding the benefits of different mortgage offerings can be a complex
process. How do you figure it all out?
Who is Fannie Mae? -
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Fannie Mae is a shareholder-owned company with a
public mission. We exist to expand affordable housing and bring global
capital to local communities in order to serve the U.S. housing market.
Fannie Mae has a federal charter and operates in America's secondary
mortgage market to ensure that mortgage bankers and other lenders have
enough funds to lend to home buyers at low rates. Our job is to help those
who house America.
Fannie Mae was created in 1938, under President Franklin D. Roosevelt, at a
time when millions of families could not become homeowners, or risked losing
their homes, for lack of a consistent supply of mortgage funds across
America.
The government established Fannie Mae in order to expand the flow of
mortgage funds in all communities, at all times, under all economic
conditions, and to help lower the costs to buy a home.
In 1968, Fannie Mae was rechartered by Congress as a shareholder-owned
company, funded solely with private capital raised from investors on Wall
Street and around the world.
Fannie Mae has a unique duty to the public it serves -- and the private
investors that fuel its service -- to be a model company focused on service,
reliability, and value.
As America continues to grow and change, Fannie Mae will be there to help
meet its growing and changing housing needs.
Fixed-Rate Mortgages
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Fixed-rate mortgages are the most common mortgage for many homebuyers because
the monthly payments are stable. The interest rate you lock-in will be the same
interest rate you pay for the life of the loan - whether it's a
15-year,
20-year, 30-year or 40-year mortgage.
What are the benefits of a fixed-rate mortgage?
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Inflation protection.
If interest rates increase, your mortgage and your mortgage payment won't be
significantly affected. Even if your taxes or insurance costs go up over time,
your basic loan payment (principal and interest) will stay the same. This is
especially helpful if you plan to own your home for five or more years.
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Long-term planning.
You know what your monthly housing expense will be for the entire term of your
mortgage. This can help you plan for other expenses and set long-term
financial goals for yourself and your family.
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Low risk.
You always know what your payment will be, regardless of what current interest
rates are. This is why fixed-rate mortgages are so popular with first-time
buyers.
There are additional considerations to be aware of with fixed-rate mortgages:
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Your mortgage interest rate won't go down, even if interest
rates drop, unless you refinance your mortgage.
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Because the interest rate is generally higher than other types
of mortgage loans, you may not be able to qualify for as large a loan with a
fixed-rate mortgage.
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Your total monthly payment can occasionally increase based on
changes to your taxes and insurance. In many cases you pay these costs through
an escrow account that your lender keeps for you.
Interest
Only Fixed-Rate Mortgages -
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If you choose an interest-only option for a fixed-rate mortgage, the term of
the loan is divided into two periods. During the first period, your monthly
payment is lower because you pay only interest and no principal. In the second
period, you pay both. For example, on a 30-year fixed rate mortgage, you might
make interest-only payments for the first 15 years, and then pay both principal
and interest for the remaining 15 years.
Interest-only loans can free up cash for other purposes during the initial
period of the loan, but when you begin paying both principal and interest your
monthly payments will be larger.
As with all interest-only mortgages, interest-only fixed-rate mortgages are
not for all borrowers, and should be offered appropriately only to borrowers who
clearly understand and qualify for the potential payment increases.
15, 20, 30, or 40 Year?
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When you're looking for a mortgage, you need to decide which loan term you
want and choose the type of interest rate.
The loan term is the length of time you have to pay back the loan. The
longer the term, the lower the monthly mortgage payment. The shorter the
term, the higher the monthly mortgage payment.
Most home mortgage lenders offer two basic terms: 15 and 30 years, and
many also offer 20-year fixed rate mortgages. Some lenders now offer a
40-year fixed rate mortgage as well.
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15-Year Term
This term has higher monthly payments because the loan is shorter. The
interest rate is usually lower and you can build equity faster.
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20-Year Term
This fixed-rate mortgage builds equity more quickly than with a
traditional 30-year mortgage as well as saves you interest over the life
of your loan.
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30-Year Term
Interest rates may be somewhat higher for this term and you pay more
interest over time.
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40-Year Term
Longer-term loans may result in lower monthly amortization payments, but
you will pay more interest over time and rates may be higher than for a
shorter-term loan.
What type of loan term should you choose? -
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If you can make higher payments and want to build equity quickly, a
15-year term may work for you.
If you want to qualify for a larger loan amount, longer terms may be a
good choice - especially if you don't plan to move and the interest rates
are reasonable when you sign the loan. This is generally the easiest loan
term to qualify for. You can always make larger monthly payments and ask
your lender to re-amortize your loan to pay your loan off faster.
Adjustable
Rate Mortgage (ARMS) -
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Adjustable-rate mortgages (ARMs) are popular because they usually start with
a lower interest rate and a lower monthly payment. The lower rate (and lower
monthly payments) may also allow a higher loan amount. However, the interest
rate can change during the life of the loan, which would mean that your monthly
payment would increase (or decrease).
It's important to understand the specifics of an adjustable-rate mortgage,
commonly called an ARM:
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Adjustment periods.
All ARMs have adjustment periods that determine when and how often the
interest rate can change. There is an initial fixed-rate period during which
the interest rate doesn't change - this period can range from as little as 1
month to as long as 10 years. After the initial period, the interest rate will
often adjust each year. For example, with a 3/1 ARM, your interest remains the
same during the first 3 years, and then can adjust every year following, up to
a maximum amount (the "lifetime cap").
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Indexes and margins.
At the end of the initial period and at every adjustment period, the
interest can change based on two factors: the "index" and the margin. Interest
rate adjustments are based on a published index. There are many indexes but
some commonly used for ARMs are the LIBOR and the U.S. Treasury Bill. The
rates for indexes reflect current financial market conditions, which is why
your interest rates can change at each adjustment period. The margin is the
amount (shown as a percentage) that is added to the index to determine what
your new mortgage rate will be until the next adjustment period.
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Caps, ceilings, and floors.
All ARMs have rate caps, also known as ceilings and floors. Caps decide how
much the interest rate can increase or decrease at each adjustment period and
over the life of the loan. Most ARMs have a lifetime cap that limits the
amount your interest rate can increase over the life of your mortgage.
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The number system.
There are several types of ARMs, such as the 10/1, 7/1, 5/1 and 3/1. The first
number (10 for example) is the length of the initial period, during which the
interest rate can't change. The second number (1 for example) is how often the
ARM is adjusted after the initial period. So, a 10/1 ARM won't change for the
first 10 years, but can change in the 11th year and again every year after
that. Depending on the initial cap the change could be as high as 5 percentage
points above what it was before.
There are additional considerations to be aware of with adjustable-rate
mortgages:
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Because the initial interest rate is usually lower than a
fixed-rate mortgage, your initial payments will be lower and you may qualify
for a larger mortgage amount.
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If interest rates are high when you get your mortgage but drop
during any adjustment period, your monthly payment may decrease.
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An ARM with a low initial interest rate and an initial
adjustment period after 5 or 7 years can save you money.
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ARMs can, and often do, have interest rate increases at
adjustment periods. You may have an increase in your monthly mortgage payment
after each adjustment period. The amount your mortgage might increase would
depend on the periodic cap (how much of an increase is allowed each year), the
lifetime cap (the maximum interest rate or maximum number of increases
allowed), and the size of your mortgage's margin. If the life cap is 5%, the
maximum interest rate adjustment would be to 10.75%
Interest-Only ARMS -
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An interest-only mortgage allows you to pay only monthly interest payments
for the initial period of the loan. The length of the interest-only period is
set when the loan is made, and after that period the borrower pays principal and
interest for the rest of the loan.
For example, with an interest-only ARM, you might make payments only on the
interest during the initial fixed-rate period of the loan. You would begin
paying both principal and interest when you entered the adjustable-rate period
of the loan. Sometimes the interest-only period can be longer than the
fixed-rate period of an ARM, and as the interest rate changes, the amount of an
interest-only payment changes, too. When the interest-only period is over,
whether it lasts only for the fixed-rate part of the loan or extends into the
adjustable-rate part of the loan, monthly payments will probably be larger
because they will apply to principal as well as interest.
As with all interest-only mortgages, interest-only ARMs are not for all
borrowers, and should be offered appropriately only to borrowers who clearly
understand and qualify for the potential payment increases.
Balloon/Reset Mortgages
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Balloon/reset mortgages have monthly mortgage payments based on a 30-year
amortization schedule, and you have a choice at the end of the 5- or
7-year term to either pay off the remaining balance or reset the mortgage.
So you have the advantage of a low monthly payment, like someone with a
30-year loan, but you must pay off the loan at the end of the specified
term. Many balloon mortgages have a "reset" option. That means you can
reset the interest rate of your mortgage to the current market rate for the
remainder of the amortization period. This option is typically only
available if:
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You're still the owner and occupant of the home.
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You've paid your mortgage on time for at least a year
prior to the balloon note maturity date.
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You have no other liens against the property.
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If you do not qualify for a reset, you may qualify to
refinance your balloon/reset mortgage.
There are additional considerations to be aware of with balloon/reset
mortgages:
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If you plan to sell your home before the balloon maturity
date of the balloon/reset mortgage, this type of mortgage, like an ARM,
may be a good option.
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Balloon/reset mortgages usually come with a slightly lower
initial rate than most other fixed-rate mortgage types. You may qualify
for a larger loan amount with a balloon/reset mortgage than you would with
a fixed-rate mortgage.
Unlike ARMs, whose interest rates may reset or adjust a number of times
over the loan's life, a balloon mortgage comes with only adjustment.
However, if interest rates rise sharply during the term of the balloon
loan, you could face a large increase in your monthly payments when you
reset or refinance your mortgage.
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If your financial condition has changed at the end of the
balloon term because of a decline in income, family medical problem, etc.,
you may have difficulty refinancing into an acceptable new mortgage.
What the numbers mean. There are 2 types of
balloon/reset mortgages: 7/23 and 5/25. The two numbers together are the
total number of years (30) the payments will be based on. The 1st number (7
or 5) is the number of years before the balloon maturity date. The 2nd
number (23 or 25) is the balance of the term.
Comparing Mortgages
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The best way to evaluate different mortgages is to compare them in writing.
Look at all the costs, including loan and origination fees and discount and
origination points.
Ask what the
Annual Percentage Rate (APR) of the loan is. The APR factors in both the
interest rate and fees.
Be sure to ask for a
"good-faith estimate" (GFE) in writing from each lender. A good-faith
estimate will outline all the costs and help you compare lenders and mortgage
products. A GFE is a best approximation of your final costs, not a guarantee.
Still, you should not expect a large difference between the GFE and the final
statement at your closing.
Mortgage Rates
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It's important to shop around to find the mortgage and mortgage rate that's
right for you. Contact lenders at banks and credit unions as well as
mortgage brokers to find the best rate for you.
You'll have to choose between a
fixed-rate,
adjustable-rate or balloon/reset mortgage You'll also have to choose your
loan terms. Keep in
mind that the lowest mortgage rate or longest loan term may not always be the
best choice for you. You should also consider the overall cost of the loan,
including fees (application, escrow, and appraisal fees, for example) and
points.
Mortgage rates change frequently. With many lenders, you can "lock in" the
rate, which allows you to complete the mortgage process knowing the exact
interest rate you'll get for the life of the loan if the loan is a fixed rate or
for the initial period if the loan is an ARM or a balloon/reset mortgage. If you
believe rates will increase while your mortgage is being processed, you might
lock in the current interest rate through your closing date. A typical lock-in
lasts 30-60 days.
If you choose not to lock in your rate, you can "float" the rate. This means
that you can follow market rate trends and choose to lock in when the rates are
more favorable. However, you will have to lock in your rate at the end of the
float period, which is usually 72 hours before closing.
Shop around for
mortgage rates
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Even a fraction of a percent can make a big difference in your mortgage
payment, so you'll want to shop around and compare rates.
What Lenders Evaluate
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When you apply for a mortgage loan, the lender will often look at "the three
Cs" to review your application. They want to ensure that you're a good risk and
can be trusted to pay back the loan.
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Capacity.
Capacity is your current and future ability to make payments. Lenders will
look at your income, employment history, savings, and monthly debt payments.
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Collateral.
The principal collateral for a loan typically is the proposed
mortgaged property. In addition, if you have savings, land, property, or other
valuable assets, they can be used to secure loans.
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Credit.
Lenders look at your credit and on-time payment history to see your record of
paying bills and debts.
Lenders will ask for financial statements to see if you meet all of their
criteria. Sometimes, your strength in one area can cancel out your slight
weakness in another. For example, if you own a home (strong collateral), but
your credit history contains several late payments (weaker credit), your slight
credit weakness may not hurt your application.
Based on the type of mortgage you're interested in, lenders will
obtain, or you will be asked to provide, some or all of the following financial
documentation:
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W2's (Past 2 years)
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Most recent 30 days of pay stubs for
current employer
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Past 2 years of FULL
tax returns (1040's) (if self employed, commissioned, skilled trades)
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Name, address, & phone of
landlords, 2 year history (if renting)
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Name, address, & phone of employer, 2 year history
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Bank statements for all accounts, 2
consecutive months
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Recent statements for all retirement
accounts
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Recent statement for all
investments, such as stocks, bonds, etc.
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Property address & Loan information on other real estate owned
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Child support information from
Friend Of The Court showing monthly payment and how long you have been
receiving or paying (if receiving or paying child support)
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Divorce Decree (if divorced)
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Bankruptcy papers (if filed for
bankruptcy in the past)
Steps in the Process
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When you apply for a mortgage, several things happen:
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Your lender will get an appraisal.
The appraisal will determine the market value of your new home, which will be
used as collateral for your loan. You'll be charged a fee for this service; it
will likely be included in your
closing costs.
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Your lender will look at your credit report.
Your lender will look at your
credit
report to verify your credit history. You'll be charged a fee for this
document as well. If you're pre-approved, this step may have already been
completed.
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Your lender will verify your personal information.
Your bank account and employment information will be verified. Your lender may
ask you for your 2 most recent monthly bank statements or pay stubs. If you
can't provide them, a Verification of Employment (VOE) and Verification of
Deposit (VOD) will be mailed on your behalf to verify the last 2 years of
employment and banking information.
Mortgage
Documents Provided To You
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Your lender is required by law to provide you with the following documents:
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Truth-in-Lending disclosure.
This disclosure includes a summary of the total cost of credit, such as the
Annual Percentage Rate (APR) and other specifics of the loan.
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"A Home Buyer's Guide to Settlement Costs."
This guide is a government publication that describes the closing or
"settlement" process, associated costs, and your rights.
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Adjustable-Rate Mortgage (ARM) disclosure.
This disclosure includes information about terms and costs associated with an
ARM, past performance of the index to which the interest rate will be tied,
and the "Consumer Handbook on Adjustable-Rate Mortgages."
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Annual Percentage Rate (APR) information.
This is the cost of credit expressed as a yearly rate. The APR includes the
interest rate, points, broker fee and any other charge you're required to pay
in order to obtain your mortgage loan.
APPLY
NOW!
Information Source: Fannie
Mae & Freddie Mac
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