Home Buyers Guide

Financing your Home Purchase

Types of Mortgages

Fixed Rate Mortgages
Fixed-rate mortgages are generally for 15- or 30-year terms. (Click here for additional rates and terms.) With a fixed-rate mortgage, you lock in your interest rate for the life of the loan and can feel secure knowing your monthly payment will never change. Fixed-rate mortgages are generally most popular when rates are low, which allows borrowers to lock in a low rate for their entire loan term. However, since lenders are concerned about future rate increases, lenders may price fixed-rate mortgages higher than variable-rate loans.

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Adjustable Rate Mortgages
If you’re buying for the first time, frequently moving, looking for a way to qualify for a more expensive house than you’d normally expect for your income level, or just looking for more creative ways to finance, look into an adjustable rate mortgage (ARMs). ARMs have a set interest rate for the first 1, 3, 5, or 10 years. (Click here for additional rates and terms.) The initial rate is lower than the market rate for fixed rate mortgages. However, after the initial fixed term, these rates can adjust upward or downward depending on the mortgage market at the time. Adjustments are typically capped at a maximum of 2% per year, with a lifetime cap of 6%. ARM interest rate changes are tied to changes in an index rate.

Using an index to determine future rate adjustments provides you with assurance that rate adjustments will be based on actual market conditions at the time of the adjustment. The current value of most indices is published weekly in the Wall Street Journal. If the index rate moves up so does your mortgage interest rate, and you will probably have to make a higher monthly payment. On the other hand, if the index rate goes down your monthly payment may decrease.

An often used index for ARM rate adjustment is the US 10-Year Treasury Bond, often known as the “T Bill” or the “Long Bond”. The yield on the Treasury Bond drives mortgage interest rates.

Jumbo Mortgages
If you’re in the market for a large home or one on a large lot, you may need to finance a considerable sum. Many mortgage plans have limits on the total amount loaned for single-family homes. A jumbo mortgage is simply a regular mortgage at a higher dollar amount and usually a higher interest rate.

Construction Loans
Construction loans provide financing for you to build your home. The loan is approved based on building plans and specifications.

Bridge Loan
Using the equity in a buyers current home to help get into a new home. A bridge loan can be used for either a new construction or new purchase.

Bi-Weekly or Weekly Mortgages
A bi-weekly mortgage payment is your mortgage payment divided in half and paid every other week. A weekly payment is your mortgage payment divided by four and paid every week. Making your payments bi-weekly or weekly is essentially paying on your loan more often then you would by just making your twelve monthly payments.

This chart illustrates typical savings on a $100,000 mortgage:

*For illustrative purposes only. Current rates may vary.

Private Mortgage Insurance
Many homebuyers confuse private mortgage insurance and mortgage life insurance, which are very different products. Mortgage life insurance pays off a mortgage in the event of a borrower's death. It protects you. Private Mortgage Insurance (PMI) protects the lender from the perceived additional risk associated with low down payment loans. Should you fail to make your payments and the lender forecloses, the mortgage insurance is paid to the lender to offset some of their losses.

PMI benefits homebuyers by enabling them to buy a home with less than a 20% down payment. It allows people with good credit and good earnings to get into their dream home without having to wait until they accumulate a large amount of savings.

PMI is usually required on all mortgages with less than a 20% down payment. You pay it monthly, and the premium is determined by the size of your down payment. Some lenders, like CoVantage Credit Union, allow you to pay PMI in one lump sum that you can also finance with your mortgage loan.

Once your loan balance is paid down to less than 75% or 80% of property value, you can cancel your PMI. In fact, lenders are required to automatically terminate mortgage insurance for many borrowers when their balance has been paid to 78% of the original property value.

When shopping for a mortgage, ask if Private Mortgage Insurance is required and how much the lender charges in premiums.

Title Insurance
Title insurance is unlike private mortgage insurance (which protects the lender in the event of default); it is not homeowner’s insurance (which protects you in the event of damages to your home); and it is not mortgage life insurance (which pays off a mortgage upon the borrower’s death).

Title insurance protects both the lender and you, the home buyer, by ensuring that you have full and clear title to the property, that no one else has any rights, liens, claims or encumbrances on your property. If any claims of ownership arise while you or your heirs own the property, the title insurance company that issued your policy is responsible for legal fees to defend your rights, and any losses arising from a valid claim.

The company which issues your title insurance policy conducts a title search to be sure you have free and clear title to the property, that the transfer of that title from the previous owners is handled correctly, and that you are fully protected should anyone claim ownership to the property after your loan is closed.

The title search includes public records, and information from the title company’s database. If title problems are found, they will need to be cleared up prior to your purchase of the property.

Title insurance companies issue two types of title policies:

Both policies are issued at closing for a one-time premium, if the loan is a purchase. If you are refinancing your home, you should already have an owner's policy that was issued when you purchased the property, so the mortgage lender will only require that a lender's policy be issued.

Appraisals
Once an offer has been accepted by the seller, the buyer’s real estate agent will let the lender know that the contract is a "go" and the lender orders an appraisal.

A certified appraiser will visit the property, measure it, and note the property's features and condition. The appraiser compares the property the buyer wants to purchase to other recent comparable properties sold, and adjusts the value to account for differences in size, age, condition and features. The appraiser’s professional opinion of value, or appraisal, is used by the lender to determine that there is enough value in the home to justify the sales price and the mortgage amount. For this reason, appraisals are normally conservative. Do not be disappointed if the appraised value is very close to your sales price; the appraiser's function is simply to validate what you have paid.

What happens if the appraisal comes in less than the sales price? Several options are available.

• The seller may agree to lower the sales price to the appraised value.
• The buyer may choose to take the home at the agreed upon original sales price and increase your down payment to cover the difference.
• The buyer and/or the seller, may contest the appraisal. The real estate agents can provide newer, or different, comparable sales information, and ask the appraiser to reconsider the value previously stated.
• Or, the buyer can decide not to buy the house and have the earnest money refunded.

(Click here for more information regarding the difference between an appraiser and a certified home inspector.)

Next: Refinancing or Existing Mortgage or Frequently Asked Questions