15, 30, & 40 Year Loans

Are 40-year mortgages a good idea?
Smaller monthly payments are the primary advantage of adding 10 years to the traditional 30-year mortgage, but real estate experts say the shorter-term loan usually is more beneficial for the home buyer. The drawback becomes apparent simply by calculating the cost of additional interest payments, which can total thousands for a few dollars difference in mortgage difference in mortgage payments.

What about splitting my mortgage in two and paying bi-weekly?
Some people set on paying off their home loan early and reducing interest charges opt for a biweekly mortgage. Monthly payments are divided in half, payable every two weeks. Because there are 52 weeks in a year, the program results in 26 half-payments, or the equivalent of 13 monthly payments per year instead of 12. Using the biweekly payment system, a homeowner with a $70,000, 30-year biweekly mortgage at 10 percent interest could save $60,000 in interest and pay off the balance in less than 21 years.

What about a 15-year v. 30 year loan?
The difference in payments and overall savings between a 15-year fixed-rate loan and a 30-year fixed-rate loan depends on the interest rate and the loan amount. Using a $100,000 loan and 7.25% interest rate as an example, monthly payments on the 15-year note would be $912.86. Monthly payments on a $100,000 loan at 7.25% fixed for 30 years would be $682.18. The 15-year note offers the opportunity to save considerable money over the life of the loan, since the period of amortization is half that of the 30-year note. This means that the total interest paid on a 15-year note as compared to a 30-year note is significantly less. However, calculating the overall savings of the 15-year note over the 30-year note depends on several individual circumstances, such as the borrower's changing income status.

Alternative Loans

What are the risks of "b" and "c" loans?
The major risk is the cost of the loan. Desperate home buyers who are not selective when seeking an "A-," "B," "C" or "D" loan may find themselves locked into long-term loans with outrageous fees and interest rates.

Traditional lenders who offer conforming loans are extremely competitive. They must offer desirable terms or lose their share of the market. Meanwhile, hopeful home buyers who were rejected often turn to mortgage brokers and specialized mortgage lending businesses. Alternative lending sources not only offer a variety of loan products but also are more willing to deal with higher debt-to-income ratios, credit problems and other black marks on an individual's record. In cases where negative information on a credit report may be due to disappear in the next few years, or a borrower expects their income to increase significantly, non-conforming loans without excessive prepayment penalties can be excellent. The borrower can obtain a conventional loan as soon as they qualify, yet enjoy the benefits of home ownership and establish equity in the meantime. Many home buyers engaged in this process look at these less desirable loans as a penalty while others are grateful for a second chance. Yet no one should be so anxious that they sign for a loan with questionable terms.

Credit

How long do bankruptcies and foreclosures stay on a credit report?
Bankruptcies and foreclosures can remain on a credit report for seven to 10 years. Some lenders will consider an borrower earlier if they have reestablished good credit. The circumstances surrounding the bankruptcy can also influence a lender's decision. For example, if you went through a bankruptcy because your employer had financial difficulties, a lender may be more sympathetic. If, however, you went through bankruptcy because you overextended personal credit lines and lived beyond your means, the lender probably will be less inclined to be flexible.

What do I do about bad credit?
Credit problems are the main reason would-be home buyers are denied a loan. The first step to clearing up your credit is to get a copy of your credit report to make sure that the negative credit information is indeed accurate. For a copy of your report, contact one of the three major credit reporting agencies

Where do I get a copy of my credit report?
For a copy of your own credit report, call one of the three main national credit reporting agencies: Equifax, (800) 685-1111; Experian, (800) 311-4769 or Trans Union, (312) 408-1077. The bureaus also should provide instructions on how to read their report and dispute any inaccuracies it contains.
 

Pre-Qualifing & Pre-Approval?

How do you qualify as a first-time buyer?
In general, lenders define a first-time home buyer as someone who has not owned any real estate -- whether a personal residence, vacation home or investment property -- during the past three years. Lenders verify an applicant's status by examining their income tax returns, checking to see that the individual did not take any deductions for mortgage interest or property taxes.

What is the first step when looking for a home loan?
Most experts recommend that you should get pre-qualified for a loan first. By being pre-qualified, you will know exactly how much house you can afford. Almost all mortgage lenders now pre-qualify and pre-approve customers, and many of them can even do it on the Internet. You also can do your own affordability calculations; most recent consumer books on home buying include steps to doing so, as do various real estate Internet sites.

What can I afford?
Know what you can afford is the first rule of home buying, and that depends on how much income and how much debt you have. In general, lenders don't want borrowers to spend more than 28 percent of their gross income per month on a mortgage payment or more than 36 percent on debts. It pays to check with several lenders before you start searching for a home. Most will be happy to roughly calculate what you can afford and pre-qualify you for a loan. The price you can afford to pay for a home will depend on six factors:
1. gross income
2. the amount of cash you have available for the down payment, closing costs and cash reserves required by the lender
3. your outstanding debts
4. your credit history
5. the type of mortgage you select
6. current interest rates

Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance (or PITI as it is known). If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI. This ratio should fall between 28 to 33 percent, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range.

What do I do if I get turned down for a loan?
Increasing numbers of loan applicants are finding ways to buy their own home despite past credit problems, a lack of a credit history or debt-to-income ratios that fall outside of traditionally acceptable ranges. Ask the lender for a full explanation, then appeal the decision in writing.