Credit
report: Credit history is usually determined
by a credit scoring process called FICO. The score
ranges from a high of 850 to a low of 450. Your
FICO score will determine the category of your loan,
from prime (the best) to subprime or another category.
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Debt-to-income ratio:
When lenders calculate your monthly housing expenses,
they include Principal, Interest, Taxes and Insurance
(called PITI in the real estate industry). Lenders
usually require that this amount fall between
35% and 40% of your monthly gross income (income
before taxes). Where you fit in this 35% to 40%
range depends on your down payment, type of mortgage
loan, credit history, long-term debt and employment
stability.
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Fixed-Rate Mortgage:
With this mortgage, the interest rate remains
the same for the life of the loan. If you plan
to stay in your home for many years, securing
a fixed interest rate may be your primary concern.
There are drawbacks, however. If you sell your
home before the loan is paid off, the new buyer
may have trouble assuming the existing loan. In
addition, some fixed-rate mortgages impose a penalty
if you pay off the loan balance early.
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Adjustable-Rate Mortgage
(ARM): This mortgage adjusts up or down with
the changing marketplace. Most ARM’s are
offered with a lower, or “teaser,” interest
rate for a certain period of time. Once that period
is over, the mortgage payments change periodically-for
example, twice a year. The interest rate changes
are usually subject to two cap limits-one for
the adjustment periods and one for the life of
the loan.
If you believe your household income will increase
going forward, and if you plan to move in a few
years, then you may want to consider an adjustable-rate
mortgage.
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Balloon Mortgage:
This type of mortgage usually offers a low interest
rate that is fixed for a period of five, seven,
or ten years. At the end of this term, you have
the option to refinance the mortgage or pay off
the entire loan balance. If you think you may
sell your home in a few years, a balloon mortgage
may be a wise decision. However, if the loan becomes
due during a period of high interest rates, you
could become trapped if you are unable to obtain
a new mortgage or replace the old one.
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Negative Amortization Mortgage:
Under this arrangement, your monthly payments
are less than the true amortization amounts-so
the loan balance increases over the term of the
loan rather than decreases. For some loans, the
negative amounts may be reconciled by applying
the deficits against the borrower’s down
payment equity.
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