Financing Basics

What is a mortgage?

Generally speaking, a mortgage is a loan obtained to purchase real estate. The "mortgage" itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.

What is loan to value (LTV), and how does it determine the size of my loan?

The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay,$2,500 as a down payment.

The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require mortgage insurance policy.

What are the advantages of 15 and 30-year loan terms?

30-Year In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions. As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.
15-Year Loan is usually made at a lower interest rate. Equity is built faster because early payments pay more principal.

Are there special mortgages for first-time homebuyers?

Yes. We offer several affordable mortgage options which can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.

How much of a down payment do I need to make?

There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you'll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and possibly repairs and decorating.

What is included in a monthly mortgage payment?

The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable).

What are some factors affect mortgage payments?

The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.

How does the interest rate factor into securing a mortgage loan?

A lower interest rate allows you to borrow more money than a high rate with the same monthly payment. Interest rates can fluctuate as you shop for a loan, so ask lenders if they offer a rate "lock-in" which guarantees a specific interest rate for a certain period of time. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the interest rate because it also includes the cost of points, mortgage insurance, and other fees included in the loan.

What happens if interest rates decrease and I have a fixed rate loan?

If you have a fixed rate loan, the principal and interest portion of your mortgage payment will not change, even if rates decrease.  If interest rates drop significantly, you may want to investigate refinancing. Most experts agree that if you plan to be in your house for at least 18 months and you can get a rate 2% less than your current one, refinancing is smart. Refinancing may, however, involve paying many of the same fees paid at the original closing, plus origination and application fees.

What are discount points?

Discount points allow you to lower your interest rate. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or 0.125) of a percentage point. When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.

What is an escrow account, and do I need one?

Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they ensure that money will always be available for these payments. If you use an escrow account to pay property tax or homeowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.

What is RESPA?

RESPA stands for Real Estate Settlement Procedures Act. It requires lenders to disclose information to potential customers throughout the mortgage process. By doing so, it protects borrowers from abuses by lending institutions. RESPA mandates that lenders fully inform borrowers about all closing costs, lender servicing and escrow account practices, and business relationships between closing service providers and other parties to the transaction.

What is a Loan Estimate (LE), and how does it help me?

A LE is an estimate that lists all fees paid before closing, all closing costs, and any escrow costs you will encounter when purchasing a home. The lender must supply it within three days of your application so that you can make accurate judgments when shopping for a loan.

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Buyer's Guide

Why should I buy, instead of rent?

A home is an investment. When you rent, you write your monthly check and that money is gone forever. But when you own your home, you can deduct the cost of your mortgage loan interest from your federal income taxes, and usually from your state taxes. This will save you a lot each year, because the interest you pay will make up most of your monthly payment for most of the years of your mortgage. You can also deduct the property taxes you pay as a homeowner. In addition, the value of your home may go up over the years. Finally, you'll enjoy having something that's all yours - a home that shows your own personal style as well as an investment in your future.

Should I use a real estate broker? How do I find one?

Using a real estate broker is a good idea. All of the details involved in home buying, can be overwhelming. A good real estate professional can guide you through the entire process and make the experience much easier. A real estate broker will be well-acquainted with all the important things you'll want to know about a neighbourhood you may be considering...the quality of schools, the number of children in the area, the safety of the neighbourhood, traffic volume, and more. He or she will help search the multiple listing services for homes available. With immediate access to homes as soon as they're put on the market, the real estate broker can save you hours of wasted driving-around time. Need a recommendation? A Century Loan Officer would be happy to make recommendations based upon realtors that he or she has worked with in the past.

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

Well, that depends on a number of factors, including the cost of the house and the type of mortgage you would like. 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. Closing costs - which you will pay at settlement - average 3-4% of the price of your home. These costs cover various fees and processing expenses. When you apply for your loan, we will give you an estimate of the closing costs, so you won't be caught by surprise.

How do I know if I can get a loan?

Use our simple mortgage calculators to see how much mortgage you can afford - that's a good start. Our highly trained professional loan officers can help you find a loan that fits your needs and is custom for each individual. Pre-approval prior to finding the home of your dreams will help speed up the process.

What do I need to take with me when I apply for a mortgage?

If you have everything with you when you visit with us, you'll save a good deal of time.
 
You should be prepared to provide the following information:
  • Your legal name
  • Your social security number
  • The address of the property you would like to buy (if you have already selected a home)
  • An approximate value of the property you would like to purchase
  • The amount of the loan you would like
  •  Your approximate monthly income
 
Things will be sped along if you also have:
  • a list of all credit card accounts and the approximate monthly amounts owed on each;
  •  a list of account numbers and balances due on outstanding loans, such as car loans;
  • copies of your last 2 years' income tax statements;
  • the name and address of someone who can verify your employment.
  • copies of your checking and savings account statements for the past 6 months;
  • evidence of any other assets like bonds or stocks;
  • a recent paycheck stub detailing your earnings;

How do I know If I'm ready to buy a home?

You can find out by asking yourself some questions:

  • Do I have a steady source of income?
  • Have I been employed on a regular basis for the last 2-3 years?
  • Is my current income reliable?
  • Do I have a good record of paying my bills?
  • Do I have few outstanding long-term debts, like car payments?
  • Do I have money saved for a down payment?
  • Do I have the ability to pay a mortgage every month, plus additional costs?

If you can answer "yes" to these questions, you are probably ready to buy your own home.

How do we determine the maximum loan amount that you can afford?

We consider your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. According to general calculations your mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, should total no more than 41% of income. We also consider cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.

How can I determine my housing needs before I start to search for a home?

Your home should fit the way you live, with spaces and features that appeal to the whole family. Before you begin looking at homes, make a list of your priorities - things like location and size. Should the house be close to certain schools? your job? to public transportation? How large should the house be? What type of lot do you prefer? What kinds of amenities are you looking for? Establish a set of minimum requirements and a wish list. Minimum requirements are things that a house must have for you to consider it, while a wish list covers things that you'd like to have but aren't essential.

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