by Nancy Osborne, COO of ERATE
When searching for a home loan it is advised to first determine the financial objectives you require of a home loan. Consider the following:
1. How long do you intend to live in the property?
For example, if you plan to stay in the property for 7 years or less, you may want to consider an intermediate adjustable with a rate that is fixed for a 5 or 7 year period. Why pay the higher rate of a 30 year fixed when you don't require such long term financing. Also if your time horizon of ownership is 7 years or less, it is advisable to opt for minimal closing costs (no closing cost mortgage) because your opportunity to recoup the price of high closing costs is dramatically reduced.
2. What are your current financial priorities (i.e. cash flow, rapid repayment of the home loan)?
For example, if cash flow is a top priority, an adjustable with varied payment options may be your best bet. Some adjustable products allow borrowers to choose from 3-4 payment options each month (i.e. interest only, allowing for negative amortization, 30 year fixed rate fully amortized or 15 year fixed rate fully amortized). This allows a borrower to choose a different payment option every month based upon his or her monthly cash flow.
For others, the goal may be rapid repayment in which case a 15 year home loan may be considered or possibly an adjustable rate with a lower rate of interest supplemented by additional principal payments to retire the mortgage debt early. With an adjustable vs. a fixed rate, your principal reduction payments will afford you a progressively lower required monthly home loan payment as the mortgage is recast and interest is calculated and your payment is based on the existing home loan balance vs. the original balance. With a fixed rate home loan your required payment will remain constant over the life of the home loan, regardless of any principal reduction payments you may make.
3. Do you anticipate any major changes to your financial situation in the next few years?
For example, do you anticipate receiving funds (stock options, inheritance, sale of an asset) in the next few months or years that would permit you to pay down your home loan balance? If so you may choose a home loan with an interest rate that is guaranteed for a shorter term (i.e. an ARM with a rate fixed for 1-5 years) reflecting the time frame from which you expect to receive the funds. After this time you could refinance, using these funds to pay down the balance on your existing home loan or if you currently had an adjustable that is scheduled to recast, you may simply pay the balance down and enjoy a lower monthly payment without refinancing.
4. What kind of recent credit history do you have?
If you have excellent credit, you may want to inquire about home loan products that are discounted for individuals with high credit ratings. In addition to credit, some lenders will also provide further discounts to borrowers who have high equity in their property, usually considered to be 30-35%+.
For those having credit blemishes, it is best to discuss your history openly and honestly with your home loan consultant and to review your current credit report together. The market for less than perfect credit applicants (referred to as subprime) has grown dramatically over the last few years offering competitive interest rates and a greater variety of product options. For those planning to improve their credit ratings, it is best to take shorter term financing of 2 to 3 years, after which one can refinance into "A paper" (the best) financing.
5. Are you self-employed and will you have a difficult time documenting your income?
If you will not be able to sufficiently document your income, you may opt for a quick qualifier, easy qualifier or no income verification home loan. These products usually offer a trade off though, the less documentation you are able to provide the higher the interest rate will be. Some of these programs also require a higher amount of equity in the property. There are also programs that do not require verification of either income or assets (referred to as NINA mortgages). Each of these mortgages could have higher interest rates and equity requirements associated with them.
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.