Frequently Asked Questions
What are options
for buyers who can't afford a 20% down payment?
Assuming you can afford (and qualify for) high monthly mortgage payments
and have an excellent credit history, you should be able to find a low (10-15%)
down payment loan. However, you may have to pay a higher interest rate and
loan fees (points) than someone making a larger down payment.
What is private
mortgage insurance?
Private mortgage insurance (PMI) policies are designed to reimburse a mortgage
lender up to a certain amount if you default on your loan and the foreclosure
sale is less than the amount you own the lender -- that is, the amount of
your mortgage loan plus the costs of the foreclosure sale. Most lenders require
PMI on loans where the borrower makes a down payment of less than 20%. Premiums
are usually paid monthly and typically cost less than one-half of one percent
of the mortgage loan. With the exception of some government and older loans,
you can drop PMI once your equity in the house reaches 22% and you've made
timely mortgage payments. Ask your lender for details on the cost of PMI and
requirements for canceling it.
Another source of down payment money is a loan against your 401(k) plan.
Ask your employer or plan administrator if your plan allows for loans. If
it does, the maximum loan amount under the law is the one-half of your interest
in the plan or $50,000, whichever is less. Other conditions, including the
maximum term, the minimum loan amount, the interest rate and applicable loan
fees, are set by your employer. Any loan must be repaid in a "reasonable amount
of time," although the Tax Code doesn't define reasonable. Be sure to find
out what happens if you leave your job before fully repaying a loan from
your 401(k) plan. If a loan becomes due immediately upon your departure, income
tax penalties may apply to the outstanding balance.
Can I tap
into my IRA or 401(k) plan for down payment money?
Under the 1997 Taxpayer Relief Act, first-time homebuyers can withdraw up
to $10,000 penalty free from an individual retirement account (IRA) for a
down payment to purchase a principal residence. This $10,000 is a lifetime
limit. The law defines a first-time homeowner as someone who hasn't owned
a house for the past two years. If a couple is buying a home, both must be
first-time homeowners. Ask your tax accountant for more information, or check
IRS rules at www.irs.gov.
Another source of down payment money is a loan against your 401(k) plan.
Ask your employer or plan administrator if your plan allows for loans. If
it does, the maximum loan amount under the law is the one-half of your interest
in the plan or $50,000, whichever is less. Other conditions, including the
maximum term, the minimum loan amount, the interest rate and applicable loan
fees, are set by your employer. Any loan must be repaid in a "reasonable amount
of time," although the Tax Code doesn't define reasonable. Be sure to find
out what happens if you leave your job before fully repaying a loan from
your 401(k) plan. If a loan becomes due immediately upon your departure, income
tax penalties may apply to the outstanding balance.
What kinds of
government loans are available to homebuyers?
Several federal, state and local government financing programs are available
to homebuyers. The two main federal programs are:
VA Loans. U.S. Department of Veterans
Affairs (VA) loans are available to men and women who are now in the military
and to veterans with an other than dishonorable discharge who meet specific
eligibility rules, most of which relate to length of service. The VA doesn't
make mortgage loans, but guarantees part of the house loan you get from a
bank, savings and loan or other private lender. If you default, the VA pays
the lender the amount guaranteed. This guarantee makes it easier for veterans
to get favorable loan terms with a low down payment. For more information,
check the VA's Website at www.va.gov or contact a regional VA office for
advice.
FHA Loans. The Federal Housing
Administration (FHA), an agency of the Department of Housing and Urban Development
(HUD), insures loans made to all U.S. citizens and permanent residents who
meet financial qualification rules. Under its most popular program, if the
buyer defaults and the lender forecloses, the FHA pays 100% of the amount
insured. This loan insurance lets qualified people buy affordable houses.
The major attraction of an FHA-insured loan is that it requires a low down
payment, usually about 2% to 5%. For more information, on FHA loan programs,
contact a regional office of HUD or check the FHA website at www.hud.gov/mortprog.html.
For information on other government loans, contact your state and local
housing offices. They often have programs available for first-time homebuyers
who are purchasing modestly-priced properties. To find your state housing
office, check U.S. State Resources on Findlaw (www.findlaw.com/state_gov/index.html).
Start by looking at your state's home page. You'll probably find the listing
for your state's housing office.
What's the difference between a fixed and adjustable
rate mortgage?
With a fixed rate mortgage
, the interest rate and the amount you pay each month remain the same over
the entire mortgage term, traditionally 15, 20 or 30 years. A number of variations
are available, including five-year and seven-year fixed rate loans with balloon
payments at the end.
With an adjustable rate mortgage (ARM), the interest rate fluctuates
according to the interest rates in the economy. Initial interest rates of
ARMs are typically offered at a discounted ("teaser") interest rate lower
than for fixed rate mortgages. Over time, when initial discounts are filtered
out, ARM rates will fluctuate as general interest rates go up and down. Different
ARMs are tied to different financial indexes, some of which fluctuate up or
down more quickly than others. To avoid constant and drastic changes, ARMs
typically regulate (cap) how much and how often the interest rate and/or payments
can change in a year and over the life of the loan. A number of variations
are available for adjustable rate mortgages, including hybrids that change
from a fixed to an adjustable rate after a period of years.
Which is better
-- a fixed or adjustable rate mortgage?
It depends. Because interest rates and mortgage options change often, your
choice of a fixed or adjustable rate mortgage should depend on:
* the interest rates and mortgage options available
when you're buying a house
* your view of the future (generally, high inflation
will mean ARM rates will go up and lower inflation that they will fall),
and
* how willing you are to take a risk.
When mortgage rates are low, a fixed rate mortgage is the best bet for
most buyers. Over the next five, ten or thirty years, interest rates are
more apt to go up than further down. Even if rates could go a little lower
in the short run, an ARM's teaser rate will adjust up soon and you won't
gain much. In the long run, ARMs are likely to go up, meaning most buyers
will be best off to lock in a favorable fixed rate now and not take the risk
of much higher rates later.
Keep in mind that lenders not only lend money to purchase homes; they also
lend money to refinance homes. If you take out a loan now, and several years
from now interest rates have dropped, refinancing will probably be an option.
For calculators that will help you help make refinancing decisions, go to
the mortgage calculator page.
How do I find
the least costly mortgage?
You can save real money if you carefully shop for a mortgage. Everything
else being equal, even a one-quarter percentage point difference in interest
rates can mean savings of thousands of dollars over the life of a mortgage.
In addition to comparing interest rates, there are a variety of fees --
and fee amounts -- associated with getting a mortgage, including loan application
fees, credit check fees, private mortgage insurance (if you're making a low
down payment) and points. Since points comprise the largest part of lender
fees, it's important to understand how they work: One point is 1% of the loan
principal. Thus, your fee for borrowing $250,000 at two points is $5,000.
There is normally a direct relationship between the number of points lenders
charge and the interest rates they quote for the same type of mortgage, such
as a fixed rate. The more points you pay, the lower your rate of interest,
and vice versa.
Comparing Loans
by Annual Percentage Rate
One method to compare loans with different points is to use the Annual Percentage
Rate (APR), which lenders must disclose to borrowers under federal law. The
APR can be misleading, however, as its method of calculating the cost of a
loan as a yearly rate assumes that the loan will not be paid off until the
loan term ends. While most loans are for 30 years, people generally pay off
their loans before the loan term ends because they either move or refinance
sooner. Also, different lenders have various ways of calculating costs included
in the APR, so that a loan for the same dollar amount and number of points
may have different APRs with different lenders.
Before comparing points to interest, factor in how long you plan to own
your house. The longer you live in your house (or pay on the mortgage), the
better off you'll be paying more points up front in return for a lower interest
rate. On the other hand, if you think you'll sell or refinance your house
within two or three years, we strongly recommend that you obtain a loan with
as few points as possible.
A good loan officer or loan broker can walk you through all options and
trade-offs such as higher fees or points for a lower interest rate.