Financing The Purchase Of Your Home

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Apply For A Loan

To approve your loan, the lender will require the following.

• Ask you to provide information needed to process your application, including the property address and proof of insurance.
• Order a property valuation to estimate the home’s market value.
• Give you a “Good Faith Estimate” of your closing costs.
• Check your credit history.
• Verify your employment history.
• Verify that you have sufficient funds to close.

Loan processing time varies based on the lender, the type of loan and level of activity in the marketplace.

To help ensure your loan approval is not delayed or cancelled, take the following steps:

• Obtain the name of the individual responsible for handling your loan and periodically contact that person to check your loan’s status.
• Maintain a log during the loan processing period to keep up with requirements such as your survey, title insurance and homeowners insurance.
• Obtain the results of your property valuation and read it carefully for any errors, such as wrong measurements or inaccurate comparisons to other neighborhood properties.

Obtain Homeowners Insurance

The USAA Educational Foundation publication, Homeowners Insurance, offers more information.

Your lender will tell you if you must carry flood insurance, which is a separate policy from homeowners coverage.

Select A Loan

Fixed-Rate Loans. Also known as conventional loans, fixed-rate loans are usually repayable in 15 or 30 years and are usually the preferred type of mortgage when interest rates are low. Because the interest rate remains constant, your principal and interest payment remains stable for the life of the loan. Note: Your total monthly payment could change with an increase in property taxes or homeowners insurance rates.

Assumable Loans. You assume the seller’s mortgage loan and interest rate, taking responsibility for their payments is a good idea if the original loan rate is lower than the market rate. Closing costs are generally much lower than when a new loan is established. Few fixed-rate loans are assumable.

VA Loans. The Department of Veterans Affairs (VA) offers loans to individuals with qualifying lengths of military service. They generally require a funding fee, but no down payment. VA-financed homes must pass rigid property valuations and be your primary residence. Consult your lender or the VA at www.homeloans.va.gov for more information.

FHA Loans. The Federal Housing Administration (FHA) offers government-backed mortgage loans through approved lenders. Buyers must pay a mortgage insurance premium (MIP). Homes must pass rigid property valuations and be your primary residence. Consult your lender for more information.

Adjustable-Rate Mortgage (ARM) Loans. ARM loans may be a good choice if you will be staying in your home for a period of time less than the fixed period of your ARM loan. Many offer 30-year terms with lower initial interest rates than comparable fixed-rate loans. An initial, low fixed-rate period is followed by intervals when the interest rate fluctuates and your mortgage payment generally increases. It is important to remember that while there will be up-front benefits, the uncertainty of future interest rates could result in owing more than you borrowed.

Interest-Only Mortgage (I-O) Loans. Most mortgages that offer an I-O payment plan have adjustable interest rates, which mean that the interest rate and monthly payment will change over the term of the loan. An I-O mortgage provides flexibility in the early years of the loan.

Initially you pay only the interest or can choose to repay some portion of the loan balance. After the interest is paid, you must pay the remaining balance over a shorter period of time, resulting in a significant increase (sometimes double or triple the original amount) in the payment amount. In a declining housing market, you could have a minus value in your home and an increasing mortgage payment.

For more information on ARM and I-O loans, visit www.federalreserve.gov/pubs/mortgage_interestonly/mortgage_interestonly.pdf.

Understand Mortgage Payments

• The principal portion of the payment lowers your outstanding loan balance. You are paying back a portion of the original amount you borrowed.
• The interest portion goes to the lender as payment for loaning you the outstanding principal balance. The lower your interest rate, the less your mortgage will cost over time.
• Your monthly payment may also include property taxes and homeowners insurance costs. If so, the lender holds these funds in escrow and pays the local property tax office and your insurance company when those bills are due.

Reduce Mortgage Costs

• Make an additional lump sum payment toward principal annually.
• Increase your monthly payment by a fixed amount.
• Put additional funds toward your principal balance as available (such as when you receive a bonus or monetary gift).

Some lenders offer bi-weekly payment plans which require making 26 payments each year — one every other week — equaling one-half the regular monthly principal and interest payment. This results in making one extra month’s payment each year. Because some lenders charge a fee for this option, it may be better to simply make an extra monthly payment on your own. However you choose to pay your mortgage loan, avoid “deals” asking you to pay a fee to reduce the term.

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