Chapter About Rates From Bankrate.com

CHAPTER 1

Should you buy or rent?

Emotions, family and personal reasons all come into play in any home-buying decision.
No one knows what the future holds for you, your family, your job or your finances. But we can help you understand what you're going to encounter when you embark on the sometimes-difficult journey toward the American Dream of owning a home.

"When you get that urge to buy a house, the first thing to do is step back and ask whether it makes more sense to keep renting for a while. If you still want to buy, you need to figure out how much house you can afford.

Economic differences between renting and owningIf you're looking for the best return on your money, historically you're better off investing in the stock market than buying a house. Primary homes generally don't earn the investment return of financial instruments such as mutual funds. While the stock market's long-term average rate of return is in the range of 8 percent to 10 percent, housing historically has appreciated on average in the low- to mid-single digits. Don't buy solely for investment gain.

On the other hand, Uncle Sam helps out by letting taxpayers deduct part of the mortgage interest and real estate taxes each year. Borrowers get the benefit only if they pay enough in one year to exceed the standard deduction. But that usually happens, especially during the first few years of a mortgage when most of each payment goes toward interest rather than principal.
Sunny side of homeownershipOwners enjoy other benefits, too. They build equity over time as home values rise and their mortgage balances shrink. They also don't have to worry about their housing costs shooting through the roof because lenders can't boost borrowers' rates and payments, unless those borrowers have adjustable-rate mortgages.

Cloudy side of homeownershipWhen something breaks at an apartment, it's the landlord's problem. When it's your name on the deed, the problem is yours. If you throw every penny into a down payment, you're taking a big risk because you may not have enough money left to fix leaky pipes or buy a new air conditioner.

Potential buyers might want to hold off for other reasons. If there's a good chance that you will be laid off soon, you might want to wait. The same goes for people who plan to leave a job soon. The monthly payment isn't the only obstacle for this kind of customer. Closing costs and other home-buying fees, as well as the commission that most owners end up paying to real estate agents when they sell their homes, add up. People who have to sell after living in one place for only a short time can end up in the hole on their investments.

Explore all the optionsSome middle-ground approaches to homeownership blend elements of buying and renting. Some of the more popular loan types are seller financing, "lease with an option to buy" and "contract for a deed" plans

Seller financingIn seller financing, the buyer buys a $150,000 home by taking out an $80,000 bank loan, putting $10,000 down and getting the seller to "carry back" a $20,000 second mortgage. The buyer makes payments on the first loan to the bank and the second loan to the seller. That second mortgage from the seller usually comes with a higher rate, a shorter term and a potential balloon payment. Or, the seller can hold the entire mortgage and the buyer makes payments directly to the seller.

Pro: It reduces the cash needed to get into a home and could reduce closing costs.Con: There are two monthly mortgage payments and the seller determines the interest rate for the second loan.
CHAPTER 2

Deciding between an ARM and a fixed-rate mortgage

Which is the better mortgage option for you: fixed or adjustable?
The low initial cost of adjustable-rate mortgages (ARMs) can be very tempting to home buyers, yet they carry a degree of uncertainty. Fixed-rate mortgages offer rate and payment security, but they can be more expensive.

Here are some pros and cons of ARMs and their fixed-rate brethren.

Adjustable-Rate MortgageAdvantages Disadvantages :

• Feature lower rates and payments early on in the loan term. Because lenders can use the lower payment when qualifying borrowers, people can buy larger homes than they otherwise could buy.

• Allow borrowers to take advantage of falling rates without refinancing. Instead of having to pay a whole new set of closing costs and fees, ARM borrowers just sit back and watch the rates -- and their monthly payments -- fall.

• Help borrowers save and invest more money. Someone who has a payment that's $100 less with an ARM can save that money and earn more off it in a higher-yielding investment.

• Offer a cheap way for borrowers who don't plan on living in one place for very long to buy a house.

• Rates and payments can rise significantly over the life of the loan. A 6 percent ARM can end up at 11 percent in just three years if rates rise sharply.

• Allow borrowers to take advantage of falling rates without refinancing. Instead of having to pay a whole new set of closing costs and fees, ARM borrowers just sit back and watch the rates -- and their monthly payments -- fall.

• The first adjustment can be a doozy because some annual caps don't apply to the initial change. Someone with an annual cap of 2 percent and a lifetime cap of 6 percent could theoretically see the rate shoot from 6 percent to 12 percent 12 months after closing if rates in the overall economy skyrocket.

• ARMs are difficult to understand. Lenders have much more flexibility when determining margins, caps, adjustment indexes and other things, so unsophisticated borrowers can easily get confused or trapped by shady mortgage companies.

• On certain ARMs, called negative amortization loans, borrowers can end up owing more money than they did at closing. That's because the payments on these loans are set so low (to make the loans even more affordable) they only cover part of the interest due. Any additional amount due gets rolled into the principal balance.
Fixed-Rate MortgageAdvantages Disadvantages

• Rates and payments remain constant. There won't be any surprises even if inflation surges out of control and mortgage rates head to 20 percent.

• Stability makes budgeting easier. People can manage their money with more certainty because their housing outlays don't change.

• Simple to understand, so they're good for first-time buyers who wouldn't know a 7/1 ARM with 2/6 caps if it hit them over the head.

• To take advantage of falling rates, fixed-rate mortgage holders have to refinance. That means a few thousand dollars in closing costs, another trip to the title company's office and several hours spent digging up tax forms, bank statements, etc.

• Can be too expensive for some borrowers, especially in high-rate environments, because there is no early-on payment and rate break.

• Are virtually identical from lender to lender. While lenders keep many ARMs on their books, most financial institutions sell their fixed-rate mortgages into the secondary market. As a result, ARMs can be customized for individual borrowers, while most fixed-rate mortgages can't.

Deciding between an ARM and a fixed-rate mortgage
All of these things should factor into your decision between a fixed-rate mortgage and an adjustable. But there are other important questions to answer when deciding which loan is better for you:
1. How long do you plan on staying in the home?If you're only going to be living in the house a few years, it would make sense to take the lower-rate ARM, especially if you can get a reasonably priced 3/1 or 5/1. Your payment and rate will be low and you can build up more savings for a bigger home down the road. Plus, you'll never be exposed to huge rate adjustments because you'll be moving before the adjustable rate period begins.
2. How frequently does the ARM adjust, and when is the adjustment made?After the initial fixed period, most ARMs adjust every year on the anniversary of the mortgage. The new rate is actually set about 45 days before the anniversary, based on the specified index. But some adjust as frequently as every month. If that's too much volatility for you, go with a fixed-rate mortgage.
3. What's the interest rate environment like?When rates are relatively high, ARMs make sense because their lower initial rates allow borrowers to still reap the benefits of homeownership. Rates could fall even further, meaning borrowers will have a decent chance of getting lower payments even if they don't refinance. When rates are relatively low, however, fixed-rate mortgages make more sense. After all, 7 percent is a great rate to borrow money at for 30 years.
4. Could you still afford your monthly payment if interest rates rise significantly?On a $150,000, one-year adjustable-rate mortgage with 2/6 caps, your 5.75 percent ARM could end up at 11.75 percent, with the monthly payment shooting up as well.How adjustable rates can riseYear of ARM Rate Monthly paymentFirst year 5.75% $875Second year 7.75% $1,075Third year 9.75% $1,289Fourth year (6% lifetime cap) 11.75% $1,514 ($639 more than first year)
Now, let's compare this worst-case ARM scenario to a fixed-rate mortgage:ARM vs. fixed mortgage as rates riseInterest rate during 4 years Total payments during 4 yearsARM: 5.75% to 11.75% $57,036Fixed rate: 7.75% $51,600Savings with fixed-rate mortgage over 4 years: $5,436.
In the above case, the fixed-rate mortgage costs less than the worst-case ARM scenario. Experts say when fixed mortgage rates are low, they tend to be a better deal than an ARM, even if you only plan to stay in the house for a few years.
Compare the ratesTo find out what the mortgage principal and interest would be on a particular loan you may be considering, first input your ZIP code to get best mortgage rates in your area. Then proceed to the Bankrate mortgage calculator.

CHAPTER 3

Your credit score
Your monthly principal and interest charges are determined by the rate and the amount of the loan. And the rate and loan amount, in turn, are affected by several factors. The rate depends on your credit score, discount points you pay, and whether the down payment is less than 20 percent. The loan amount depends on the size of the down payment and the home's price.
There is also the matter of mortgage insurance, which is levied on borrowers who make a down payment of less than 20 percent.

What determines your mortgage payment?Mortgage lenders closely scrutinize your financial history to determine whether to approve your loan application.Of primary concern are:

• Your credit report, which details your payment history on all loans, bankruptcy filings and other financial information.

• Your credit score, which uses your credit report to arrive at a numerical representation of your overall creditworthiness.

Credit scores (sometimes called FICO scores after Fair Isaac Corp., the firm that created the most commonly used form) range from the 300s to about 900, with most home buyers falling in 600s and 700s. Bankrate and FICO offer a free way to approximate your credit score via the "FICO Score Estimator."Factors used to determine your credit scorePast delinquency: Those who have failed to make payments in the past tend to do so in the future. The more recent a delinquency, the more it counts against you; a 30-day delinquency within the past 12 months hinders your chances of getting favorable mortgage terms.Length of credit: The longer you've had credit, the better.Credit use: If you're maxed out or close to your credit limits, you're viewed as risky.Mix of credit: Someone with a combination of revolving and installment debt is considered less risky than one with only a secured credit card.

The higher your credit score, the less risky you appear to a lender. A good credit score will help you qualify for a mortgage loan and obtain better terms.

Cleaning up your credit reportWhy check your credit report before your lender does?
Because an estimated four out of five credit reports contain some kind of misinformation -- errors you'll want to clear up before approaching any lender.
Obtain copies of your credit report from all of the big three credit reporting agencies -- Equifax, Experian and TransUnion. Each probably will differ from the others in small ways.
Tips for cleaning up your credit report Look closely for any errors and correct them. Note late payments and credit balances; you may have to explain them to a lender. Compare account numbers to make sure they're yours. Resolve outstanding bills. Pay all bills on time. Learn more about credit scores and how they're calculated.

CHAPTER 4

10 questions to ask your mortgage lender
Once you've narrowed the lender field to a short list of finalists, it's time to compare their offers.10 key questions to askHere are the 10 key questions to ask at application time to help you find the best overall mortgage loan. If you have already selected a lender and are ready to apply, make sure you have the answers to these questions first.

1. What is the interest rate on this mortgage?

2. How many discount and origination points will I pay?

3. What are the closing costs?

4. When can I lock the interest rate and what will it cost me to do so?

5. Is there a prepayment penalty on this loan?

6. What is the minimum down payment required for this loan?

7. What are the qualifying guidelines for this loan?

8. What documents will I have to provide?

9. How long will it take to process my loan application?

10. What might delay approval of my loan?

1. What is the interest rate on this mortgage?

To determine exactly what you'll pay over the term of the loan, you need to know the rate. Rates change quickly, and if your credit is less than perfect, you may not be offered the lender's lowest figure.

To effectively compare different lenders' programs, ask for the annual percentage rate (APR) of the mortgage interest, which is generally higher than the initial quoted rate because it includes some fees. But beware: the APR found in advertisements can be misleading. Mortgage lenders don't always include all the fees they charge in the calculation that determines APR, so customers who use that figure to shop rather than an itemized breakdown of rates, points and fees may end up comparing apples to oranges.

2. How many discount and origination points will I pay?

Lenders may charge prepaid mortgage interest points to lower your interest rate or other points that have no benefit to you at all. Find out how many you'll be expected to pay and which kind of points they will be.

3. What are the closing costs?Mortgages come with fees for various services provided by lenders and other parties involved in the transaction. You want to know what those fees will be as early as possible. Lenders are required to provide a written good faith estimate of closing costs within three days of receiving a loan application.

4. When can I lock the interest rate and what will it cost me to do so?

Your interest rate might fluctuate between the time you apply and closing. To prevent it from going up, you may want to lock the rate, and even points, for a specified period. Ask your lender if lock fees apply. Also, find out what the experts are expecting rates to do, read Rate Trend Index.
5. Is there a prepayment penalty on this loan?

There may be a prepayment penalty on your loan. Some penalties are 1 percent of the loan amount, others are equal to six months' interest, some apply only when you refinance or reduce the principal balance by more than 20 percent, and some kick in if you sell your home. Find out the duration of any penalty period and how the penalty is calculated. Some lenders offer lower interest rates to buyers who accept prepayment penalties.

6. What is the minimum down payment required for this loan?

The rate and terms of your loan will be based on a down payment figure, typically 3 to 20 percent of the buy price. If you can put more money down, you may be able to lower your rate and improve your terms; if you come up short, you may be required to get mortgage insurance.

7. What are the qualifying guidelines for this loan?

These requirements relate to your income, employment, assets, liabilities and credit history. First-time home buyer programs, VA loans and other government-sponsored mortgage programs typically offer easier qualifying guidelines than conventional loans.

8. What documents will I have to provide?Most lenders will require proof of income and assets before approving your loan, and may require other documents as well. Buyers with excellent credit may qualify for a no-documentation or "no-doc" loan, but they can expect to pay a hefty down payment and higher interest rate.

9. How long will it take to process my loan application?

The answer will depend on a number of variables. When the loan business is brisk, underwriters get backed up, verification takes longer, appraisals move slower and other bottlenecks develop along the loan pipeline. Lenders may say two weeks, but 45 to 60 days is probably more realistic in most cases. You'll need their best guess to determine how long to lock in your loan.

10. What might delay approval of my loan?If you provide the lender with complete, accurate information, the loan process should run smoothly. If the underwriter discovers credit problems, however, there could be delays. Make sure you notify your lender if you change jobs, increase or decrease your salary, incur additional debt or change marital status between the time you submit an application and the time the loan is funded.
Put these 10 questions to your leading candidates and compare their answers. The results should lead you toward the mortgage lender that is right for you.

CHAPTER 5

Inspection and insuranceBy Bankrate.com
While the lender and third parties are preparing your loan for closing, there are a couple of things for you to tackle. You probably will want to have the home inspected, and you will be required to buy homeowners insurance.

Home inspectionHome inspection is commonly required to determine the structural and mechanical condition of the home you're buying, including the roof, heating, plumbing, air conditioning and electrical wiring. The inspection may reveal the need for repairs that the seller may have to complete before the sale of the house can go through.

It's a good idea to have the home inspected after you agree on a price but before signing the contract and putting down a deposit. If you're in a hurry to lock in the deal, make sure your contract states that the terms are conditioned on a satisfactory professional inspection. The cost of a home inspection typically ranges between $250 and $500.

Homeowners insuranceAfter the home has been appraised, you'll be in a better position to obtain adequate insurance.Coverage comes in two types:

• Replacement cost policy - With a replacement cost policy, a 20-year-old camera destroyed in a storm would be replaced with an equivalent new model.

• Cash value policy - With a cash value policy, you would receive nothing for the camera because the item has lost its value over time.
Owners of older dwellings and contents tend to prefer the replacement cost policy, which may cost 10 percent more; owners of newer houses and furnishings should consider cash-value policies.

Whichever policy you choose, be sure to ask your insurance agent about safety features such as deadbolts, storm shutters and security systems you can install to reduce your premium.

CHAPTER 6

Understanding the closing process
On closing day, all parties will sign the papers officially sealing the deal and ownership of the property will be transferred to you. It's your opportunity to make any last-minute changes to the transaction.

The day before closing, be sure to gather all the paperwork you have received throughout the home-buying process: good-faith estimate, contract, proof of title search and insurance if necessary, flood certification, proof of homeowners insurance and mortgage insurance, home appraisal and inspection reports. You might need to refer to these documents at closing.
Most home-sale contracts entitle you to a walk-through inspection of the property 24 hours before closing. This is to ensure that the seller has vacated the property and left it in the condition specified in the sales contract.

If there are any major problems, you can ask to delay the closing or request that the seller deposit money into an escrow account to cover the necessary repairs.At closing, your participation will be twofold:

• Sign legal documents. This falls into two categories: the agreement between you and your lender regarding the terms and conditions of the mortgage and the agreement between you and the seller transferring ownership of the property. Be sure to read all documents carefully before signing them, and do not sign forms with blank lines or spaces.

• Pay closing costs and escrow items. Borrowers handle the numerous fees associated with obtaining a mortgage and transferring property ownership in one of two ways: they either roll them into the principal balance of the new loan or agree to pay higher interest rates and have their lenders foot the bill. Some buyers may have to pay these out-of-pocket fees.
Present at closingClosing procedures vary from state to state (and even county to county), but the following parties will generally be present at the closing or settlement meeting:Present at closing

• Closing agent, who might work for the lender or the title company.

• Attorney: The closing agent might be an attorney representing you or the lender. Both sides may have attorneys. It's always a good idea to have an attorney present who represents you and only you.

• Title company representative, to provide written evidence of the ownership of the property.

• Home seller.

• The seller's real estate agent.

• You, also known as the mortgagor.

• The lender, also known as the mortgagee.

The closing agent conducts the settlement meeting and makes sure that all documents are signed and recorded and that closing fees and escrow payments are paid and properly distributed.

Closing documents

You will receive the following important documents:

Closing documents

HUD-1 settlement statement:

A detailed list of all costs related to the sale of the home. It is similar to the good-faith estimate you got weeks earlier, but the HUD-1 is not an estimate;

it is a precise record of the settlement costs.

Both you and the seller sign it.

Compare the HUD-1 statement against the good-faith estimate to see if the actual closing costs differ significantly.

By law, you have the right to review the HUD-1 24 hours before closing. Do so. Clear up any mistakes and resolve problems.

Final TILA statement: You received the first version of this statement after applying for your mortgage. This final version outlines the cost of your loan and APR and takes into account any modifications made to your rate and points between application and closing. Make sure that everything is in order.

Mortgage note: This document states your promise to repay the mortgage. It indicates the amount and terms of the loan, and what the lender can do if you fail to make payments.

Mortgage or deed of trust: This document secures the note and gives your lender a claim against the home if you fail to live up to the terms of the mortgage note.Certificate of occupancy: If you are buying a newly constructed house, you need this legal document to move in.

Once you've reviewed and signed all closing documents, the house keys are yours and you will have successfully bought your new home!

CHAPTER 7

When your mortgage is sold to a mortgage servicer
At closing, your lender must inform you of any plans to turn over the rights to administer your loan to a mortgage servicer, as often happens when a mortgage is sold. The new servicer could be another lender, a bank, an investor or a third-party processing company that specializes in servicing mortgages. Over the term of your loan, you may have several mortgage servicers.

Do you need a mortgage servicer?Duties of a mortgage servicer:

• Collect and process your monthly mortgage payments.

• Forward your payments to the investor who owns your loan (if other than the servicer). The servicer acts on the investor's behalf, should problems arise with the loan.

• Pay your property tax and homeowners insurance from your escrow account.

• Send you an annual mortgage statement that details which portions of your mortgage payments were applied to principal, interest, taxes and insurance, and any adjustments in payments to cover taxes and insurance in the coming year.

• Counsel and assist you to overcome delinquencies if you miss loan payments. For instance, a forbearance, or deferral of principal and interest payments, may be extended to help you out of financial difficulties. If the loan becomes seriously in default, foreclosure might be necessary to protect the investor's interest in the property and salvage the borrower's equity, if any.

Rules that apply to a change in mortgage servicer:

• You must be notified in writing of the change by both your original servicer and the new one, noting the date of transfer and contact information of the new servicer.

• The new servicer must honor the terms and conditions of your original mortgage agreement, with the exception of those directly related to servicing the loan.

• You must be notified of any changes to terms of your homeowners insurance.

• During the transfer, you have a 60-day grace period during which you cannot be charged a late fee if you mistakenly send a mortgage payment to your old servicer.

• Put any questions or disputes you have with the new servicer in writing and continue to make payments while you settle the dispute.

• Federal law requires the servicer to investigate your disputes and make any necessary corrections within 60 business days.

After your mortgage servicer has changed, carefully examine your mortgage statements, making sure all payments have been recorded and taxes and insurance premiums have been paid on time. Retain copies of letters, canceled checks and other paperwork relating to your mortgage and payments in case you need to document any dispute.

source from : bankrate.com