Housing How Tos
Terms to Know Before Buying A Home*
APR: Short for annual percentage rate, APR is how much your loan will cost over the course of a year. This figure is almost always higher than the interest rate, because it takes into account the interest charged as well as fees or additional costs associated with the loan. Since all lenders use the same formula, it can be a more effective way of comparing mortgages rather than just the interest rate.
Closing costs/settlement fees: The costs, in addition to the price of the property, that buyers and sellers are charged to complete a real estate transaction. Costs include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges.
Escrow: An account held by a neutral third party (called an escrow agent) who works for both the lender and the borrower. Escrow accounts are usually required by lenders to cover property taxes and mortgage insurance. After an initial deposit, borrowers pay into the escrow monthly – usually as part of the mortgage payment.
Loan Estimate (LE): An accurate estimate of fees associated with a loan provided to the customer by a mortgage lender or broker. An LE is required by law under the Real Estate Settlement Procedures Act (RESPA). The estimate must be provided within 3 business days of applying for a loan.
Mortgage broker: An individual or company who connects borrowers and lenders for the purpose of facilitating a mortgage loan. Unlike a mortgage lender, a broker does not make the loan or service the mortgage. A mortgage broker may represent various lenders or may offer loans from one single source.
Points: Borrowers can pay a lender points to reduce the interest rate on the loan, resulting in a lower monthly payment. The cost of one point is equal to 1 percent of the loan amount. Depending on the borrower, each point lowers your interest rate by one-eighth to one one-quarter of a percent.
*Source: American Bankers Association
5 Important Questions When Choosing Your First Home*
Moving into your own place can be exciting and frightening at the same time. We suggest considering the following questions when choosing your own home.
Start with an evaluation of your financial health. Figure out how much money you have for a down payment or deposit on a rental. Down payments are typically 5 to 20 percent of the price of the home. Security deposits on rentals are usually about one month of rent and more if you have a pet. But be sure to keep enough in savings for an emergency fund. It’s a good idea to have three to six months of living expenses to cover unexpected costs.
Consider all of your current and expected financial obligations like your car payment and insurance, credit card debt and student loans. Make sure you will be able to make all the payments in addition to the cost of your new home. Aim to keep total rent or mortgage payments plus utilities to less than 25 to 30 percent of your gross monthly income. Recent regulatory changes limit debt to income (DTI) ratio on most loans to 43 percent.
A high credit score indicates strong creditworthiness. Both renters and homebuyers can expect to have their credit history examined. A low credit score can keep you from qualifying for the rental you want or a low interest rate on your mortgage loan. If your credit score is low, you may want to delay moving into a new home and take steps to raise your score. For tips on improving your credit score, visit aba.com/consumers.
Create a hypothetical budget for your new home. Find the average cost of utilities in your area, factor in gas, electricity, water and cable. Find out if you will have to pay for parking or trash pickup. Consider the cost of yard maintenance and other basic maintenance costs like replacing the air filter every three months. If you are planning to buy a home, factor in real estate taxes, mortgage insurance and possibly a home owner association fee. Renters should consider the cost of rental insurance.
Generally, the longer you plan to live someplace, the more it makes sense to buy. Over time, you can build equity in your home. On the other hand, renters have greater flexibility to move and fewer maintenance costs. Carefully consider your current life and work situation and think about how long you want to stay in your new home.
Getting a Loan: What You Need to Know*
Preparation is key to navigating today’s housing market. ABA offers the following tips to help prepare potential home buyers. Know your own financial situation. Before you begin the home loan application process, determine what you can realistically afford. Take into consideration your credit score, how much debt you currently carry and what type of down payment you are prepared to make. Have your documents ready.
You will be required to furnish the following information depending on your employment and financial situation:
- Pay stubs, tax returns and financial statements (one that is less than 30 days old)
- Copies of other monthly payments like car loans, credit cards, and student loans
- List of current assets (less than 2 months old)
- Any other information (such as proof of additional income) that you think will help your banker to positively evaluate your credit request positively.
Review the basics. Knowing the fundamentals of the home loan process is an excellent way to prepare to choose the right mortgage. Make sure you are familiar with interest rates, loan terms and additional fees associated with buying a home.
*Source: American Bankers Association