Selecting the right mortgage.Because most home buyers finance their purchase, many turn to their CPAs with questions about mortgage products and financing options. How can prospective buyers determine which mortgage products are right for them? What are the advantages and disadvantages of each? Since buyers and their financial circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or vary greatly, there are no simple answers. Choosing the best mortgage product depends a great deal on the borrower's personal situation. Important factors include income, ability to make a down payment and the length of time the home will be occupied. Some buyers also are eligible for special programs with reduced interest rates, lower down payments or less strict eligibility standards. The sidebar (1) A Windows Vista desktop panel that holds mini applications (gadgets) such as a calendar, calculator, stock ticker and Vonage phone dialer. It is the Windows counterpart to the Dashboard in the Mac. See Windows Vista and gadget. on page 69 describes the calculations most lenders use to qualify a prospective borrower. Most mortgage products fall into a few basic categories: fixed rate, balloon balloon, lighter-than-air craft without a propulsion system, lifted by inflation of one or more containers with a gas lighter than air or with heated air. During flight, altitude may be gained by discarding ballast (e.g. , adjustable rate Adjustable rate Applies mainly to convertible securities. Refers to interest rate or dividend that is adjusted periodically, usually according to a standard market rate outside the control of the bank or savings institution, such as that prevailing on Treasury bonds or notes. , Federal Housing Authority (FHA See Federal Housing Administration. FHA See Federal Housing Administration (FHA). ) and Veterans Administration (VA). Exhibit 1, page 70, provides a checklist of mortgage types to help buyers understand the features, advantages and disadvantages of each category. This article reviews the basic mortgage types and some of the factors to be considered in helping clients select the best optin. FINDING A MORTGAGE LENDER Choosing a lender is more complicated than just finding the lowest interest rate. Typical sources of mortgage loans include mortgage bankers Mortgage Banker A company, individual or institution that originates, sells and services mortgage loans. Notes: Don't confuse a mortgage banker with a mortgage broker. , banks, savings and loans savings and loan n. a banking and lending institution, chartered either by a state or the Federal government. Savings and loans only make loans secured by real property from deposits, upon which they pay interest slightly higher than that paid by most banks. and credit unions. Mortgage bankers may offer the most competitive rates and fees because their large-scale large-scale adj. 1. Large in scope or extent. 2. Drawn or made large to show detail. large-scale Adjective 1. wide-ranging or extensive 2. operations make loan processing cheaper. Prospective borrowers also may wish to approach local institutions where they have longstanding Adj. 1. longstanding - having existed for a long time; "a longstanding friendship"; "the longstanding conflict" long - primarily temporal sense; being or indicating a relatively great or greater than average duration or passage of time or a duration as specified; relationships. In addition to interest rates, the following factors should be considered when choosing a lender. Points. Lenders charge points (essentially prepaid interest Prepaid interest An asset account showing interest that has been paid in advance, which is expensed and charged to the borrower's P & L statement. prepaid interest ) for processing a loan-- one point equals 1% of the loan amount. Typically, the lower the interest rate, the more points a lender charges. Borrowers should consider the annual percentage rate (APR APR See: Annual Percentage Rate ), which represents the total cost of the loan, including finance charges. Because points are paid up front, borrowers must decide what's more important: * A lower interest rate over the life of the loan, but higher up-front up-front or up·front Informal adj. 1. Straightforward; frank. 2. Paid or due in advance: up-front cash. adv. costs. * A higher interest rate and lower points, which reduces up-front costs. While no-point loans are available and may benefit cash-poor buyers, CPAs should make certain the corresponding interest rate borrowers will pay is not out of line with market conditions. Communication. Loan processing can be a confusing con·fuse v. con·fused, con·fus·ing, con·fus·es v.tr. 1. a. To cause to be unable to think with clarity or act with intelligence or understanding; throw off. b. and stressful experience. Borrowers should look for lenders who offer frequent updates on a loan application's status. Clear lines of communication "Lines of Communication" is an episode from the fourth season of the science-fiction television series Babylon 5. Synopsis Franklin and Marcus attempt to persuade the Mars resistance to assist Sheridan in opposing President Clark. can eliminate anxiety and speed processing by enabling borrowers to satisfy additional information requests quickly. CPAs also can help by clearly describing the mortgage application process to clients so they know what to expect. A broad menu of loan products. To meet borrowers' varying needs, lenders should offer a wide variety of mortgage products, including fixed- and adjustable-rate, balloon, government-sponsored and low-down-payment loans. Processing time. At the outset, ask about a lender's processing time, which can have a significant effect on a loan's cost and a borrower's ability to purchase a particular property. In a period of rising interest rates, even a small change can make the difference in affording a property. Lenders with automated au·to·mate v. au·to·mat·ed, au·to·mat·ing, au·to·mates v.tr. 1. To convert to automatic operation: automate a factory. 2. loan-processing capabilities can pass the time and cost savings on to borrowers. Fees. While application fees are only a small part of the cost of a mortgage, planners should be wary of lenders who charge no application fees but make loans at higher rates. A $200 fee is less costly than paying thousands of dollars in extra interest over the life of a loan. CPAs should warn clients to avoid institutions that charge high application fees and promise a quick lending decision. FIXED-RATE MORTGAGES Fixed-rate mortgages offer advantages for purchasers who want the security of a monthly fixed principal and interest payment during the entire loan term. Historically, fixed-rate mortgages were offered for either 15- or 30-year terms. However, there now is a third choice for many buyers: a 20-year fixed-rate mortgage, which offers the interest savings of a short-term Short-term Any investments with a maturity of one year or less. short-term 1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time. loan and the lower payments of a long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. mortgage. Exhibit 2, page 72, illustrates the financial advantages of each of the three loan options. When presented with such a worksheet See spreadsheet. worksheet - spreadsheet by their CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , Tom and Sue Rutledge Rut·ledge , John 1739-1800. American politician and jurist. Governor of South Carolina (1779-1782) and a delegate to the U.S. Constitutional Convention, he advocated slavery and a strong central government. of Seattle Seattle (sēăt`əl), city (1990 pop. 516,259), seat of King co., W Wash., built on seven hills, between Elliott Bay of Puget Sound and Lake Washington; inc. 1869. decided a 20-year fixed-rate mortgage was their best financing option. Both Rutledges were in their early 40s and had established careers in the Seattle area; they believed buying a two-story Victorian home would meet their current needs and offer investment potential before retirement. They had saved enough money for the down payment and earned sufficient monthly income to qualify for the 20-year rate. This option allowed them to repay the mortgage before retirement while still building equity. BALLOON LOAN Not everyone has the Rutledges' financial flexibility. Tony and Anna Flores Flores, town, Guatemala Flores (flōrəs), town (1990 est. pop. 2,200), capital of Petén department, N Guatemala. Flores was built on an island in the southern part of Lake Petén Itzá and on the site of the , who were in their late 40s, wanted to move back to Flagstaff, Arizona
Neither Flores had expected to retire before age 65. The couple faced a dilemma: On the one hand they wanted to move; on the other they couldn't because they were temporarily cash poor. Their CPA advised them the early withdrawal penalties made the cost of suing their retirement assets to buy a home prohibitive--she said they had to wait at least 10 years to gain access to these funds. By following their CPA's advice, the couple was able to buy a new home without incurring in·cur tr.v. in·curred, in·cur·ring, in·curs 1. To acquire or come into (something usually undesirable); sustain: incurred substantial losses during the stock market crash. 2. any undue financial burden. The answer came in the form of a balloon loan. Ballon bal·lon n. Buoyancy or lightness in movement that allows a dancer to rise and fall smoothly. [French, balloon; see balloon.] loans are amortized as if they were long-term mortgages, but the full balance comes due much earlier--10 years in the Flores's case. By purchasing a home in this way, they were able to take advantage of low monthly payments of $750, which included the same principal and interest as a 30-year fixed-rate loan Fixed-rate loan A loan whose rate is fixed for the life of the loan. . They also saved some initial costs by taking advantage of the lower interest rates offered on balloon loans. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the terms of their loan, the couple agreed to repay the balance in 10 years or face the possibility of refinancing Refinancing An extension and/or increase in amount of existing debt. . They knew this would not present a problem because they could use part of their retirement assets to repay it or use retirement income to refinance Refinance 1. When a business or person revises their payment schedule for repaying debt. 2. Replacing an older loan with a new loan offering better terms. Notes: When a business refinances they typically extend the maturity date. . ADJUSTABLE-RATE MORTGAGES Adjustable-rate mortgage (ARM) A mortgage that features predetermined adjustments of the loan interest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined spread, or Another mortgage product offering even greater flexibility is the adjustable-rate mortgage (ARM), in which the interest rate changes at established intervals based on fluctuations in a preestablished index such as Treasury bills or certificates of deposit. Usually there is one cap on the periodic payment increases or decreases and another on the upper limit of the interest rate. The advantage of an ARM is the initial interest rate is lower, allowing buyers to qualify for higher loan amounts. The down-pay-ment amount typically determines what interest rate is used to qualify a borrower for an ARM. The interest rate is adjusted periodically (usually annually, but sometimes at two- or three-year intervals or longer) and is based on the index rate in effect at the time the adjustment is made. No changes are made during the period, no matter what happens to the index rate. Many ARM loans can be converted to fixed-rate loans at some point in a loan's life. Often, the low initial rate adds up to significant savings in the first few years. In deciding whether to convert to a fixed-rate loan, a borrower should check currently available rates on new loans and ask a CPA to compare the conversion cost to a no-cost refinancing (no points, no application fee, etc.). The disadvantages of ARMs are the unknown fluctuations in monthly payments from one established period to the next. In addition, the conversion rate may be slightly higher than the market rate when the loan is converted to a fixed rate. After being told the advantages and disadvantages of an ARM, Joan and Edward Johnson Edward Johnson may refer to:
Rather than waste money on rent, the Johnsons decided they wanted to build some equity during their Chicago stay. Because of the ARM's lower initial rate, they were able to qualify for a $300,000 home, which they easily sold before moving to New Jersey. With the extra cash generated from the sale of that house, the Johnsons were able to purchase a new home with even more attractive mortgage terms. FEDERAL HOUSING AUTHORITY Not all home buyers are like the Rutledges or Johnsons. As a result, there is a growing trend in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. to help low- to moderate-income earners buy homes. FHA loans FHA loan is a federal assistance mortgage loan in the United States insured by the Federal Housing Administration. The loan may be issued by federally qualified lenders. were established to help lower income families obtain loans insured by a self-supporting program. Unlike conventional loans, FHA loans allow borrowers to make down payments of as little as 3%. As of January 1, 1994, the maximum FHA loan limit was increased to $151,750, depending on the area of the country. The advantage of such loans is that less cash is required up front. The disadvantages are that loan amounts are limited and monthly mortgage insurance premiums are required, as well as an up-front premium at closing. If it wasn't for the FHA loan program, 32-year-old Laura Levinson would not have been able to purchase a home in Altadena, California Altadena is an unincorporated census-designated place in Los Angeles County, California approx. 14 miles from the downtown Los Angeles Civic Center. The population was 42,610 at the 2000 census. . Recently divorced, Laura wanted to build equity in a home and continue to save for her daughter's college education. Since her funds were limited, Laura did not have sufficient money saved to meet a conventional loan's usual 10% down-payment requirement. However, Laura's CPA reminded her she could show a history of prompt payments on other monthly financial obligations, along with a steady ployment record. Because of her credit history, Laura qualified for an FHA loan. VETERANS ADMINISTRATION Another self-supporting program offers loans to eligible veterans or their surviving spouses who have not remarried. The VA guarantees loans to lenders so veterans don't have to make down payments. Because there are no disadvantages (VA loan rates are comparable with conventional interest rates), eligible veterans or their surviving spouses should inquire in·quire also en·quire v. in·quired, in·quir·ing, in·quires v.intr. 1. To seek information by asking a question: inquired about prices. 2. further about such loans through local mortgage-lending institutions. Historically, VA loans have been offered at 15- and 30-year fixed-rate terms. Now, 20-year fixed-rate mortgages also are available to eligible veterans. To help veterans even further, Congress removed limits on interest rates veterans had to pay to qualify. This should help more veterans become homeowners. Due to some additional initiatives, veterans also can apply for VA ARMs. Currently, VA ARMs have a yearly cap of 1% on payment changes and a lifetime cap of 5%. It is anticipated these changes will help increase VA loan volume by 15% to 25% over the next few years. For Sara Singer, the widow of a Desert Storm veteran, obtaining a VA loan was probably the only way she could buy a home for her family in 1993. Monthly mortgage payments were no more than her current rent, so she took advantage of the nodown-payment provision. This left Singer free to build equity and devote her savings to securing her family's financial future. PAYMENT OPTIONS Once a borrower has selected the appropriate mortgage product and begun to make payments, CPAs may wish to advise them about some money-saving payment options. For example, many lenders allow borrowers to make mortgage payments every two weeks. That means a 13th monthly payment is made each year and a 30-year mortgage can be repaid in as little as 21 1/2 years at substantial savings. Another money-saving idea CPAs may recommend to some clients is making extra mortgage principal payments. For example, on a $100,000 loan at 9% for 30 years, monthly payments are $804.62. Over 30 years, the Years, The the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109] See : Time total interest charge is about $189,668. If an additional montyly principal payment of $67.05 ($804.62 divided by 12) is made, the interest charge falls to $129,712, a savings of $59,956. CPAS CAN HELP Making home ownership a reality is probably one of the most rewarding things a CPA can do for cautious first-time buyers first-time buyer n → persona que compra su primera vivienda first-time buyer n → personne achetant une maison ou un appartement pour la première fois first-time buyer . Because there are so many financing options and mortgage products available, many potential home buyers are confused and skeptical about their choices. In some cases, would-be buyers miss attractive opportunities that offer greater financial flexibility in the future. EXECUTIVE SUMMARY * FOR CLIENTS TRYING TO realize the American dream American dream also American Dream n. An American ideal of a happy and successful life to which all may aspire: of home ownership, the wide variety of mortgage products available to finance that dream can be confusing. * CHOOSING THE BEST MORTGAGE product depends largely on a borrower's personal situation, including income, ability to make a down payment, the length of time the home will be occupied and eligibility for certain special programs. * SELECTING A MORTGAGE LENDER involves considering a wide variety of factors, including interest rates, points, lender accessibility, product availability, loan processing time and fees. * AMONG THE MORTGAGE PRODUCTS offered today are fixed-rate, balloon, adjustable-rate and government-sponsored loans for moderate-income borrowers and veterans. Loan terms also vary; traditional 15- and 30-year terms have been supplemented by 20-year loans. QUALIFYING FOR A MORTGAGE Lenders use a wide variety of criteria in qualifying prospective borrowers for loans, including credit history, the down-payment amount, the property's location and condition, other debt, the borrower's employment history and--most important--income. To determine how much income a borrower needs to qualify for a loan, lenders use formulas to calculate how much the borrower can afford to spend on housing. For example, many lenders believe monthly housing costs (mortgage, property and casualty insurance and property taxes) should not exceed 28% of monthly pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern gross income. Percentage limits usually also are set on other debt, including car loans, credit cards and student loans. If a prospective borrower earns $40,000 annually, monthly gross income is about $3,333. The amount available for housing expenses (28%) is about $933. If property taxes and homeowner's insurance are $200 monthly, $733 remains for mortgage payments. If the buyer selects a 30-year fixed-rate mortgage at 8%, he or she qualifies for a $100,000 loan. Assuming a 20% down payment, the borrower could purchase a home for up to $125,000. For purposes of computing computing - computer monthly gross income, acceptable income includes salaries, declared tips, bonuses, net business income, investment income, Social Security benefits, etc. Income not considered includes temporary or noncash payments such as unemployment, welfare or incidental Contingent upon or pertaining to something that is more important; that which is necessary, appertaining to, or depending upon another known as the principal. Under Workers' Compensation statutes, a risk is deemed incidental to employment when it is related to whatever a or casual earnings. Prospective borrowers should consult local lenders for exact lending standards, which may vary from region to region, lender to lender and property to property. EXHIBIT 1 Popular mortgage types Fixed rate Features * Fixed principal and interest payments are made monthly during the term of the loan. * The loan is paid in full at the end of the loan term. * Different terms are available. Advantages * As interest rates increase, monthly principal and interest payments are always known and remain the same. * The amount borrowed is fully amortized over the life of the loan. Disadvantages * As interest rates decrease, monthly payments remain the same. Balloon Features * Monthly principal and interest payments are based on a 30-year amortization. * The loan balance is due at the end of the balloon period. The most common intervals are 5, 7 or 10 years. Advantages * Such loans usually are available at a lower price (at a lower rate or with fewer points) than fixed-rate loans. * If the home buyer or investor plans to live in the home for less than the balloon period, such loans offer the advantages of fixed-rate loans at a lower cost. Disadvantages * At the end of the balloon period the loan must be repaid or refinanced. Adjustable rate Features * The interest rate adjusts at established intervals based on an established index rate. * Payment changes usually are capped. One cap applies to each adjustment and another to the upper limit of the interest rate. Advantages * The lower initial rate allows the home buyer to qualify for a higher loan amount. * If the index interest rate decreases during the life of the loan, the interest rate on the loan also decreases. * Many adjustable-rate loans can be converted to fixed-rate loans. * Often the very low initial rate yields significant savings in at least the first year. * The worst case is always known because of the rate caps. Disadvantages * Unpredictable fluctuations in monthly payments from one adjustment period to the next may be unacceptable to potential buyers. * The conversion rate may be slightly higher than the market rate at the time the loan is converted to a fixed rate. * When index rates rise, so do interest rates. Federal Housing Authority Features * Loans are insured by the Federal Housing Authority (FHA). * Down-payment requirements generally are lower than conventional loans. * The maximum loan amount is established by the FHA and may differ from region to region. Advantages * Less cash is required up front. Disadvantages * The loan amount is restricted. * Both up-front and monthly mortgage insurance premiums are required. Veterans Administration Features * The Veterans Administration (VA) offers eligible veterans or surviving spouses no-down-payment loans. * The maximum loan amount is established by the VA; however, it is higher than FHA limits. Advantages * No down payments are required on most loans. Disadvantages * None. [TABULAR tab·u·lar adj. 1. Having a plane surface; flat. 2. Organized as a table or list. 3. Calculated by means of a table. tabular resembling a table. DATA OMITTED] |
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