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Home financing today.

With housing prices in California down significantly from their peak about three years ago, and interest rates lower than they've been in 20 years, monthly payments on a newly purchased house in the state might be as much as one-third lower than they would have been for the same house at the height of the boom.

How much house you can afford is a function of how much cash you can put down toward the purchase and how big a loan you can qualify for. As was true for your parents, the ballpark figure for the most house you can afford is three times your gross annual income (assuming 20 percent down).

Lenders prefer that monthly housing payments (principal, interest, taxes, and insurance) not exceed about a third of your monthly gross income, though some will let you go substantially higher, depending on your financial profile and earning potential. Find out exactly how much you can borrow by prequalifying with a lender before you start house hunting.

Four out of five home loans written today are conventional: at least 20 percent down and the rest financed by a new mortgage. In low-interest times--like now--most loans have a fixed interest rate, which means the monthly payment will stay the same for the term of the loan (usually 30 years, though sometimes 15).

These days, about a third of the home loans secured in California feature an adjustable rate mortgage (ARM). Interest rates on ARMs are set at a certain percentage (called the margin) over an index that generally represents the cost of the money to the lender; they currently average about 2 percentage points lower than those on fixed-rate mortgages. An ARM gives you greater purchasing power because what you can afford is calculated by the discounted starting rate; the lower the rate, the more money you qualify for.

What you gain in purchasing power, however, you lose in stability. Your monthly payment may change once, twice, or even 12 times a year, depending on your terms and on the movement of the index. When shopping, pay attention to the periodic cap (how much the loan can change at one time) and the overall cap (the loan's maximum-rate ceiling). Some ARMs have neither--they're cheap, but not for the faint of heart or potentially shallow of pocket.

A myriad of hybrid loans are also available today; almost all are some combination of a fixed- and adjustable-rate loan. For example, you can get a fixed-rate loan that converts after five years to an ARM (or requires a substantial payment to retain the fixed rate).

Regardless of the type of loan you choose, your up-front cash outlay will include closing costs that average about 4 percent of the borrowed amount. Any lender or broker must explain closing costs, detail what documents you'll have to produce, and provide you with a good-faith estimate of how much cash you'll have to supply at closing. One of the largest charges you pay is points; a point is 1 percent of the loan value. Lower-point loans have higher interest rates and vice versa.

Securing all that cash is often the hardest part of the home-buying process. If you can't swing the 20 percent down payment and have enough left over for closing costs, though, you still have options.

Increasingly, many sellers are willing to carry a loan themselves. Home sales involving this "junior financing" option, typically 10 percent of the purchase, appear wherever housing is expensive. It provides an additional sales incentive for the buyer.

If your credit history is good, some mortgage lenders may also fund up to 90 percent or more of the house value. But most lenders require that any loan over 80 percent of the house value carry mortgage insurance, and few private insurers will issue such a policy. Federal Housing Administration (FHA) loans are government-insured; they allow you to borrow up to 95 percent of a house's value (they'll also allow you to finance much of your closing costs). FHA loans became more useful in expensive areas last October, when their maximum borrowable amount rose from $124,875 to $151,725.

State and local housing agencies also have programs; check in your area. A new program in the legislative works in California will allow first-time home buyers to secure FHA-style loans for much greater amounts--for instance, up to $230,000 in the Bay Area, the most expensive part of the state (the amounts allowed under the program would vary by region). The California Housing Loan Insurance Fund (CaHLIF) program should be on the ballot next June.
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Title Annotation:Special Report: The Endangered Western Home
Author:Crosby, Bill
Date:May 1, 1993
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