Posted on December 16, 2019 by Nancy Liu | Category: Real Estate
Necessary Considerations on financing
In previous articles, we have briefly introduced the main categories of mortgage options. In this article, let’s think about what are the issues we should consider before getting a loan. Different people has different financing needs: some borrowers finance base on a long term plan, and some are interested in short term investment or temporary goal, while others might have both long term and short term financing needs. Different borrowers have different financial situations, which implies: only by finding the option best accommodates your personal needs, can the financing decision made to be beneficial in the long run.
Before making the decision, you may ask yourself these questions:
How long do you plan to live in this house? If you plan to stay in this house for a long time, you can choose the one of the 15 or 30 year Fix Rate Mortgage as your financing option. The advantage of this option is that your monthly payment will be consistent throughout the term of loan. However, if you mean to move to a better house in a few years, the Adjustable Rate Mortgage (ARM) will be a good choice; it helps to reduce your initial interest rate.
How long do you plan to stay at your current job? If you are not sure, it is better for you to choose the mortgage which requires the least of your income as monthly payment, such as Balloon Mortgage.
Are you expected to expand your living spaces because you will welcome new members into this family? If your answer is yes, you may obtain equity line of credit from the increased value of your property to use as the fund in expand or remodel your house. Of course, you can also refinance your current mortgage to take out more cash.
Are you preparing for your children’s tuition? If yes, you may also apply a 15-years equity loan or refinance your current mortgage.
What’s your long-term financial goal? The advantage of finance your home through mortgage or equity line of credit is the tax deduction on your mortgage interest. However, the benefit for investors financing by mortgage varies depending on the person’s age, and financing goal. Investors need to carefully balance their investment and their retirement goals.
Interest Rate, Point, and Other Fees.
If you decide to obtain a loan, I want to remind you on a few technical aspects that needs to be taken into considerations. The note gives clear indication of interest rate and the terms of the loan. But the point is another factor of consideration. Point is the fee the borrower needs to pay the mortgage company or lender; a point generally equals to 1% of the total loan amount. You may apply for a lower interest rate by purchasing points. You may contact with your Mortgage Company or lender for details. One of the loan document given to you is TRUTH-IN-LENDING (TIL), which indicates the Annual Percentage Rate (APR) of your loan. APR is not your mortgage interest rate, but the annual lending rate. The annual lending rate expressed by taking the interest rate, point, agency fee, and other fees into account. It is always a good idea to obtain APR information before closing to assist you in making better decision on your financing options.
Most lenders require you to have an Escrow Account with the mortgage. This account is used to pay for your property tax and insurance, not the interest and principle of your loan. Your monthly mortgage payment may increase if you have an escrow account, but it prevents you from being penalized for late payment in tax and insurance. Lender will pay the tax and insurance out of the escrow account when they become due. Some borrowers do not want their monthly payment increased, so they request to waive the escrow account. Often times the lender charges a fee to waive the escrow account
Private Mortgage Insurance (PMI)
In order to prevent Mortgage fraud, the lenders require the borrower purchase PMI for high risk loans. That is to say, if the down payment is less then 20% of the total purchase price or the appraised value, the borrower would be required to purchase PMI, which will also be accounted into your monthly payment. Therefore, before taking a loan, consult your mortgage broker about PMI and ways to avoid paying PMI on your mortgage.
This article is only for your reference. Please do not apply mechanically to any exact cases. You are welcome to consult our attorneys at Liu & Associates, P.C. For contact information, please click here.