Mortgages 101 – A First Lesson
February 29th, 2008 Categories: Alexandria Dirt, Arlington Dirt, First Time Buyers Club, Home Buying, McLean Dirt, Real Estate 101, Reston Dirt
Mortgages 101
One question I get asked a lot is “What are rates these days?”
And the answer is, drumroll please….. “well, that depends!” You know, back in the old days, real estate finance was fairly simple. You had to save up a nice down payment of 20% and there was 1 program (an 80% first trust loan) and a rate. That’s it – simple – so simple that the real estate agents used to qualify the consumers! Yep – you met with your Realtor, filled out an information sheet, then he or she would qualify you and after writing a contract, THEN you would head off to find a lender.
Wow have things changed! Now, the lender is one of the very first things we usually like to get taken care of. 1) It helps you to understand what you can afford and 2) you can choose the program that best suits your plans.
Some of the more popular mortgage programs are:
The Classic 80% – fully amortized loan
The Classic with a twist – maybe an 80/10/10 or an 80/15/5 that involve a 2nd trust or Home Equity Line of Credit
Interest Only
ARMS
Another twist now is that the interest rates are influenced by your credit score – the better the score, the lower the risk and therefore, the lower the rate.
Let’s look at some of these programs.
You’ve heard 1st trust, 2nd trust, 80/15/5 or 80/10/10… these terms get tossed around all the time – mainly these programs are determined by how much cash you have to put down at settlement. Example: If you’re looking to purchase a home for $400,000 by the old standards you would need to have $80,000 to put down and you would then finance 80% or $320,000. If you don’t have $80K, you might look at an 80/10/10 which means your 1st trust loan would be in the amount of $320,000 and you would have a 2nd trust loan in the amount of $40,000 which would reduce your down payment to $40,000.
If you don’t have $40K, then you could either look at an 80/15/5 which would lower your down payment requirement to 5% – $20,000 – or you could even consider 100% financing which is still an option today under certain circumstances! With the credit crunch and the tightening up of loan guidelines, you may find this is no longer an option for you – all the more reason to be working with a good, local, TRUSTWORTHY lender!
Once you determine what your cash position is and how much you’d like to 
finance, then you would need to choose a program – do you want to pay down your loan amount each month? That’s called a “fully amortized” loan – if you are more aggressive (and possibly a more disciplined investor) you might want to consider an interest only loan – NO principle is paid down, but the theory is that you can take that monthly savings and place it in your investment account.
In this scenario, you are relying on housing market appreciation to allow you to make a profit and move in years ahead. It’s all about risk. You should also consider the length of time you plan to stay in your home. If you’re looking at a 5-7 year investment, you might consider a 10 year ARM or Adjustable Rate Mortgage. If you’re in shorter – there are 3 or 5 year ARMS.
These days there is an additional category of loans that should be discussed, and I will do so in another post. Those are Government backed loans: FHA, VA, VHDA and the like. These are now VERY viable options whereas they used to be looked at as options only for those with credit issues. This is quite possibly the best route to take in some cases now.
One thing is for sure – you need to be well guided, well educated and ready to make some responsible choices for yourself — especially to avoid future problems. Many people have gotten in over their heads and are now going through the foreclosure process. If you’re conservative and have good advice, there are wonderful properties out there just waiting for you to call “home.”
I hope this has given an introduction to the very complex mortgage industry – de-mystifying some terms – it’s always good to partner with a good lender that can help you navigate through this complex process, making it simple and straight forward. I can help you find some great lenders if needed – I’m always here!
Happy Friday!
Jennifer Klaussen
Serving all of your real estate needs in Arlington, McLean and the entire Northern Virginia Region!
Contact me today for a free home valuation or buyer counseling session! The Time is NOW!
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A great post so many people need to really take the time to decide which they are looking for and what there intentions are for the property and then to factor in the current and proposed market. I wish all homebuyers would go thru a course to qualify for any loan to be sure they understand what they are doing short and long term.