Mortgages: 5 Important Things to Know

Five Important Things to Know about Mortgages


The banking and credit crisis has created new rules, processes and challenges for home financing. To help navigate people through the home buying process I often rely on Kimberly Dragone, Mortage Banker at William Raveis Real Estate, Mortgage and Insurance, in Newton and Brookline.

Kimberly and I recently sat down to talk about some of the frequently asked questions she receives about home mortgages:

1.What will interest rates go down to and when will the rates drop?
“Right now, the rates have dropped to historic lows, and we can expect they will begin to springboard upward.”

Kim added, that taking into account the cost of inflation, customers who buy, or refinance, at these rates are going to make money on this interest rate.

2. Does it make sense for to pay points?
“The answer to whether a buyer should pay points depends on how long that homeowner is going to hold onto the property.”

This is a complex question, because there are instances where paying points can work to a buyer's advantage. Some issues that must be factored into the equation are: tax implications, loan terms, available interest rates, and duration of ownership. People need to understand that points are not necessarily a bad thing. There are many instances, when paying points results in a lower tax bill and reduced monthly payments. However, it is important to keep in mind that a positive return might not be realized for a couple of years (3.5+ years).

Kim explained, that by working backwards, she can calculate how points will affect a loan amount and help a Buyer determine whether points are worth paying.

Example:
Ms. Homebuyer is purchasing a Single Family Property in Middlesex, Norfolk or Suffolk county. The following equation is based on a $523,750 maximum loan limit:

Principal and Interest (P + I) for a 30-yr term at 5% = $2,811.60.
1 point = $ 5,237.50 (1% of loan amount).
1 point paid would reduce the interest rate to 4.625%.
P + I at 4.625% = $2,692.80. $2,811.60 - $ 2,692.80 = $119.
Ms. Homebuyer will need to spend $5,237.50 in order to save $119.

Conclusion: It would take 3.5 years for this homeowner to realize the savings.

If holding a property for <> 3.5 years, then points may not be the way to go. Keep in mind, that the homeowner’s income could be reduced by $5,237.50 because points are tax-deductable.

3. Is a traditional credit history necessary in order to qualify for a mortgage and put 3 percent down?
A traditional credit history is not needed in order to put 3% down. Kim explained that she is able to build an alternative credit history based on rental and utility payment history.

4. Can rental income be used to qualify for a multi-unit dwelling financing, even if the rental units are unoccupied?
In our area, to qualify for a multi-unit dwelling, up to 75% of gross rent may be factored in as income. There is a 25% allowance for vacancy, and if the units are currently unoccupied, an appraiser’s report can be ordered.

5. What is the difference between a mortgage broker and a mortgage banker?
A mortgage banker has the ability to use a short-term credit line to fund the loan until they can sell the loan to the secondary market - to make a loan directly to the consumer. Mortgage bankers can be very competitive in mortgage lending as they specialize in only lending, and do not have to factor in subsidizing any losses in other departments such as traditional banking.

To view the latest rates online: http://www.raveis.com/mortgage.

Check out:
Kimberley Dragone’s Weekly Mortgage Market Report: http://tinyurl.com/ddd33q