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Start At The Beginning

Many people buying their first home are afraid lenders don't really want to work with them. That's simply not true. Without you, there would be no mortgage lending business. Lenders want to help you buy your first house!

Q I really want to own a home, but I'm not sure I can afford it. Where do I start?

A Some people don't even consider buying a home because they're afraid they can't afford it. But for most people, home ownership is within reach, especially with the many special programs for first-time home buyers. In fact, often, home ownership is as affordable as renting; in some cases even more affordable.

The best place to start is with a licensed professional mortgage lender. Use our Mortgage-Finder Form to have us help you explore all the options of home ownership.

Q How do I know how much house I can afford?

A Before you start looking at homes, you need to have some idea of what you can afford. As a general guide, you can purchase a home with a value of two to three times your annual household income, depending on your savings and debts. However, you may be able to take advantage of special loan programs for first time buyers to purchase a home with a higher value. Use our free service to find out what is available for your particular needs.

Q When should I talk to a mortgage lender?

A The short answer: When you start thinking about buying a home. It's true you can't actually apply for a mortgage until you've chosen your home and signed a contract to buy it, but you shouldn't wait until then to start talking with a mortgage lender.

Any reputable mortgage lender will be happy to help you as you look for a home. The lender will work with you to determine how much house you can afford, help steer you to special mortgages for first time home buyers, and perhaps make suggestions that could make it easier to get the best mortgage for you.

Another advantage: you'll already have a good relationship with a lender when it comes time to apply for your mortgage.

Again, through our free service, we will put you in touch with a competitive New Jersey mortgage lender.

NOTE: For answers to more questions you may have about mortgage terms or the mortgage process, take a look at our Mortgage Tips and FAQs section.

Many different institutions make mortgage loans, including banks, savings and loans, credit unions and, of course, mortgage companies.

Whatever type of mortgage lender you choose, they will need some information from you to help you learn how much house you can afford.

Below, is a long list of items you may need. However, depending on the type of mortgage you seek, some of this information may not be required. Your mortgage lender can help you with this.

About your employment and income

• Your employment, salary and bonuses, and any other source of income for the past two years (bring your tax returns or W-2 forms if possible)
• The amount of any dividend and interest income you received during the last two years
• The amount of any other regular income you may receive (alimony, child support, etc.)

About your personal assets

• Current balances and recent statements for any bank accounts, including both checking and savings
• Current market value of any investments you may have such as stocks, bonds, or Certificates of Deposit
• Interest in retirement funds, if any
• Face amount and cash value of life insurance policies, if any
• Value of any significant pieces of personal property, including automobiles

About your credit and debts

• The balances and account numbers of your current loans and debts, including car loans, credit card balances, and any other loans you may have.

Years ago, there was basically one kind of mortgage; the 30-year fixed rate. Today, you can choose from many different kinds of mortgages. It may seem confusing but these new kinds of mortgages can often make home ownership more affordable.

Q Aren't there really just two kinds of mortgages: fixed and adjustable rate?

A You could say that, because all mortgages fall into one of these two categories; that is, the interest rate you pay is either the same (fixed) for the life of the mortgage, or it can change (adjust) over the life of the mortgage (see "Mortgage Tips & FAQ's" section).

But within these two broad categories, there are many different kinds of mortgages designed to fit people in different financial situations and many of them are designed especially for first time home buyers (see "Help for First Time Home Buyers").

Q How do I know which type of mortgage is best for me?

A There isn't a single, simple answer to this question. The right type of mortgage for you depends on many different factors:

• Your current financial picture
• How you expect your finances to change
• How long you intend to keep your house
• And how comfortable you are with your mortgage payment changing from time to time

For example, a 15-year fixed rate mortgage can save you many thousands of dollars in interest payments over the life of the loan, but your monthly payments will be higher. And an adjustable rate mortgage may get you started with a lower monthly payment than a fixed-rate mortgage but your payments could get higher if the interest rate increases.

The best way to find the "right" answer is to discuss your finances, your plans and financial prospects, and your preferences with your mortgage lender.

Q What does my mortgage payment include?

A For most homeowners, the monthly mortgage payments include three separate parts:

Q How much will I need for the down payment?

A Probably less than you think. Many first-time buyers are surprised to learn there's no set answer to this question. Generally, though, your down payment can be anywhere from three to twenty percent of the home's value. Down payments can be lower for some special, first-time buyer loans, and veterans or those on active military service can obtain loans with no down payment at all. Your mortgage lender can help you with this.

There are many special programs and that can make getting a first mortgage easier. Some of the better-known national programs include:

FHA (Federal Housing Administration)

These loans are government-insured mortgages primarily for first-time home buyers. These loans allow you to buy a home with a lower down payment, and come with guidelines that let more people qualify. They're available from most mortgage lenders. There may be specific benefits and restrictions to FHA Loans in your area; ask your mortgage lender.

VA (Veterans Administration)

These loans are available to veterans of the armed services, those currently on active duty or in the reserve, and their spouses. A VA loan can make it possible to buy a home with no money down.

Rural Housing and Community Development Service (RHCDS)

RHCDS provides home financing to qualified borrowers who are unable to obtain home financing elsewhere. If you are a farmer, or live in a rural area, ask your mortgage lender if you may qualify.

There are many other loan programs that offer homebuyers low down payments and have guidelines that let more people qualify. They may be administered by state or local governments, or other organizations. Once again, your mortgage lender can help you with this.

Applying For A Mortgage Loan

There are some things all mortgage applicants will need to consider when they apply for the loan.

Q How do I choose a type of mortgage?

A Today, you have many options; see "Different Types of Mortgage Loans." Only a mortgage lender is qualified to evaluate your financial situation and match your needs with the best available type of mortgage, so be sure to discuss all of these things in your first meeting whether in person or on the telephone.

Q Do they really need to know everything about me for the application?

A It may seem that way but actually all your mortgage lender needs to know about you is your employment and finances, and information about the home you're buying.

However, you will need to provide quite a few details about these topics, and your application process will go much more smoothly if you're prepared. Be sure to ask your mortgage lender what information you'll need to complete your application.

Q How much will my credit history affect my ability to get a mortgage?

A Many home buyers are very worried about this issue. We've even heard one story that an applicant was denied a mortgage because he had returned a rented videotape late!

Of course, that could never happen. And most people don't need to worry about the effects of their credit history. However, you can be better prepared if you get a copy of your credit report to review before you apply for your mortgage. That way, if there are any errors you can take steps to correct them before you make your application.

If you have had credit problems, be prepared to discuss them honestly with your mortgage lender and come to your application meeting with a written explanation. Responsible mortgage lenders know there can be legitimate reasons for credit problems, such as unemployment, illness or other financial difficulties. If you had a problem that's been corrected, and your payments have been on time for a year or more, your credit will probably be considered satisfactory.

Q What happens after I've applied and how long will it take?

A Your lender will begin the work of verifying all the information you've provided. This process can take anywhere from one to six weeks, depending on the type of mortgage you choose, whether you're buying a home outside your local community, and other factors.

Within three business days after your application, the lender must give you an estimate of your closing costs. (The closing is the actual settlement of your loan.) You'll also get a statement that shows your estimated monthly payment, the cost of your finance charges, and other facts about your mortgage.

For many home buyers, this waiting period can be nerve-wracking. So stay in touch with your mortgage lender, be prepared to answer any questions that might come up and remember that mortgage lenders are in the business of making loans, not denying them.

Some homebuyers find the closing process to be one of the most intimidating aspects of buying a home because it's so unfamiliar. Ask your mortgage lender what to expect at your closing.

Types Of Mortgages

Although there are many options for your first mortgage loan, they all fall into one of these general categories:

Fixed Rate Mortgages

Your monthly payments for interest and principal stay the same for the life of the loan. Your property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.

Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also "bi-weekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)

Adjustable Rate Mortgages (ARMS), also called Variable Rate Mortgages

These loans generally begin with an interest rate that is 2-3 percent below a comparable fixed rate mortgage, and could allow you to buy a more expensive home.

However, the interest rate changes at specified intervals (for example, every year) depending on changing market conditions; if interest rates go up, your monthly mortgage payment will go up, too. However, if rates go down, your mortgage payment will drop also.

There are also mortgages that combine aspects of fixed and variable rate mortgages starting at a low fixed rate for seven to ten years, for example, then adjusting to market conditions.

(See the "Mortgage Tips & FAQ's" section for more complete information on the different types of mortgages.)

When shopping for mortgages on condominiums, most lenders will look for the development to meet certain requirements normally referred to as Fannie Mae or Freddie Mac guidelines. Fannie Mae and Freddie Mac set forth minimum standards a condominium association must adhere to as set forth in the association's Master Deed and By Laws. These standards include:

• Maximum number of investor units permitted and/or held by one individual
• Insurance coverage for the common elements, reserves and directors/officers
• Ownership Interest in the common elements and amenities
• Future development plans within the community
• Control of the association by the developer and home owner's association
• Maintenance of a Budget and Funding for Replacement of Capital Items

Before contacting a mortgage lender, be prepared to have answers to the questions below. Although there are additional questions to be answered, this information should get you off to a positive start. Most mortgage lenders have a questionnaire the association, management company or developer must complete prior to granting a request for a mortgage. If you can, obtain a copy of the lender's questionnaire prior to applying (if you've already had one completed, provide it to the prospective lender. Although the lender may require their own questionnaire, it may give you some preliminary direction.) Have the lender review the completed questionnaire prior to submitting the mortgage application and paying the application fee, points, etc.

• How many units are built and sold? If there is new construction going on within the development , how many units are planned?
• Of the units which are built and sold, how many are investor units?
• Does the developer (if applicable) maintain a majority control over the Association?
• Are the amenities (clubhouse, pool, tennis courts, etc.) complete and available for use by the homeowners?

If you are not familiar with the legal aspects of condominium home ownership, make sure the attorney handling your purchase has experience in condominium law. You can also find useful information from the Community Association Institute (CAI) at http://www.caionline.org/. The CAI web site can provide you with valuable information about community associations.

Choosing your mortgage lender can be as important as choosing your home. If you're comfortable with your mortgage lender, getting your mortgage and your home will be a less stressful and more pleasant experience.

We're here to help you ...

When you use our free service by submitting our Mortgage-Finder Form, your information will be reviewed by your Personal Mortgage Expert. He or she will then recommend one or more mortgage programs to you. The recommendations will be based on mortgage programs currently being offered by the most competitive licensed mortgage lenders in New Jersey.

Rates count . . .

Finding the lowest mortgage rate for you is one of the most important things your Personal Mortgage Expert will do for you.

But rates shouldn't be your only criteria

Mortgages with the same nominal interest rate can end up costing different amounts, because of additional costs such as origination and application fees (see the "Mortgage Tips & FAQ's" section for more information on costs). So shop for more than just rates.

You should also consider how many different types of mortgages a lender offers. A lender with more different types of loans may be better able to match your needs. Your Personal Mortgage Expert can help you with this.

Adjustable Rate Mortgages (ARM) are mortgage programs offering lower fixed rates for a limited period of time after which the interest rate will adjust. These loans are often quoted as a 3/1 or 7/1, where the first number represents the initial fixed rate period and the second number represents the frequency at which the rate will adjust after the fixed rate period. Most lenders offer initial fixed rate periods for 1, 3, 5, 7 and 10 years after which the rate will adjust every 1 year thereafter.

For example: a 3/1 ARM with a rate of 6.00% indicates a fixed rate for 3 years at 6.00% which will adjust every 1 year thereafter. Hence, a 3/1 ARM.

ARMs generally carry a lower rate of interest than a 30 Year Fixed rate mortgage. The trade off is the risk, after the initial fixed rate period, that the interest rate will increase over a period of time.

When shopping for an ARM be sure to get the following information:

What is the maximum an ARM can go up or down when it adjusts? The maximum a rate can go up or down varies depending on the mortgage lender and the initial fixed rate period. When shopping for an ARM you need to determine the loan's caps, margin and index.

What are Caps? There are normally 2 Caps; a per adjustment cap and a lifetime cap. A per adjustment cap is the maximum a rate can go up or down in any adjustment year. A lifetime cap is the maximum the rate can go up over the full term of the loan. For example: a 2% per adjustment cap means the maximum your rate could go up or down in any adjustment year is 2% over the current rate. If the current rate on your ARM is 6.00% the maximum rate you could be paying in the next adjustment year is 8%. A 6% lifetime cap means that the maximum interest rate you could ever pay in any year is 6% over the start rate or 12%. Your new rate is tied to an index to which the lender adds a margin.

What is an Index and Margin? Mortgage interest rates are tied to current market conditions and a good measure of market conditions are yields on treasury securities. The index is normally the weekly average yield on a 1, 3 or 5 Year Treasury Security 30 or 45 days prior to your adjustment date. Keep in mind a 1 Year Treasury yield is lower than a 5 Year Treasury yield.

To this index, the lender will add a margin of X% determined solely by the lender. A lender could add a margin of 2.25%, 2.5% up to or greater than 3% to the index to determine your new rate. When shopping for an ARM you want to look for the lowest term treasury security index with the lowest margin.

What does all this mean? The Caps, Margin and Index play an important deciding factor when shopping for an ARM. For example; you have been quoted the following rates and terms on a 3/1 ARM both with a 1 Year Treasury Security index:

• Loan #1 - Rate 6.00%: Caps are 2% per adjustment, 6% lifetime with a Margin of 2.75%
• Loan #2 - Rate 6.125%: Caps are 2% per adjustment, 5% lifetime with a Margin of 2.50%

On the surface, loan #1 looks like the better loan since the interest rate is .125% lower than loan #2 and that holds true if you plan on moving or refinancing your loan at the end of the three years. But if there is a chance you will keep the loan beyond 3 years, loan #2 is probably the better way to go because 1) when loan #2 adjusts, the rate will always be .25% below loan #1 (unless is adjusts the full 2%) and 2) the lifetime cap is a full 1% lower than loan #1.

How do I decide if an ARM is right for me? The initial fixed rate period is perhaps the most important factor when determining whether or not an ARM is for you and second most important is the margin and index. Here are some points to consider:

Do you plan on remaining in your home for a period of time which is less than or equal to the initial fixed rate period of the loan? If you move or are frequently relocated by your employer, an ARM may be for you. An ARM will provide you with a lower interest rate and payments for the amount of time you plan on being in your home. Do you plan on being in your new home for 5 years? A 5 year or 7 year ARM may be the best way to go.

Do you think you may refinance your loan over the next X number of years? Statistics show most homeowners either move or refinance their mortgage within a 7 year period. If you believe these statistics, or have experienced it yourself, a 7 or 10 Year ARM could be for you.

Do you need a low rate of interest to qualify for the home of your dreams? Since an ARM generally offers a lower rate of interest than a fixed rate mortgage, you may be able to qualify for a higher loan or more expensive home. Keep in mind, however, unless you're in a position to refinance the loan in X number of years, the interest rate may go up and you want to make sure you can still cover the monthly payments. If you have the available funds, you may be better off with a fixed rate mortgage and lowering this rate by paying points.

ARM's are not for everyone. If the possibility of having to refinance or paying a future higher interest rate is not for you, you may be better off with a fixed rate mortgage.

These mortgages offer low, fixed rate payments as though the mortgage was a thirty-year term. But instead, the loan has a fairly short term — for example, five to seven years — and then ends with a single large payment (called a "balloon payment") for all the remaining principle. It can be a good choice if you know you'll only be in your home for a short time.

There are other special kinds of mortgages available now that help achieve specific goals. Ask your mortgage lender or Realtor® for more information about your options.

When shopping for a mortgage, many lenders will quote you rates with points or you can ask for a rate with points. Each point represents one percent (1%) of the amount you are borrowing. Generally, paying points should lower the interest rate on a loan. The more points you pay, the lower the interest rate should be. Lowering the rate reduces your monthly principal and interest payment.

Break Even "Points"

As a general rule of thumb, it takes approximately 5 years on a 30 year loan to recoup the cost of the points paid provided each point lowers your rate 1/4% as described above. If the drop in rate is not 1/4% for each point paid, the amount of time it takes to recoup the points is longer.

Points are normally a good option if you plan on being in the home for a period of time greater than the time it takes to recoup the costs of the points (break even).

To calculate the break even:

• Calculate the Principal and Interest Payment on the Zero Point Loan
• Calculate the Principal and Interest Payment on the Point Loan
• Calculate the $ value of the Points
• Calculate a - b = the savings in your monthly payment
• Calculate ( d / c) / 12 = the number of years to recoup your points

Here's an example:

You are purchasing or refinancing your home and borrowing $100,000. Your options are a 30 year loan at 8.00% with 0 points or 7.75% with 1 pt.

To calculate your "break even":

• Monthly principal and interest at 8.00% = $734
• Monthly principal and interest at 7.75% = $716
• Cost of points paid = $1,000 d) Monthly Savings ($734 - $716) = $18 / mo.
• Calculate ($1,000 / $18) / 12 = 4.63 years to break even

There may also be some tax benefit to paying points.

Tax Deductibility of Points - Purchase versus Refinance

When purchasing a home, the points you pay are normally tax deductible in the year you pay them. This may shorten the break even point or number of years it takes to recoup the points considering the savings on your monthly mortgage payment and tax benefit derived.

When refinancing a home, the points you pay are normally amortized over the term of the loan when calculating any tax benefit. For example; paying $1,000 in points on a 15 year loan will give you a $66 tax benefit per year for 15 years ($1,000 / 15).

Always speak to an accountant regarding tax benefits and paying points on a mortgage loan. Your accountant can best advise you based on your particular tax status. Keep in mind, however, if it costs you $100 per month to save $75 in taxes, you are still $25 in the red!

Points and PMI

When the down payment on your loan requires PMI, we normally do not recommend points, however, the decision is purely financial on your part. Paying points may decrease your monthly payment, however, you will have less equity in your home. With less equity in your home, it will take you longer to reach the 20% equity level thereby allowing you to drop the PMI. This is also a consideration if you ever wish to refinance your home.

Do keep in mind the rate of PMI you pay goes down at the following down payment levels:

• 5% - 9.99% Down - Highest PMI Rate
• 10% - 14.99% Down - Mid Range PMI Rate
• 15% - 19.99% Down - Lowest PMI Rate

The value of the amount of ownership you have in your home after the outstanding balance of any loans are subtracted.

For example: If the market value of your home is $200,000 and you still owe $100,000 on your mortgage loan, your equity is $100,000 ($200,000 - $100,000 = $100,000).