Mortgage: How Much Can I Borrow – Affordability

When most buyers start thinking about a mortgage, the wonder how much can I borrow? While the amount you can borrow on a mortgage is important, the affordability of the loan is more so.

The current real estate market as of March 2008 is a major mess. There are a host of reasons for this, but the issue of affordability in a mortgage is one that gets far to little play. In many ways, it shows why the mortgage industry was always going to end up in trouble.

Subprime mortgages get a lot of blame for the current down real estate market and rightly so. Another major problem, however, is the step up borrower. Literally millions of people are trying to step up from one value of home to a higher value of home thus building up the value of their equity and so on. It is a smart strategy…so long as the market is going up and you plan for a pullback. In short, the question is not how much can I borrow now, but how much can I afford to pay if things go bad?

Affordability is the basic issue here. The market has pulled back in a big way. Many people are having problems for two reasons. First, they increase in mortgage payments due to the end of teaser rate periods and increasing interest rates has resulted in mortgage payments they simply can’t afford. Second, the value of homes has pulled back to a point where many homeowners don’t have any equity in their home and cannot refinance out of bad loans.

This double whammy is just that – a financial whammy? Imagine being in a situation where you are struggling to make payments on a home that you owe more on then it is worth? Talk about a recipe for financial ruin!

Remember, there are some basic issues you need to consider when buying a home. First, what is the value now and what happens if it drops 10 to 20 percent? Second, keep in mind the question is not how much can I borrower or how much will the bank loan me? The true question is affordability – how much can I afford? Stick to this and you should be fine. Bite off more than you can chew, and you could really regret it.

Types of Mortgages

When we talk about types of mortgages, we are talking essentially about the terms offered by lenders. Traditionally, the terms were more or less limited to a 30-year mortgage with a fixed interest rate. As you probably know, there are a few hundred different mortgage options now.

When discussing different types of mortgages, it is always wise to start with the bell weather loan. This would be the 30 year fixed rate mortgage. If you choose this loan, you agree to pay the debt back through monthly payments spread over 360 months or 30 years. The interest rates remain the same throughout the pay back period. The advantage of this loan is you always know your monthly cost. The downside is it takes a long time to pay it back and you can end up paying more interest over the life of the loan because of a higher interest rate than our next loan.

Our next mortgage is the adjustable rate mortgage. With this loan, the interest rate charged on the debt fluctuates based on a number of factors. The interest rate is often less than that found with a fixed rate loan, but you run the risk of the rate increasing above the fixed rate if the cost of borrowing money goes up. Essentially, you are making an educated bet as to borrowing costs in the future.

With both the fixed and adjustable rate loans, you can now get interesting terms. If you can afford to, you can now cut the payback period to 5, 10 or 15 years. This means more of your monthly payment goes to the principal of the loan versus paying interest. You can also start off with an adjustable loan and then refinance if interest rates go up above those being offered with fixed rate loans. Put simply, you now have flexibility.

A popular new loan on the market is the interest only loan. With this loan, you only pay back the interest charges each month on the loan. After a set time, say five years, you are then required to pay back the principal in full, often by selling or refinancing. The advantage of this loan is it lets you qualify for larger mortgages or make smaller monthly payments. The disadvantage is you never pay down the mortgage you owe. So, why would people want such a mortgage? They are essentially betting that the home they are buying will appreciate enough to create a profit on the home. Sometimes it works out, sometimes it does not.

Obviously, this introduction to mortgages is covering only a few of the options offered by lenders. If you are looking for a mortgage, it is important to understand that there are tons of other options. In fact, there is a mortgage program for practically any borrowing situation.

What Length Mortgage is Right for You?

What length mortgage is right for you? It depends on a number of factors including your financial situation and the purpose for buying the property in question.

What Length Mortgage is Right for You?

If you want to buy a home, you are going to have to deal with mortgages. Many people focus on two factors when choosing a mortgage program. The first is the interest rate, to wit, how to get the lowest one possible to cut down on interest repayments. The second is the cost of the loan, to wit, how many points and other costs are built into a loan that otherwise looks good, but turns out to be a bad deal. Most people, however, completely fail to address the most important issue when choosing a mortgage - the length of the mortgage.

What length of mortgage is right for you? Well, it depends. In general, the shorter the mortgage, the better it is for you. Why? The primary reason is you will pay off the home loan much faster and save on interest payments. In turn, this will create more equity in your home that can act as a nest egg for those live events that require a little cash such as emergency medical bills, college tuition for kids and so on. If none of these life events occur, you can rest easy knowing you have a pile of wealth you are literally sleeping on!

So, how much money are we talking about here? For simple math, assume you borrow $100,000 at 8 percent interest. If you pay it off over 30 years, the monthly payment would be about $733. If you pay it off over 15 years, the payment goes up to roughly $955. By paying a couple hundred extra bucks a month, however, you come out big in the end. With the 30-year term length, you will pay upwards of $150,000 in interest on the loan. The 15-year term, however, results in total interest payments of around $90,000. In short, you save $60,000 by going with the shorter length. Since most mortgages are for much more money, the savings are actually much higher in real life.

Is a shorter length of mortgage always right for you? No. If you intend to live in the home for a relatively short time period, say two to five years, the total interest savings may not be significant enough to warrant paying a higher monthly payment. To make a determination for your situation, you need to analyze how much of a strain the higher monthly payments will put on your finances. It may be worth it, but then again it may not.

What length of mortgage is right for you? Shorter is generally better, but not always.

Mortgage Refinance

For many people buying homes, obtaining financing any financing before the closing of escrow is the biggest concern. Mortgage refinance, however, can be just as important.

What Is Mortgage Refinance?

Admit it. When you file an application for a mortgage, you do not really look for the best absolute deal on the market. Whether consciously or unconsciously, your biggest concern is just to get financing so you can close the deal and not lose the home. This natural way of doing things, however, can result in a bad loan. By bad loan, I mean a loan where you are paying more than you should in relation to the interest rate. Given this situation, you probably want to do a mortgage refinance.

So, what is a mortgage refinance? A mortgage refinance is pretty much what it sounds like. You go to a mortgage lender and get a new loan that has better terms for your particular situation. This can include a better interest rate or easier payment terms. Many people will also refinance when they hit the magical 20 percent equity figure for their home. When this occurs, you can get rid of your private mortgage insurance payment and refinancing is the best way to do it.

Mortgage refinance works pretty much the same way as your original loan application. There are, however, a couple of key differences. The most important is that you now have time to shop for the best rate. The second is that you can take steps to fix any issues, such as credit scores, that hurt you with the original loan prior to apply for the refinance package. These little details can save you tens or hundreds of thousands of dollars over the life of a loan, so be a stickler!

During the recent hot real estate market, many people were getting into homes using adjustable rate mortgages or other hybrids. Such loans often start out with what is known as a "teaser" rate. The teaser rate is the initial interest rate being charged on the loan. As the years pass, the interest rate increases dramatically. With the slow down in the house market and the increase in interest rates by the Federal Reserve Bank, many people are now looking to switch to fixed rate mortgages to avoid a situation where the interest on the adjustable rate loan skyrockets. If you are in this situation, you should do so as well.

If you are considering a mortgage refinance, your best step is to speak with a mortgage professional. You can submit an inquiry for a free, no obligation consultation to learn more about mortgage refinance and your options.

Your Job and Getting Approved for a Mortgage

Unless you are one of the fortunate few, you are going to need financing to buy a home. This brings us to the subject of your job and getting approved for a mortgage.

Your Job and Getting Approved for a Mortgage

When you are ready to buy your first home or move up to a bigger, better property, you need to consider your financing options. While many things go into finding the best loan, most people are first concerned about actually being approved for a loan. One factor that is critical when an underwriter analyzes your loan application is your employment status. Mortgages are all about risk in the eyes of a lender. Your job status is a huge factor in evaluating that risk and ultimately getting approved for a mortgage.

When we talk about employment, we are going to focus on the three most common categories. The first is the salaried employee who receives the same earnings each month. The second is the self-employed person who owns their own business and has fluctuating revenues. The third is the commissioned person, a salesperson, who also receives fluctuating revenues based on their production each month.

Salaried employees are the simplest for lenders to evaluate. The annual earnings of this person are a set figure. Lenders are very comfortable with this job designation because they can accurately predict the money you have coming in relation to debts and so on. In general, lenders are looking for stability in employment with a two-year history. If you have changed your job, make sure to explain why and try to stay in the same general profession.

Self-employed individuals are in a bit more of a bind when it comes to mortgages. If you are in this designation, you tend to show a range of earnings versus a steady amount each month. Moreover, you also tend deduct just about everything you can to limit taxes. This can cause problems when you apply for a loan because your reported income is low. If you are self-employed, lenders are going to want to see tax returns, bank account statements and other financial documents for the last two years. If at all possible, do not switch your business effort to a new line of work during this two-year period as the lender will consider it a brand new business and raise its risk assessment.

Commissioned employees are more and more common these days as corporate culture changes. If you fall in this designation, the good news is lenders are much more comfortable with commission earnings these days. As with self-employed individuals, however, it is important that you do not change your job in the two years prior to applying for the loan. Lenders will view such a change negatively, because they will consider your new position independently from the old one. This makes you a riskier proposition in their eyes.

If you are planning on buying a home in the next few years, stability is very important. While there are exceptions to every rule, your best course of action is to stay the course with your job. When it comes to getting approved for a mortgage, this will help a lot. You can always make a job change after being approved.

Mortgage Loans

When it comes to mortgage loans, it pays to compare mortgage lenders and shop for the best low rate loans. Whether you are looking for the best fixed rate mortgage, adjustable or refinance, we've got the information and quotes you need.

It is no secret the days of mortgage lenders giving out easy money are over. The near collapse of the mortgage industry took care of that. There were many lessons to learn from the disaster, but one of the biggest is to educate yourself as much as possible regarding mortgage loans. This is true regardless of whether you are a first time buyer, deciding between a fixed rate or adjustable mortgage or just looking to refinance.

As a borrower, the lessons of the real estate mess should be clear. First, just because someone will give you a load of money, it doesn’t mean you should borrow the full amount. You are going to have to pay it back, so make sure you can afford the monthly payments. Second, you must read the fine print on the loan. Are those low initial interest rates going to last or bump up in a few years to some rate you can’t really afford?

At the end of the day, mortgage loans are a necessary evil if you plan on pursuing the American Dream of homeownership. To avoid a bad deal, you need to be aggressive. Compare what mortgage lenders have to offer. The difference can be surprising. If you don’t, you are not going to get the best fixed rate or adjustable mortgage. What may seem like a low rate, will soon become a bad deal as you learn what others are paying.

Contrary to what you hear in the media, the only real way to determine the mortgage that is best for you is to see what you actually qualify for. If you are looking for a mortgage to purchase a home, a refinance mortgage or a home equity loan, approach it as a business decision. Know what you are getting into and compare mortgage lenders to get the best rates on fixed, adjustable and refinance loans.

Mortgage Loans for the Self-Employed

Mortgage loans for the self-employed can be very difficult to get. Recently, the no document loan was a great way around this problem, but the program was seriously abused and is all but gone these days. Why? Well, people were making any old claim regarding their income since they didn’t have to prove anything. This ultimately resulted in problems when loans started going bad and the lenders figured out a lot of people really weren’t making $250,000 a year! So, what can you do now? Well, you are going to have to submit a ton of documentation to prove your situation. If you still are rejected, try going to the bank where you keep the business accounts. They know what you make and have a history to look at. If they will not write you a loan, take your business banking elsewhere to a bank that will.