Top 10 Things To Consider On Home Loans
By Tom Levine
Here are our Top 10 most important things to consider when
shopping for a Home Loan, Equity Line of Credit, or Refinance, courtesy of
LoanResources.Net: 1. Down-Payment
2. Fixed Versus Adjustable Rate
4. Loan Types
5. Loan Amount Qualification, Income
6. Loan Amount Qualification, Expenses
7. Employment and Credit History
9. Sub-Prime Loans
1. Down-Payment - As a general rule of thumb, lenders will be
seeking contribution from you of around 3% to 6% of the total loan value. This
can be negotiable, and there are many loan packages available.
2. Fixed versus Adjustable - The two most common loan products
available for home mortgages are fixed rate versus adjustable rate.
Fixed rate means that you agree on an APR (annual percentage
rate) that does not change through the life of the loan, whereas, an Adjustable
Rate Mortgage, better known as an ARM, means that rates and monthly payments can
change, often tied to the U.S. Government Treasury Bills or some other form of
"index", with the frequency of change dependent upon the terms of the loan.
Deciding on which way to go involves many variables. We suggest
that you start by examining the fixed rate products available on the market.
They are by far the most popular, and arguably with the least amount of risk.
After evaluating several preliminary loan offers (quotes) for fixed rate
mortgages, you can then venture into the world of ARM's to see if one of these
products may be right for you. But, proceed with caution, and understand all the
risks, alongside any potential benefits.
3. APR - APR, better known as the annual percentage rate, aka:
"rate", is arguably the most important consideration you must examine when
looking for a loan. The APR includes principle, interest, "points", fees, PMI
(Mortgage insurance), and other costs associated with the loan. While all costs
and terms are significant and affect the bottom line, we suggest that shopping
rate is a very good starting point.
4. Loan Types: There are several standard loan products to look
for, including 30 year fixed, 15 year fixed, bi-weekly mortgages, 1 month ARM's,
5 year fixed ARM's, 2nd Fixed, ARM's with a provision to convert after 5 years,
lender buydowns, and discounted mortgages.
We think the best place to start, is to obtain quotes for a 30
year fixed rate loan, and then go from there. 30 year fixed rate loans generally
produce the lowest monthly payments for fixed rate products, and they are
relatively safe. Once you know where you stand with a 30 year fixed, after
obtaining quotes from several lending institutions, then you can consider the
possibility of exploring more exotic loan products. At this juncture, you will
want to consult with those you trust, for good, solid advice and feedback on
risk versus reward.
5. Loan Amount Qualification, Income: This can vary widely
depending on you, your lender, and many other variables. However, as a rule of
thumb, look at 2 to 2 ½ times your current household income, as a baseline to
determine how much you can afford to borrow.
6. Loan Amount Qualification, Expenses: This is another broad
category that varies from one lending institution to the next. However, there
are two general factors to look at, and they are Housing Expenses (such as
mortgage, property taxes, and insurance), and long-term debt (which can include
credit cards, auto loans, etc.).
First, add all your expenses together. As a rule of thumb, you
will want your expenses to not exceed 33% to 36% of your gross household income.
Second, examine your housing expenses only. As a rule of thumb,
you'll want these expenses to not exceed 25% to 28% of your gross household
7. Employment and Credit History: Lenders generally want to take
a look at your employment history so that they can see a pattern of stability
and income. Lenders generally also want to take a look at your credit history,
so that they can see a pattern of borrowing and repayment in your past. Lenders
cannot discriminate and must use this information solely for the purpose of
considering your ability to repay a loan. Also, many loan products are available
for all kinds of customers, with varied financial backgrounds and histories.
8. Points: Points are one of the primary fees charged on the
loan, and they represent the profit earned by the lending institution. One point
represents one percent of the total loan amount, and points are usually
tax-deductible (along with the interest paid on the loan). They are broken down
into two basic types:
Origination Points - Origination Points are the fees charged by
the lender, and represents their gross profit.
Discount Points - Discount Points are most often charged in
association with a lowered interest rate. In other words, the Discount Points
represents a dollar amount, as a fee for giving the borrower a lowered APR
(lower than what the lender might otherwise charge).
9. Sub-Prime Loans: Sub-Prime Loans consist of loan products
designed for customers with challenging credit and financial backgrounds, or,
customers that are looking to re-establish credit. They can be significantly
higher then the prime lending rate, with less favorable terms (Often times, the
loans are for the short-term, such as 2 to 3 years). However, they do offer a
venue for certain individuals, and they can allow customers to re-establish
credit, or buy new homes prior to cleaning up a credit history, etc.
For some of you, this avenue may offer exactly what you're
looking for. It's important to know that lenders who specialize in sub-prime
loans are out there and want to earn your business. However, we advise that you
proceed with caution. Be sure to gather sound advice from trusted friends and
professionals, and understand all the risks versus rewards, prior to signing on
the dotted line.
10. Short-Forms: The most important thing you can do as a
consumer of loan products is to shop around and get several preliminary loan
quotes for your consideration.
These are no risk, no obligation, preliminary loan offers. They
take 30 seconds to 2 minutes to complete, they require no personal or
confidential disclosure on your part, and they require no commitment from you.
We suggest that you obtain 3 or 4 offers. You can then examine
and compare the terms, rate, fees, and all other pertinent information about the
loan product, and the lender, at your leisure and in the comfort of your own
LoanResources.Net has categorized hundreds of online services
that you can explore. You can also go to any search engine and find them from
application forms that make sense and are relatively easy and quick for you to
Also, take a quick look at the current interest rate for 30 year
fixed loans, as well as the 6 month trend graph. We have set up a free webpage
with this information, or you can find many graphs and charts via your favorite
We've enjoyed providing this information to you, and we wish you
the best of luck in your pursuits. Remember to always seek out good advice from
those you trust, and never turn your back on your own common sense.
Disclaimer: Statements and opinions expressed in the articles,
reviews and other materials herein are those of the authors. While every care
has been taken in the compilation of this information and every attempt made to
present up-to-date and accurate information, we cannot guarantee that
inaccuracies will not occur. The author will not be held responsible for any
claim, loss, damage or inconvenience caused as a result of any information
within these pages or any information accessed through this site.
Tom Levine has been involved in insurance and finance for over 14 years, and
provides a solid, common sense approach to solving problems and answering
questions relating to consumer loan products.