One of the most important things to do before looking for a home is to get pre-approved with a mortgage broker. Remember that the interest rate is not be the only factor in determining your choice of lender as there are a number of varying factors involved in successfully obtaining the right mortgage for you. Some of these are:
There is a loan product solution for almost every situation and Menard Johnson has relationships with a number of lenders to provide you with the most options.
Sample Loan Products
Fixed-Rate Mortgage - The most common mortgage plans are 30, 20 and 15 year plans. Your payments and interest rate remain fixed and unchanging over the entire term of the loan.
A $200,000 loan amount at 6.5% over 30 yrs. = $1264
A $200,000 loan amount at 6.25% over 15 yrs. = $1715
The difference in the mortgage payment is $451/month. You build equity faster and lower your interest expense over the life of the loan.
Adjustable Rate Mortgage - These are more commonly referred to as "ARMs." These are more complex than a fixed-rate mortgage because payments and interest rates have the potential to change.
3/1 ARM - fixed rate for 3yrs and then will adjust once annually.
5/1 ARM - fixed rate for 5yrs and then will adjust once annually.
7/1 ARM - fixed rate for 7yrs and then will adjust once annually.
10/1 ARM - fixed rate for 10yrs and then will adjust once annually.
ARMs will have a margin (typically between 2.25-2.75%) that remains constant through the life of the loan. This margin is added to an index which is constantly moving up or down.
Common Adjustable Rate Indexes:
LIBOR Index - London Interbank Offered Rates
MTA Index - Monthly Treasury Average
COFI Index - 11th District Cost of Funds Index
CODI Index - Certificate of Deposits Index
Example: ARM with a 2.25% margin and using the LIBOR index which is 5.516% would result in a fully indexed rate of 7.766%.
Interest-Only Mortgage - The interest-only mortgage has become a very popular product in the last few years. The obvious benefits being a lower payment while no principal reduction occurs.
For example: $200,000 x 6.500% = $1083/month. That's a savings of $181/month versus the fully amortized payment.
Ownership vs. Renting
Leverage your return on investment when you own vs. simply exchanging monthly rent for shelter
Build your equity and net worth faster vs. doing that very thing for a landlord
Take advantage of various tax advantages vs. just paying your taxes!
Overall pride in owning your own property and home vs. living your life under another's roof
Return on Investment (ROI)
ROI = Interest or Appreciation / Investment
For example: a bank CD of $7,500 is invested and returns $225 at the end of 1 year.
ROI = $225/$7,500 or 3%
Example: A person purchases a $200,000 condo. The down payment is 5% ($10,000) and closing costs total $3,500. Total investment is $13,500. The condo gains 4% in appreciation the first year of ownership. What is the ROI? ROI = $8,000/$13,500. The ROI = 59%!
Home Ownership - It's rigged in your favor!
Leverage (Buy a $200,000 condo and only put 5% down)
Paying the mortgage is forced savings
Federal government provides tax advantages for home ownership
Lenders continue to broaden product offerings
Real estate historically appreciates over time
Home owners have at least 10 times the net worth of renters