When searching for a loan
you should first decide on the objectives you require of a
loan. In order to do this, you need to ask yourself the following
questions and click to learn more:
- How long
do you plan to live in the property?
- At present,
what are your financial goals (ex: maintaining a certain
cash flow, quickly paying off the mortgage, etc.)?
- Are you
expecting any changes to occur in your financial situation
in the next few years (ex: retirement, promotion, career
change, children going to college, etc)
- What is
your recent credit history?
- Will you
have a difficult time documenting your income, perhaps because
you are you self-employed?
How long do you plan to live in
the property?
The amount of time you plan on living in your home is important
in determining the type of loan you should consider. For example,
if you plan to stay in the property for 7 years or less, you
may want to consider an intermediate adjustable with a rate
that is fixed for a 5 or 7 year period. Why pay the higher
rate of a 30-year fixed when you don't require such long term
financing? Also if your time horizon of ownership is 7 years
or less, it is advisable to opt for minimal closing costs
because your opportunity to recoup the price of high closing
costs is dramatically reduced.
At present, what are your financial
goals (ex: maintaining a certain cash flow, quickly paying
off the mortgage, etc.)?
If cash flow is a top priority, for example, an adjustable
with varied payment options may be your best bet. Some adjustable
products allow borrowers to choose from 3-4 payment options
each month (i.e. interest only, allowing for negative amortization,
30 year fully amortized or 15 year fully amortized). This
allows a borrower to choose a different payment option every
month based upon his or her monthly cash flow.
For others, the goal may be rapid repayment in which case
a 15-year mortgage may be considered or possibly an adjustable
rate with a lower rate of interest supplemented by additional
principal payments to retire the mortgage debt early. With
an adjustable vs. a fixed rate, your principal reduction payments
will afford you a progressively lower required monthly mortgage
payment as the mortgage is recast and interest is calculated
and your payment is based on the existing mortgage balance
vs. the original balance. With a fixed rate mortgage your
required payment will remain constant over the life of the
mortgage, regardless of any principal reduction payments you
may make.
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Are you expecting any changes to
occur in your financial situation in the next few years (ex:
retirement, inheritance, promotion, career change, children
going to college, etc)?
For example, do you anticipate receiving funds (stock options,
inheritance, sale of an asset) in the next few months or years
that would permit you to pay down your mortgage balance? If
so you may choose a mortgage with an interest rate that is
guaranteed for a shorter term (i.e. an ARM with a rate fixed
for 1-5 years) reflecting the time frame from which you expect
to receive the funds. After this time you could refinance,
using these funds to pay down the balance on your existing
mortgage or if you currently had an adjustable that is scheduled
to recast, you may simply pay the balance down and enjoy a
lower monthly payment without refinancing.
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What is your recent credit history?
If you have excellent credit, you may want to inquire about
mortgage products that are discounted for individuals with
high credit ratings. In addition to credit, some lenders will
also provide further discounts to borrowers who have high
equity in their property, usually considered to be 30-35%+.
For those having credit blemishes, it is best to discuss your
history openly and honestly with your mortgage consultant
and to review your current credit report together. The market
for less than perfect credit applicants (referred to as subprime)
has grown dramatically over the last few years offering competitive
interest rates and a greater variety of product options. For
those planning to improve their credit ratings, it is best
to take shorter term financing of 2 to 3 years, after which
one can refinance into "A paper" (the best) financing.
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Will you have a difficult time
documenting your income, perhaps because you are you self-employed?
If you will not be able to sufficiently document your income,
you may opt for a quick qualifier, easy qualifier or no income
verification mortgage. These products usually offer a trade
off though, the less documentation you are able to provide
the higher the interest rate will be. Some of these programs
also require a higher amount of equity in the property. There
are also programs that do not require verification of either
income or assets (referred to as NINA mortgages). Each of
these mortgages could have higher interest rates and equity
requirements associated with them.
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