Über die Autorin bzw. den Autor

David Reed (Austin, TX) is a veteran mortgage banker who has closed more than 1,000 mortgages. He is a columnist for Realty Times and Mortgage Originator Magazine and is a member of the Mortgage Speakers Bureau. He is the author of Mortgages 101 (0-8144-7245-1), Who Says You Can't Buy a Home (0-8144-7340-7), and Mortgage Confidential (0-8144-7369-5).

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MORTGAGES 101

AMACOM

Contents

Preface.............................................................................................xxiSECTION I MORTGAGE FUNDAMENTALS....................................................................1CHAPTER 1 Introduction to Mortgages................................................................3CHAPTER 2 How to Know How Much Home to Buy.........................................................29CHAPTER 3 Getting Your Finances Together...........................................................38CHAPTER 4 Down Payments and How They Impact Your Mortgage..........................................51CHAPTER 5 Getting Your Credit Together.............................................................71CHAPTER 6 Credit Scores: What They Are, How They Work, and How to Improve Them.....................90SECTION II THE RIGHT MORTGAGE......................................................................101CHAPTER 7 Finding Your Home Loan...................................................................103CHAPTER 8 Loans for Good to Great Credit...........................................................135CHAPTER 9 Loans for People with Impaired or Damaged Credit.........................................147CHAPTER 10 Refinancing and Home Equity Loans.......................................................162CHAPTER 11 Construction and Home Improvement Loans.................................................182SECTION III THE RIGHT LENDER AND RATE..............................................................197CHAPTER 12 Finding the Best Lender.................................................................199CHAPTER 13 Finding the Best Loan Officer...........................................................213CHAPTER 14 Finding the Best Interest Rate..........................................................225CHAPTER 15 Closing Costs and How to Save on Them...................................................243CHAPTER 16 The internet and mortgages..............................................................254APPENDIX: Monthly Payment Schedules................................................................267Glossary............................................................................................271Index...............................................................................................289

Chapter One

There's a lot more to buying a home than just picking one out and moving in. If you don't have a wad of cash stuffed in your sofa cushions, chances are you'll need a mortgage. Mortgage lending has been around for a long, long time, and some things haven't changed, while other parts of the mortgage process are brand new. Knowing what you're getting into can help you to make the right decisions.

1.1 WHAT'S THE DIFFERENCE BETWEEN BUYING AND RENTING?

One way you own the roof over your head, and the other way, you don't. If you've always rented or otherwise never owned a home, one of the things you'll discover is that when things go wrong with your house there's no landlord to yell at. There's no superintendent to come fix your leaky faucet. If your hot-water heater is busted, you're the one who has to make the trip to your appliance store to shell out another thousand bucks or so just so you can take a hot shower in the morning.

When you rent, you can pretty much walk away as long as your lease agreement has been fulfilled. Want a change of scenery? Pack up and move across town. Want a swimming pool and fitness center without the hassles of owning either? Rent. Want new carpet or drapes every year? Rent. Want your utility bills paid? Rent. Free cable? Ditto. You get the point. Renting has its perks. Much less responsibility and no hassles of ownership.

1.2 HOW DO I KNOW IF IT'S BETTER TO BUY A HOME OR CONTINUE RENTING?

Perhaps one of the easiest ways to determine if it's better to buy or rent is to sit down and calculate the financial advantages of owning versus renting. This is commonly done online with a "rent versus buy" calculator found on the Web.

TELL ME MORE

These calculators compare your current or probable rent situation with a projected home ownership number. They're easy to find. I ran a Google search for the term "mortgage and calculator" and retrieved 6,100,000 websites that had those two terms in combination.

But the kicker is that these calculators rarely will tell you, "No, it's not a good idea to buy." That's because of the tax benefits of home ownership. The interest and property taxes associated with a mortgage are generally tax deductible. You can deduct them from your gross income when you file your taxes. With rent, you can't.

Yeah, I know. When you're a renter you don't pay property taxes or mortgage payments. Instead you give money to someone else for the privilege of living there. But you can't write off your rent. It's just that. Rent.

When might a "rent versus buy" calculator suggest it's better to rent? When you intend to own your next home for only a year or so. Buying a home incurs other expenses, such as money for the down payment, property taxes, and hazard insurance (which is much higher than a renter's policy). Many apartment complexes pay your electric bills along with water and other utilities. When you own, you pay all these expenses. Owning a home with all its tax benefits doesn't outweigh the acquisition costs to buy the home if you're only going to own it for a short period. Short term, rent. Longer term, buy. Are your rent payments the same or less than what a mortgage payment would be? Depending upon where you live, they may be the same. Especially if interest rates are relatively low.

Let's say you're renting a nice 3,000-square-foot, three-bedroom home close to schools in a friendly neighborhood. You might be paying $1,800 each month in rent. A similar three-bedroom home might cost $150,000. If you put 5 percent down to buy the home, your monthly house payment, including taxes and insurance, would be close to $1,200 using a 30-year fixed rate at 7.00 percent.

If rent payments in the area in which you want to buy are near what a mortgage payment would be, it makes sense to buy. If you can save $600 per month and you also get to write off the mortgage interest and property taxes, then it's truly a no-brainer.

Another reason buying is generally better than renting is simply a matter of appreciation and equity. When you rent and property values increase, your landlord will probably raise your rent again. And, of course, each time you make a rent payment you're not increasing your equity in anything; you're just helping your landlord increase his stake in your house or apartment. I'll give you an example.

Your rent is currently $1,000 per month, and you're thinking about buying a $150,000 home. If you put 20 percent down and borrow $120,000 at 7.00 percent on a 30-year fixed rate, your principal and interest payment are about $800 a month. Let's also assume that property values are increasing in your area by about 5 percent per year. What's the situation after two years?

If you rented, you paid someone else $24,000. But if you owned and itemized your federal income taxes, you likely deducted over $16,600 in mortgage interest on your income taxes. You also paid your loan down by over $2,500...