1. How do I know how much house I can afford?
2. What is the difference between a fixed-rate loan and an adjustable-rate loan?
3. How is an index and margin used in an ARM?
4. How do I know which type of mortgage is best for me?
5. What does my mortgage payment include?
6. How much cash will I need to purchase a home?
7. Definitions


Q : How do I know how much house I can afford?

A : Lenders use guidelines to determine whether prospective home buyers will be able to pay their monthly mortgage payments comfortably. Though flexible, the guidelines generally state that a household should spend no more than 28 percent of its income on housing expenses and no more than 36 percent of its income on total debt obligations (including the monthly mortgage payment).

You can also use one of my calculators to determine how much house you can afford. Remember, if you're buying a house with someone else -- a spouse, parent, partner, or companion, for example -- that person's annual gross income and debts can be considered in computing the cost of the home.

Preparing a budget might be a good way to help the lender know whether you have enough money for a down payment, closing costs, monthly mortgage payment, taxes, insurance, and other costs associated with buying a home.

Q : What is the difference between a fixed-rate loan and an adjustable-rate loan?

A : With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an adjustable-rate mortgage (ARM), the interest changes periodically, typically in relation to an index. While the monthly payments that you make with a fixed-rate mortgage are relatively stable, payments on an ARM loan will likely change. There are advantages and disadvantages to each type of mortgage, and the best way to select a loan product is by talking to us.

Q : How is an index and margin used in an ARM?

A : An index is an economic indicator that lenders use to set the interest rate for an ARM. Generally the interest rate that you pay is a combination of the index rate and a pre-specified margin. Three commonly used indices are the One-Year Treasury Bill, the Cost of Funds of the 11th District Federal Home Loan Bank (COFI), and the London InterBank Offering Rate (LIBOR).

Q : How do I know which type of mortgage is best for me?

A : There is no simple formula to determine the type of mortgage that is best for you. This choice depends on a number of factors, including your current financial picture and how long you intend to keep your house. Independence Financial Corporation can help you evaluate your choices and help you make the most appropriate decision.

Q : What does my mortgage payment include?

A : For most homeowners, the monthly mortgage payments include three separate parts:
Principal: Repayment on the amount borrowed
Interest: Payment to the lender for the amount borrowed
Taxes & Insurance: Monthly payments are normally made into a special escrow account for items like hazard insurance and property taxes. This feature is sometimes optional, in which case the fees will be paid by you directly to the County Tax Assessor and property insurance company.


Q : How much cash will I need to purchase a home?

A : You should not purchase a home unless you feel comfortable that you can make the mortgage payments and are able to pay for other housing-related costs.

Up-front costs include the down payment and costs related to closing and settling-in. On-going costs include your utilities, mortgage payment, property taxes, homeowner's insurance, and others. Mortgage insurance may also be required.

Some additional housing costs to keep in mind when calculating moving expenses are furniture, appliances, lawn and garden equipment, or any repair work that may need to be done before you move in.

Review the pre-qualification you receive from your lender. Although it is not an approval for a loan, a pre-qualification letter is a good way to gauge how much you can pay for a home, and judge whether the home you're considering is within your price range.



Definitions

Cash on hand
Cash you have for the down payment and closing costs.

Interest rate
The current interest rate you can receive on your mortgage.

Term in years
The number of years over which you will repay this loan.

Property tax rate
Your property tax rate. 1% for a $100,000 home equals $1,000 per year in property taxes.

Home insurance rate
Your homeowner's insurance rate. 0.5% for a $100,000 home equals $500 per year for homeowner's insurance.

Loan origination rate
The percentage the lending institution charges for its origination fee. 1% for a $100,000 home equals $1,000.

Points paid
The total number of points paid to reduce the interest rate of your mortgage. Each point costs 1% of your mortgage balance.

Other closing costs
Estimate of all other closing costs for this loan. This should include filing fees, appraiser fees and any other miscellaneous fees paid.

Total closing costs
Total upfront costs to close your loan. This is the sum of the loan origination fee, amount paid for points and other closing costs.

Total for down payment
Total funds remaining for down payment.

House payment
Total of principal, interest, taxes and insurance (PITI) paid per month for your home. Insurance includes Principal Mortgage Insurance (PMI) and homeowner's insurance.

Principal payment
Total of principal paid per month on your mortgage.

Tax savings
The value of the tax deduction you receive on your mortgage's interest and home's property taxes. For example, if you have $900 in interest and $100 property taxes per month, the value of the tax deduction would be $280. (At a tax rate of 28%).

Monthly PI
Monthly principal and interest payment.

Monthly PMI
Monthly cost of Private Mortgage Insurance (PMI). For loans secured with less than 20% down, PMI is estimated at 0.5% of your loan balance each year.