Mortgage insurance

If your down payment on a home is less than 20 percent of the appraised value or sale price, you must obtain mortgage insurance.

Mortgage insurance sometimes is referred to as private mortgage insurance, or PMI, to distinguish it from FHA and VA insurance, which are run by government programs. The cost of mortgage insurance varies depending on the size of the down payment and the loan, but it typically amounts to about one-half of 1 percent of the loan.

With mortgage insurance, the borrower pays the premiums, but the lender is the beneficiary. The coverage protects lenders against the borrower's default. If a borrower stops paying on a mortgage, the insurance company ensures that the lender will be paid in full. Mortgage companies pick insurance providers for their customers, but the borrowers have to foot the bill. Usually, they do so in monthly installments. But some lenders offer programs whereby the borrower pays the entire insurance premium in a lump sum at closing.

By the numbers ... 80-10-10 plan If we compare the purchase of a $150,000 home under the 80-10-10 plan to a standard fixed mortgage including mortgage insurance, we find that the former is $35.36 cheaper each month. Here's how it works: Under the 80-10-10 plan, the 10 percent down payment on a $150,000 house is $15,000. The first mortgage is $120,000 at 7 percent, which comes to a monthly payment of $798.36. The second mortgage for $15,000 has a 9 percent interest rate, making a monthly payment of $120.69. The total monthly payment for both loans is $919.05. With a $15,000 down payment, one mortgage of $135,000 at 7 percent has a monthly payment of $898.16, plus mortgage insurance of $56.25, making a total payment $954.41.

House value: $150,000 80-10-10 plan Down payment 10% $15,000 Mortgage 1 $120,000 7% $798.36 Mortgage 2 $15,000 9% $120.69 Total monthly: $919.05 Standard fixed mortgage plan Down payment 10% $15,000 Mortgage 1 $135,000 7% $898.16 Mortgage insurance + $56.25 Total monthly $954.41

Monthly difference: $35.36

Your mortgage payment: Introduction

Understanding how your mortgage payment is calculated will help you know just what you can afford to pay each month.

Your mortgage payment is affected by many factors. In this chapter, we'll show how your credit score is considered by lenders and what you can do to improve it before you shop for a mortgage. The amount you put down on your home will affect other aspects of your mortgage, but there are programs for you even if you have a small down payment. We also discuss private mortgage insurance and points -- which also affect your mortgage payments.

Necessary paperwork for a buyer

Mortgage lenders may require proof of your assets, income, credit quality and other financial information.

Here are some documents you may want to gather in case the lender needs them:

What you'll need

• Federal tax returns and W-2 forms from the past two years. • At least one recent paycheck stub showing your name and Social Security number, the name and address of your employer, and your year-to-date earnings (some lenders will want the most recent month's worth of paycheck stubs). • Proof of other income: a second job, overtime, commissions/bonuses, interest and dividends, Social Security disbursements, VA and retirement benefits, alimony and child support. • List of creditors, including credit card issuers, student loans, car loans, child support and alimony. You may be asked to show proof of your minimum monthly payments and total balances, too. • Investment records: mutual fund statements, real estate and automobile licenses, stock certificates and proof of other investments or assets. • Canceled checks showing mortgage or rent payments. • Home sales contract, including the purchase price, if you've found the house you want to buy.

Not all lenders and loan programs will require all of this documentation, and borrowers with very strong credit scores may need to provide little or any of it. But having it handy may save valuable time during the application process.

Finding the Lowest Mortgage for Your New House

If you're going to buy a house, chances are you'll need a mortgage, but did you know the differences between mortgage brokers and bank loan officers?

Bank Loan Officers

The loan officers at a bank, credit union or other lending institution are employees who work to sell and process mortgages and other loans originated by their employer. They often have a wide variety of loans types to draw from, but all loans originate from one lending institution.
The loan officer takes your application and works to find a home loan that suits your needs. If your personal credit is approved, the officer moves forward to process the purchase.

Mortgage Brokers

Mortgage brokers are professionals who are paid a fee to bring together lenders and borrowers. They usually work with dozens or even hundreds of lenders, not as employees, but as freelance agents.
Think of mortgage brokers as scouts.
They find and evaluate home buyers, analyzing each person's credit situation to determine which lender is the best fit for that person's needs. The broker submits the home buyer's application to one or more lenders in order to sell it, and works with the chosen lender until the loan closes. A good mortgage broker can find a lender for just about any type of credit.
The mortgage broker working to secure your loan is earning a fee for the transaction and the better deal they achieve for a lender, the more they are paid. Don't be too anxious to disclose to a broker the interest rate you are willing to accept--let them tell you what terms they can secure. Shop around to make sure the terms are reasonable.
Many of the mortgages companies that advertise online are mortgage brokers.

What Difference Does it Make?

A local or online mortgage broker may find you a lender in another part of the country. An online bank might not have a local office where employees can help you one-on-one.
Some out of town lenders don't understand the types of heating systems used in specific areas, they aren't familiar with private septic systems, and they don't immediately understand common classifications and terms used by local appraisers. Those are just a few examples of problems I've seen that caused significant slow-downs in loans made by an out of town lender working with a mortgage broker.
Using a local bank can sometimes be a plus. Their staff generally understand the specifics of local properties, but a distant lender who doesn't will delay closing until questions are answered.
Mortgage brokers can often find a lender who will make loans that a bank refuses--problem credit is one example. Loans for unique or commercial properties might be easier to secure through a mortgage broker.
Make your choice of a lender based on the best loan terms you can find. Ask questions about expected time-frame. Ask your real estate agent friends who have recently bought a home for lender and broker referrals.

Pull Your Own Credit Reports

Order your credit reports and scores from all three major credit reporting agencies before you visit a bank or broker. Personal copies of current reports should provide enough details for them to give you an opinion of the types of loans they can offer you.
The lender you decide to use will access your credit files, but taking your personal copies to the initial interview avoids multiple credit pulls that can lower your scores. Requesting your own credit reports does not affect your scores.

BIMONTHLY MORTGAGES - ARE THEY FOR YOU?

You make your mortgage payment two times a month, instead of monthly. Since there are 52 weeks in the year, you end up making 26 payments, which is the equivalent of one month's extra payment. This additional payment significantly reduces the amount of interest charged for the mortgage and often reduces the term of the loan.

Most lenders require that you maintain a deposit account from which payments can be drawn on an automated basis. This eliminates some paperwork and the extra mailing that would be necessary with the additional payments. Some lenders will require that the borrower's paycheck be direct-deposited into this same account.

You will want to consider this option carefully, as it could be restrictive for your personal financial arrangements. The biweekly mortgage could also have a less competitive interest rate and may not be offered by your selected lender.

WHAT MORTGAGE TO GET IF YOU'RE A TRANSFEREE

There is a very popular loan available that is almost customized for the transferring borrower. It is called a "balloon" mortgage. The loan is amortized for 30 years, and you will get a substantial break on the interest rate if you are willing to let the investor call the entire balance due at a present future date (usually five or seven years).

However, there are safety features included in this type of mortgage. There is guaranteed renewal at the end of five or seven years at the interest rates available at that time. Most of them only guarantee a new loan if you meet certain conditions (like making your payments on time).

If you decide to stay in your home, you can refinance to avoid the future balloon or call on your note.

The interest break you will get for selecting one of these loans can be as much as one full percent (for example, an interest rate of 8.25 percent when fixed interests are higher).

Interest Only Lowest Mortgage Rate

With an Interest Only Mortgage loan, you pay only the interest on the mortgage in monthly payments for a fixed term. This is a great option if you are looking for greater purchasing power and increased cash flow. This plan could result in a monthly mortgage payment hundreds of dollars less than a traditional mortgage. Check to see how much money you could save!