Considering Home Ownership?
We know you probably have tons of questions regarding mortgages. The first thing you need to do is check if you have good credit. We can help!
COSTEP is a not-for-profit organization based in McAllen, Texas that provides free financial literacy and credit counseling.
We can help you manage your credit and make sure you are ready to buy your dream home. Feel free to reach out to us here.
The U.S. Department of Housing and Urban Development sponsors housing counseling agencies around the country to provide you with information on buying a home, protecting your credit and preventing foreclosures. They will explain the documents you need to provide your mortgage company, help you make a budget so you can meet your monthly payments and provide you with helpful local resources.
The best thing about it? Help is FREE. To find a housing counselor click here:
We recommend before calling a counselor you gather the following information so you’re prepared:
- Mortgage statements (if any)
- Monthly debt payments (e.g. credit card payments, student loans, etc.)
- Income details
ARM vs Fixed Rate Mortgages
An adjustable rate mortgage (ARM) is a home loan that has an interest rate that changes periodically. Therefore, your payments can go up or down even without considering increases in your property taxes and hazard insurance The initial rates are lower than fixed-mortgage rates but can increase over time due to market rates. ARMs make sense if you plan to be in the house for only a few years.
Fixed rate mortgage – this is the most common type of home loan. Interest rate remains the same for the entire period of the loan. This means your monthly payments won’t change, except if your property taxes or hazard insurance increases, which makes it a great loan option for first time homebuyers. However, if the market lowers interest rates, this means you will still have to pay the fixed rate you got when getting the loan and you could potentially miss out on saving money on your mortgage.
Have you ever wondered why everyone recommends making a down payment of at least 20% of the total amount of your home? Well, primarily because that way you won’t have to pay for mortgage insurance. Mortgage insurance is a policy that protects lenders against people that fail to make their mortgage payments. This insurance reimburses the lender if you default on your own home. However, you are still responsible for paying the premiums.
As the name implies, hazard insurance is used to provide coverage in the event a catastrophe. Not all catastrophes might be covered so it is important for you to check your policy. For example, your hazard insurance may cover hurricanes and fires but not floods and tornados. Annual increases in your hazard insurance will cause an increase in the monthly payments you make to your lending institution or loan servicer.
This is a tax placed on the real estate property (including the land) you own. It is mainly used by municipalities to fund programs like building schools and infrastructure. The rates of property taxes vary between municipalities, counties, school districts, and other taxing authorities. Annual increases in your property taxes will cause an increase in the monthly payments you make to your lending institution or loan servicer.
FICO score is a credit score created by Fair Isaac Corporation, a company that takes credit information and uses it to create scores that help lenders predict behavior, such as how likely is someone to pay their bills on time. Currently there are over one hundred credit-scoring models, but over 90% of financial decisions are made using a FICO score.
An APR or annual percentage rate is the amount of interest on your loan amount that you have to pay annually. It does not account for the compounding of interest within that year. If you have a low APR, you will have to make lower monthly payments. An APR not only includes the interest rate but also the lender fees required to finance the loan.
APY, or annual percentage yield is a percentage rate reflecting the total amount of interest paid on an account, based on the interest rate and the frequency of compounding for a 365-day period. For example, if a credit card company charges 1% interest each month, the APR would equal 12% (1% x 12 months = 12%). How is this different from APY? Well, APY takes into account compound interest (interest on interest).
The APY for a 12% rate of interest compounded monthly would be 12.68% a year APY=(1+ r/n)n -1(r = stated rate, and n = number of compounded periods). If you only carry a balance on your credit card for one month’s period you will be charged the equivalent yearly rate of 12%. However, if you carry that balance for the entire year, your effective interest rate becomes 12.68% as a result of compounding each month.
If your down payment is less than 20% of the total value of the amount financed, you are subject to property mortgage insurance.