Buying a home is one of the most important purchases an individual or couple can make but it is also one of the most expensive. The process of buying a home is filled with payments and topics that almost require a mortgage dictionary to wade through the process.

What is an escrow account?

Escrow is the name of the account that is set up to deposit money for taxes and insurance payments on behalf of the homeowner. It is a separate account outside of any mortgage lender’s general operating account.

What is included a mortgage payment?

A mortgage payment is the monthly payment made on a home. Mortgage payments will vary depending on different factors, but most mortgage payments are made up in part of principal, interest, insurance, and taxes. That is, the cost of insurance and taxes are generally included in a monthly mortgage payment. This is part of the escrow process.

What taxes could be included?

Taxes are a part of most homeowners’ financial responsibilities. Taxes will vary depending on state and local laws, and some may be required to be paid as part of the monthly mortgage. Common taxes could include:

• Property Taxes: These taxes are usually assessed by a county or city based on the value of a home and the land the home is on
• School Taxes: Many states or municipalities assess school taxes to support public education; some school taxes are built into property taxes.
• Utilities: Some municipalities or counties include certain utilities such as trash pick-up as part of the yearly cost of property taxes.
• Emergency Responders’ Tax: The taxes that pay for fire fighters and ambulance services can sometimes be included in property taxes or paid as a stand-alone tax.

What kinds of insurance payments could be part of a mortgage payment?

Home insurance protects the value of the home in the event of a fire, flood or other disaster. Many states have laws regarding insurance, as do mortgage lenders. Common insurance packages that might be required for a homeowner to carry can include:

• Homeowner’s Insurance: This insurance is generally a requirement unless a home is paid for in full and typically covers the cost of the home and its contents if destroyed or damaged from a fire, theft, or act of nature such as a tornado, falling tree or other covered peril. Homeowner’s insurance also usually covers the medical and legal costs if an individual is injured on the covered property.
• Private Mortgage Insurance (PMI): PMI insurance covers the risk of the mortgage payment not being made. It is generally required by lenders if a homebuyer cannot come up with a down payment that is at least 20% of the purchase price of the home.
• Flood Insurance: Depending on where you live you may be required to purchase flood insurance as flood damage is generally not part of homeowner’s insurance.
• Mortgage Insurance Protection: This could be a rider on a homeowner’s insurance that makes sure that the mortgage will be paid in the event of the sudden death of a homeowner.

How does an escrow account work?

Escrow is an account that is set up for homeowners to deposit money into at the closing of a house. The money deposited will go towards the taxes and insurance that will be paid as part of the monthly mortgage.

The lender usually requires an escrow account to ensure that the taxes will be paid on the home and the insurance against damage will remain current. This is to protect the lender from loss due to damage or destruction or forfeiture from a home seized for non-payment of taxes.

A homebuyer places a certain amount in the escrow account during the closing of a purchased home; this account will be used by the lender to pay the taxes and insurance. Then, a portion of the monthly mortgage payment is deposited into the escrow account for the payment of taxes and insurance. When the taxes or insurance payments are due, the lender pays them from the escrow account.

What would happen if the taxes or insurance were not paid?

The lender is at risk if a homeowner does not pay for insurance or taxes. A city or county could seize the home if the property taxes are not paid. The lender would either need to pay the taxes to reclaim the property or wait until it was sold at auction. Additionally, the lender would have to suffer a complete loss if the home burned down or was flooded and the insurance had lapsed.

Are there times when an escrow account is not necessary?

Requiring an escrow account is the choice of the lender, and it is usually installed when a homebuyer cannot afford 20% of the home’s cost as a down payment. This tells lenders that the homebuyer does not have a large volume of cash flow; thus, the homeowner is at a higher risk of not paying the taxes or insurance.

If a bank or a mortgage company feels that a homeowner has a low risk of missing the tax or insurance payments, then they might not require an escrow account. Making a down payment larger than 20% of a home’s purchase price is one way that can show a lender that an escrow account is not needed.

Any homeowner can request that an escrow account be done away with. However, if a lender agrees, it might be after a fee is assessed for waiving escrow.

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• The location
• The real estate market of the moment
• How much homework and hassle you’re willing to accept

It also depends on how you go about buying the property.

How do I buy a foreclosure?

Buying a pending foreclosure from the homeowner is one way to purchase the property. This process is only possible if you work with the homeowners before the foreclosure officially goes into effect.

Once the lender officially forecloses, the property goes to a public auction, which is a second way to buy a foreclosure. A third way to buy the property is to buy it directly from the bank, where the property ends up if no one buys it at auction.

What are some hassles in each type of transaction?

Buying directly from the owner may come with many problems with the title as well as with the property itself. It’s also the deal most likely to fall through. You may also be responsible for paying for the inspection and the real estate excise tax.

Hassles at auction include the sheer number of other people who may show up to bid on that same property. If bidding becomes intense and heated, you may end up with bids that are higher than the home is worth.

Bidding at auction also does not allow you to look inside the property prior to bidding, whereas buying from the owner or the bank may give you such an opportunity. There is also a high chance of a foreclosure slated for auction being postponed.

If a homeowner files bankruptcy or the bank tries to work with the owner to modify the loan, the foreclosure may not happen at all. Even if a foreclosure does go through, certain states allow the previous owners a shot at buying their own property back.

You may also have a tough time getting the former owners out of the home. Having to start eviction proceedings is not uncommon.

What are potential detriments of buying foreclosures?

A major caveat is watching for foreclosures that are priced much higher than they are worth. Kiplinger’s notes this could be the case when the homeowner is selling the home and wants to cover the cost of taxes, the balance of the mortgage, and closing costs.

Setting a price may be a hassle, with many foreclosures sold at auction where you have to show up and bid and pay cash if you win the bidding wars. Foreclosures may also include a lengthy waiting period before you can move in and expensive and extensive repairs to the home.

The home could be trashed or stripped if the previous occupant was upset or hoped to sell what they stripped to make additional money. Previous owners may remove the light fixtures, appliances, doorknobs and anything else that could be sold or to simply decrease the value of the home.

Finding out the true number of liens, judgments and foreclosure deeds of trust associated with the property may also be tricky. Being responsible for paying off any existing tax liens is also typically part of a foreclosure purchase, as is buying title insurance as soon as possible.

Emotional issues may be another part of the so-called bargain. Those losing their homes may be fraught with anger, fear and other intense emotions that make buying their foreclosed home from them a difficult task.

What else should I know about buying foreclosures?

Rather than trying it on your own, you may benefit from buying a foreclosure with the help of a real estate agent who sells them on a regular basis. Other helpful hints include being prepared to pay up front with sufficient cash to cover the full cost of the foreclosure and associated fees.

Foreclosures generally do not offer the same type of financing options as buying homes through the traditional market. Putting money aside for possible repairs and remodeling may be another major help, as is willingness to buy a foreclosure that is in a less than perfect state.

Exceptional discounts may be had from the banks if the property has been on their books for 12 months or longer, especially if you’re willing to take it off its hands “as is.”

Other things to watch out for are the state of the neighborhood and your reason for purchasing the foreclosure in the first place. If you hope to buy the property cheap to spruce it up and resell for a profit, MoneyCentral.MSN.com notes you have many factors working against you.

The longer the property is in your hands and vacant, the more it may cost you in property taxes and insurance while you are the official owner. You usually also have to factor in closing costs above and beyond the price of the foreclosure and, of course, the repairs and refurbishment to make the home ready to sell.

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Mortgage origination points are a fee paid to compensate the lender (or broker) for the effort of evaluating and processing the loan and charged most often to people who do not have very good credit. Some say its to offset the risk while others argue its because these clients will pay anything to buy a home.

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Discount points work a little different and are used to reduce the interest rate. You can usually “buy” as many points as you want on a loan, from a quarter of a point, all the way up to four or five points which in turn lowers you interest rate. A good formula to use is paying one point often equals around a 0.25% lower mortgage rate and whether or not you should buy points will depend on your unique financial situation and goals.

If you are in a situation where you can afford to pay a lot of money up front and plan to stay in your new house for a long time you may want to consider paying discount points. However, if you could barely scrape together a down payment for the mortgage, but expect your financial situation to improve over time, going without points is probably the best bet. The length of time you plan to stay in your home is a big factor as it can take years to recover the cost of points and if you are someone who moves every few years buying points can be a terrible waste of money.

Do I have to pay points at closing?

Sometimes people do not have the money to pay for points at the time of closing, but choose to “roll them into the loan.” By doing this, they are adding the cost of the points to the balance of the loan, but getting the lower interest rate. This may seem counter-productive, but again, it can make good financial sense if you plan to be in the house you are financing for a long time.

How much can points lower an interest rate?

A single point lowers the interest rate between one eighth and one quarter of one percent. Therefore, you would essentially be paying one percent of the loan up front to save an eighth or a quarter of a percent on interest over the whole life of the loan.

For example, if you have a $100,000 loan at five percent interest, you could by two discount points at $1,000 each for a total point cost of $2,000. This could lower the interest rate to as low as 4.5%. With this rate change, it would take just about five years to make back the money you spent on points through interest savings, so it would be a good move for someone planning to stay in the house longer than five years.

Are points tax deductible?

Origination points are usually not tax deductible because they usually include fees that would normally be itemized, like notary fees and inspection fees. If, however, the origination points were charged just for the purpose of getting the mortgage itself, they may be deductible.

Discount points are tax deductible in the year in which they are charged. This is another important consideration in deciding whether to pay points. If you need some extra tax saving in the year, in which you buy the house, discount points can help a little with that.

How else can I get a lower mortgage rate?

The first key to getting a lower mortgage rate is to get control of your credit rating. The better credit rating you have, the better interest rate in which you will qualify. You can check your credit rating through one of the major credit bureaus and then take the necessary steps to build or repair your credit in preparation of getting a loan.

It’s always a good idea to check and see if there are any federal loan programs you qualify for. VA loans, FHA loans, and other federal programs can sometimes get you a reduced rate or lower down payment. Sometimes a professional organization or employer may be able to land you a better rate, as well.

Shopping around is always a good idea for finding a good mortgage rate. Beyond your own bank or credit union, it’s a good idea to shop online and even use loan comparison sites to find the best rates. When shopping online, though, be careful to check to be sure that the company offering the loan is legitimate as there are many scams out there.

To get the best possible interest rate, you should try to finance the mortgage for the lowest number of years you can afford. The downside of cutting the years off your mortgage is that it increases the monthly payment, but the interest rate could be as much as a full percentage point lower. Usually your choices are 15 or 30-year mortgages, but many lenders also offer 10, 20 or 25-year mortgage options.

Adjustable rate mortgages are also sometimes a good option to save money on interest. The introductory rate generally lasts from five to seven years and could be as much as a full percentage point lower than the fixed rate for a loan. The danger of this type of loan is that it adjusts to a new rate after the introductory period is up, and it could be considerably higher than the starting rate.

You have many options for obtaining a mortgage. Understanding how the different types work will ensure that you can keep your home for years to come.

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• The cost of the home
• The type of mortgage
• How much you plan to use as a down payment

In addition to the down payment you will need to have funds to cover a variety of things such as closing costs, escrow accounts and more. All of these things together could constitute anywhere from 5% to 25% of the total amount of the mortgage.

The down payment can be the biggest portion by far of the money paid at the time you get a mortgage, but it depends on the type of loan you get. For a VA or USDA loan, there actually is no down payment required, although you are welcome to put down as much cash as you want. You can get a down payment as low as 3.5% for an FHA loan, but for conventional loans you will need to put at least 20% down if you want to avoid the added cost of Private Mortgage Insurance (PMI).

Earnest money, also known as a good faith deposit, is money you actually need to put down before closing. You put up earnest money, which can be as little as a few 100 dollars or as much as 3% of the total loan amount, as soon as you make an offer on a house to prove to the buyer that you are serious. Once you close, the earnest money can be applied to your down payment.

Reserves are made up of money that actually stays in your bank account, but your lender will need to verify that it’s there. The idea of reserves is that your lender will want to know that you have enough money to pay your first few mortgage payments, including principle, interest, taxes, and insurance. Reserves are especially likely to be required for buyers without much of a credit history, and a lender may ask a borrower to have two months to six months of reserves.

Closing costs are generally about 3-4% of the mortgage balance, but lenders sometimes offer discounts for preferred buyers.

What are closing costs?

Closing costs are usually split between the buyer and the seller however this is not mandatory and sometimes homebuyers may have to pay all of these expenses. The buyer or borrower is often expected to pay for the:

• Appraisal
• Credit report fee
• Closing fee
• Title search fee
• Flood determination fee
• Homeowner’s insurance
• Courier fee

Each party is also responsible for attorney fees and title insurance. All of these expenses (including the down payment, discount points, and private mortgage insurance) are often loosely referred to as part of the closing costs.

How can I avoid paying private mortgage insurance (PMI)?

If you can’t afford to put 20% down and you don’t qualify for a VA or FHA loan, you will most likely have to pay private mortgage insurance (PMI). Sometimes, however, you may find a lender who has a special offer wherein they will waive the private mortgage insurance in exchange for you paying a higher interest rate. The advantage of this is that interest charges are tax deductible, but PMI is not.

If you are stuck paying PMI on your loan, you can still get out of it eventually. It should be cancelled automatically when you pay off 22% of your loan, or you can contact your insurance company and ask them to cancel it when you’ve paid 20% of your loan. If your home suddenly goes up in value, you could refinance when you’ve built up 20% equity in your home, and then the new loan would not require PMI.

What is the difference between a VA, USDA, FHA, and conventional loan?

A VA loan is simply a loan for someone who served his or her country in the armed forces. The government fully insures a VA loan at no cost, so there is no risk to the lender. Since the lender has no risk, they do not require a down payment or private mortgage insurance from the buyer.

An FHA loan is a government-backed insurance program for mortgages. Qualifying for an FHA loan can be difficult, as they have requirements for the ratio of housing cost to income, the ratio of debt to income, and overall credit score. There are also stringent requirements for an FHA property, which must be appraised by a certified appraiser to be free of major problems before the FHA will insure the mortgage.

An FHA loan has definite advantages, though, and is worth the effort to try to qualify. An FHA loan allows the seller or the lender to assume a greater portion of the closing costs, allowing you to spend less cash up front as a buyer. More importantly, the FHA mortgage insurance premium is considerably less than a private mortgage insurance premium.

A conventional loan is the term given to a normal loan issued by a bank or other lending institution. The terms and conditions of a conventional loan vary greatly from institution to institution.

So how much money do I need to buy a home?

The answer to your unique situation will depend on a lot of different variables but there are many options for people with all different types of budgets. The best way to find out how much money you really need is to get pre-approved for a mortgage and contact several different lenders to inquire about their home loan options.

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If your mortgage lender does not offer bi-weekly payment options, all is not lost. You can either refinance with a company that does offer biweekly payment plans, assuming it is financially advantageous for you to do so, or you could go to a third party company that will handle bi-weekly payments for your current mortgage. For a fee, some companies will collect payments every two weeks and put them into an account so that they can make one extra payment for you each year.

Another option is to simply stay on your current payment plan and add about 10 percent to each monthly payment. This accomplishes the same thing as paying bi-weekly mortgage payments.

What are the advantages of paying your mortgage bi-weekly?

By paying your mortgage bi-weekly, you are in essence making one extra monthly payment per year. This is because a month is not exactly four weeks, and all those extra days in each month add up to four extra weeks, or one extra month. Paying every two weeks will mean that you will be paying even for those extra days in the year.

Since interest is spread out over an entire year, regardless of how many biweekly or monthly payments you make, there will be no extra interest to pay with your extra payment. This means that the entire balance of this extra payment goes towards principal, which will help you pay down your mortgage much more quickly.

What other methods can be used to pay a mortgage off more quickly?

One popular way to pay off a mortgage more quickly is to refinance into shorter-term loan. Dropping from a 30-year mortgage to a 15-year mortgage, for example, can often save from a quarter to a half of a percent on the interest rate and apply more money toward principal. The downside is that the monthly payment is much bigger and you would be locked in to pay that payment each month.

One alternative to refinancing into a shorter-term loan that doesn’t carry the same financial risk is to just pay extra each month. You would not get the reduced interest rate, but you could still pay down the principal fast. If you could afford to pay 30 to 40% more each month for a shorter-term loan, you could still pay that extra 30 to 40% extra on your existing loan, all applied toward the principal. You would have the peace of mind that if times got tough; you could go back down to your regular payment.

If you can’t afford to shorten your mortgage term or pay as much extra as you would with a shorter term, you can still find other ways to whittle down your mortgage. Some people do so by applying some or all of their tax refunds, bonus checks or other unexpected cash to their mortgage principal. Others round up their monthly payments to the nearest $10, $50, or $100, every little bit helps.

What other debts should be paid off before paying a mortgage off early?

Most debts should be paid off before applying significant money to pay off your mortgage early. Your mortgage will be among the lowest interest debt that you have, so it is costing you the least to keep it. In addition, mortgage interest on your home is tax deductible, so you are getting a tax savings from that debt that you won’t get from most others.

Credit cards will generally have interest rates two or more times that of your mortgage, but sometimes you might have a promotional period with a low or nonexistent interest rate. In that case, if you’re sure you can pay the card off before the promotional rate expires, you can afford to divert extra money to your mortgage rather than paying extra on the card.

Similarly, car dealers often offer low interest rates or even zero percent interest for the life of the car loan as an incentive to buy. In this case, obviously, the car loan is costing you less than the mortgage so you should pay down the mortgage. Other exceptions like this are possible, so in general just keep in mind that you should just pay the highest interest rate first.

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Before you select a mortgage loan for your co-op, you should be prepared to negotiate, a lot. Comparison-shopping is a must. This is because most co-op mortgage lenders may attach certain stipulations, like height restrictions on the building or occupancy requirements. You must also clear your mortgage request with the corporate board before you begin the application process.

Acquiring a mortgage for your co-op is not impossible, but it will pose a challenge. Make sure you research your options carefully and thoughtfully. Do your homework and ask questions. This will help you avoid common mistakes that many make when applying for a mortgage loan.

Is it easier to get a mortgage for a condominium or a co-op?

Applying for a mortgage for a condominium is often much easier than a co-op because a condominium is privately owned and considered individual property; a co-op is not. However, a co-op mortgage can have a lower down payment because they use stock shares as a basis for collateral.

When you mortgage a condo, the process differs slightly. You are responsible for providing collateral based on personal finances, like stocks, bonds, real estate or you may need a large down payment.

The type of paperwork and documentation is usually the same when applying for both co-ops and condos, but more people are allowed to voice their opinions and give decisions with co-ops. After all, you are only part owner of the co-op.

Owning a condo means, you have the final say. You decide when and how to apply for the mortgage without interference from a committee. This can make the process move along more smoothly with fewer delays and results that are more positive.

How do I know if I qualify for a good rate?

You may want to request a copy of your credit history before you apply for the loan. The best way to feel confident when working with lending institutions is to fully understand the way they work. Loan officers look feverishly for people with excellent credit scores; they want to loan money. If you have a positive score with all three of the credit bureaus, you will be in a good position to negotiate terms.

You also need to see how you size up before you apply for the loan by completing the pre-qualification process. To complete this step, you can walk into any bank that offers mortgage loans and work with one of the representatives. They should be able to take your information and in a few short minutes, provide you with the average amount in which you qualify. Remember, this is an estimate only.

With your current credit history and a ballpark figure of the amount you may be approved for, you can now start the search for a lending institution that will offer you a comparable rate for the mortgage you need. Fueled with excellent information and a positive attitude, you should be able to surpass your goal.

How long does the mortgage process take?

You can find some mortgage lenders who may be able to complete your request in about a week. A lot of the waiting depends on your ability to complete the application and supply all of the necessary documentation in a timely manner. Be prepared to show the following:

• Proof of employment
• Bank statements
• W-2 (at least two years)
• 401k or IRA
• Title or deed
• Homeowner’s insurance
• Home appraisal

Of course, your lending institution may request all or some of these papers. It is best to have more than what you think you need. If you have time, you should make photocopies of each and place them in a safe location inside your home. Take your originals and place them in a separate area, outside of the house, like a safe deposit box. Copies can be faxed easily enough.

Once your application is received, your loan officer will review the documents to determine if you have provided them with sufficient information. If everything is in order, the decision can be made within one week. If not, and your application needs supporting documents, they will place everything on hold until you satisfy their request.

At times, the loan officer may approve your loan, pending certain conditions. You will be given a specific period to satisfy the requirements. If they deny your loan, they may seek out other lending institutions to offer you options or simply close your request. You will be notified either way.

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Credit card debt is a concern for many households and makes the desire to refinance a common one. The average household’s credit card debt in the United States is $9,000. Credit card debt is associated with high interest rates and penalty fees that many find financially crippling.

What is mortgage refinancing?

Refinancing a mortgage is actually like taking out a new mortgage. The old mortgage’s terms and payments are paid by the new mortgage and typically include all of the original fees associated with closing a mortgage, such as:

• Appraisal costs
• Processing fees
• Underwriting fees
• Title fees
• Escrow fees

Because a homeowner is essentially paying off the old mortgage and taking out a new mortgage, one new fee could be a prepayment penalty. Prepayment penalties are around 80% of six months’ worth of payments. Not all mortgages have a prepayment penalty fee, but it can be a very large amount if a mortgage assesses such a fee. There are also no-cost refinancing offers available, but the terms of any refinance must be understood before committing.

What types of mortgage refinancing are available to consolidate credit card debt?

There are different ways to refinance a mortgage to pay off credit card debt. Some people use mortgage refinancing tools such as:

Refinance to a lower rate

This can be done through going from an adjustable rate mortgage to a fixed term mortgage or refinancing to a mortgage with a lower rate. This may leave a homeowner with a lower mortgage payment every month; that extra money can be used to pay down credit card debt over time.

Extend the term of the loan

Extending the number of years that a homeowner has to pay off a mortgage will result in lower payments; again, that additional money can be used each month to pay off credit card debt.

Cash out home equity to consolidate debt

A homeowner can take out a larger loan than the cost of the house. The additional amount can be used to pay off credit card debt in one large payment.

What are the advantages of mortgage refinancing to pay off debt?

Credit cards can have high interest rates that only increase debt at an alarming rate with some credit card rates exceeding over 30%. Home mortgage interest rates are generally under 6% and consolidating credit card debt into a home loan can have substantial savings. Mortgage interest can also be usually claimed on income taxes as a deduction whereas credit card interest cannot.

What are the disadvantages of refinancing?

For starters, the credit card debt is essentially added to the end of a home loan. The home then becomes collateral when it is used to pay off debt; if a homeowner is unable to make the payments, then the homeowner runs the risk of losing the home. Refinancing also usually extends the length of a loan and has high closing costs. If those habits that led to high credit card debt are not changed, then mortgage refinancing to pay off credit card debt will not be a sound financial decision.

When is refinancing a good decision?

Refinancing is a good choice if high credit card debt is creating financial difficulties for a homeowner. If refinancing will save substantial money in the long run, then it is most likely a good financial move. It is a decision that should be made with a full understanding of all of the terms, fees, and rates involved.

When is refinancing a bad decision?

There are a few instances when refinancing is not a good financial decision. Firstly, it is not a good choice if a homeowner has been paying on a home loan for over ten years. Then, the homeowner has paid off most of the interest on the home and is mainly paying the balance of the actual loan; refinancing brings all of that interest back into the mortgage payments.

Secondly, refinancing is not a good idea if it will not save money in the long run. If the new interest rate is not low enough or the credit card debt is not high enough, the high fees associated with refinancing might erase any savings from paying off credit card debt.

What are other options for paying off credit card debt?

There are other options using a home’s equity rather than refinancing that can be used to pay off credit card debt. Each option has its own advantages and disadvantages that must be carefully weighed.

Getting a second mortgage (such as a home equity loan or home equity loan) is one way to get cash to pay off debt without touching your first mortgage. Interest rates for home equity products are still far lower than credit card rates.

Before refinancing make sure you have a sound understanding of the loan terms and a commitment to spending money wisely future, otherwise you will just end up trying to refinance again in a few years.

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Lending requirements for homes have grown stricter in the past several years but there are still some programs which allow people to buy a home with little money down. Do your research and talk to a qualified mortgage broker to help you identify the optimal down payment for your home purchase.

What is a typical down payment?

Banks ideally like to see a down payment of 20% of the purchase price on the purchase of a new house. This means that if you are purchasing a house for $200,000 you will need a down payment of $40,000.

If you have good credit and income/employment history, many banks will allow a down payment of 10%-15%. These loans are harder to qualify for, and they may have a higher interest rate to balance the risk of the lower down payment. Such a sizeable down payment can be difficult for many homebuyers, especially if they are making their first home purchase. In order to accommodate these purchasers, many banks and government agencies offer special financing programs for low down payment loans.

How can I get a low down payment loan?

The most common programs for low down payment loans are FHA and VA. These loans allow a very low down payment, but there are qualification restrictions and some additional fees involved.

FHA loans are government-insured loans that enable a borrower to purchase a house for as little as 3.5% down. In order to qualify, the buyer must have good to excellent credit and verifiable income. FHA loans require the buyer to purchase mortgage insurance, which is an additional monthly premium added to the cost of the mortgage. Mortgage insurance protects the lender if the buyer defaults on the loan.

VA loans are structured very similarly to FHA loans. The VA program is exclusively for service members or veterans who are buying a home. With a VA loan, the homebuyer can put as little as 5% down.

Other low down payment options may be sponsored by state agencies. In some cases, these loans may require as little as 0% down but are usually subject to income restrictions. To find out about these programs in your state, contact a licensed real estate broker or call your state’s Housing Office.

What are the drawbacks of a low down payment loan?

While a low down payment loan may seem like a great way to save cash, it could end up costing you much more than a traditional loan in the long run. Low down payment loans typically have higher interest rates than traditional loans. Banks do this because they recognize that a low down payment loan is a riskier investment. Over the lifetime of the loan, paying higher interest rates will likely add up to much more than the difference between 5% and 20% down.

Mortgage insurance is another expense associated with low down payment loans. Mortgage insurance can cost anywhere from $20 to $200 per month, depending upon the size of the loan and the risk involved. In many cases, mortgage insurance can be dropped once the buyer reaches 20% equity in the home. This means that the additional premium can be dropped when the amount left on the loan is 80% or less of the home’s appraised value. However, under recent changes to FHA guidelines, mortgage insurance must be kept for a minimum of five years, regardless of the homeowner’s equity in the property.

Low down payment loans also tend to have higher closing costs than traditional loans. This is partially because there is more paperwork and the loan is more time consuming to service.

What other expenses should I plan for besides a down payment?

As a homebuyer, you should be aware that a down payment isn’t the only cash you will have to outlay when purchasing a property. Understanding the other expenses involved can help you realistically plan for what kind of down payment you can afford.

Prior to closing, you will have to pay for inspections and appraisals on the property that you are buying. These fees can cost anywhere from $300 to over $1000 and then you have have closing costs. Closing costs include lender fees, title fees, legal fees and more and can quickly esclate to another 1%, 2% or more of your purchase price.

Depending on your lender, closing costs may be rolled into the total amount of the loan. If you choose this option, make sure you know how much it will affect your loan amount and if your lender will still qualify you for the increased amount. This will also slightly increase your down payment as a percentage of the increased total loan.

The key to choosing the right down payment option for a home purchase is to understand all the facts and costs involved up front. Even no money down home loans still often require a nice chunk of change to close.

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How much time and money can I save making extra mortgage payments?

The exact amount of time and money you may save by making extra mortgage payments depends on the details of your particular loan.

For example, if you had a 15-year mortgage for $300,000 that has a 5% interest rate and an extra $200 was paid each month, the term of the loan would be reduced to 13.4 years instead of 15 years and the money saved in interest payments would be about $15,000.

Of course, paying more than an extra $200 each month would save even more time and money. More money would also be saved if you have an interest rate higher than 5% on the mortgage.

How much do interest rates matter?

Interest rates play a big part in deciding if you want to make extra mortgage payments. If your mortgage interest rates are high, paying off the debt as quickly as possible is typically a good idea.

If the rates are fairly low, however, you may have more beneficial options of what do to with the money you would have used for extra mortgage payments. A 5% interest rate on a mortgage, for instance, is actually less than 5% if you are able to receive money back as a tax deduction.

What else could I do with the money?

Saving money is always a good idea in general, although you may also benefit from using the money in other ways. If you owe money on a high interest credit card, for instance, you may end up saving more from paying off that debt, especially if the interest rate on your credit card is higher than the interest on your mortgage.

Putting money into an existing retirement plan where your employer matches your funds is another beneficial idea. Many people opt to contribute the largest amount an employer will match instead of making extra mortgage payments.

Stockpiling money into an emergency fund is another important move. This helps ensure you have enough to cover unforeseen expenses like the loss of a job, costly home or car repairs or health issues.

Although keeping your money in a savings account can make it subject to taxes, you can invest in a number of other options that do not incur any taxes.

Putting money into savings accounts that are exempt from taxes is an option, with choices including an individual retirement account, a health savings account and a 529-college savings account.

Investing the money in mutual funds is another option that could actually make you money over time, as long as the interest you earn is greater than the interest on your mortgage payment.

Other investment options include real estate and stocks, with the latter particularly attractive if you have an option of buying through a purchase plan with a discount from your employer.

What else should I know before I make extra mortgage payments?

Regardless of how much or how little extra you pay on your mortgage, it’s imperative to make sure your bank is applying your payments to reduce the balance of your principal. They should not be used to pay off interest. Also, double-check your bank’s calculations as extra mortgage payments can be confusing and even headache inducing.

The stability of the economy and your own job is another factor. That emergency savings would come in handy if you were to lose your job and it could also help if you were suddenly transferred or out of work and forced to move elsewhere.

Making extra mortgage payments on your home if you are unsure of your future in that particular location could also backfire if you had to move and were unable to quickly sell or even rent out your house without having cash in hand.

One more consideration for making extra mortgage payments is the emotional relief you may feel by paying off your mortgage as early as possible. Paying off your mortgage prior to retirement can especially be a huge relief since you will no longer have to worry about monthly installments.

When should I never make extra payments?

If you are in financial duress or in danger of facing foreclosure, making extra payments on your mortgage may not be the best idea. The money may instead be needed for food or other necessities. If the threat of foreclosure is looming in the background, or your house has already entered foreclosure proceedings, making any payments on your mortgage may only mean you are making payments that may be lost if the foreclosure does go through.

Likewise, if your house is worth much less than what you initially paid and you have even an inkling that you may throw up your hands and walk away from the home, making extra payments only means you will eventually lose the money if you decide to bail.

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Your lender will consider the location of the site, the design of the building and construction costs before approving any type of financing. If you own the property, the amount of the loan may also differ. Of course, your credit history, income and typical mortgage application data also play a huge role in determining the cost of your construction loan.

A good place to start could be finding how much you can borrow before you even apply for the loan. You can go to a few local banks and meet with the customer service agents. During your meeting, let them know you want to find out about the pre-qualification process. Once you have an idea of the amount you qualify for, you are that much closer to landing the right loan.

What will the lending institution ask me for?

You will be asked to produce documents to prove your employment status. This can include contact information of your current employer, hire date information, title, and income (monthly or annual). If you are self-employed, you will need accounts payable and receivable statements and tax returns.

They may also ask for your financial institution information including name and location, copies of your statements and account numbers. If you own property, especially the lot where the construction will be performed, you will need to forward purchase agreements, deeds, and/or title ownership.

Because this is a construction loan, you will also need to show designs, schematics and blueprints, a list of the materials being used and a breakdown of the over-all costs. If you run into any problems or have questions and concerns, you can contact a loan officer for assistance. They are able to help you with paperwork and ultimately, want your business so use them as a resource if needed.

How long will I have to repay the loan?

Construction loans are very different from traditional mortgages. They are designed for short-term use, not to be dragged out for several years. For this reason, the interest rates are generally much lower on construction loans. This is also one of the reasons why they are more difficult to be approved. During the application process, the repayment period is given. Under normal circumstances, you may be obligated to pay the interest of the loan while the construction is still going on; once complete, the loan is due.

Most people choose to convert the construction loan in an attempt to repay over time. If you can take out a mortgage to pay the balance of the construction loan, this might be an option worth considering. A first mortgage carries a lower interest rate so you may be able to save a little money. Another option to look into is for people who are building their first home. You may be able to convert a construction loan into a permanent loan to include your mortgage.

What is the difference between a home equity loan and a construction loan?

The primary difference between home equity loans and construction loans is home equity loans are granted to current homeowners who have built equity in their existing homes; construction loans are more for a project surrounding a home that has not been built yet. If you choose a home-equity loan to cover the cost of a home improvement project, your rate will be fixed.

Construction loans have variable and fixed interest rates, depending on the type of collateral, if any that is put up to secure the loan. While payments are completed in installments, just like home equity loans, construction loans surround the timeframe required to complete the project.

Typically, a home equity loan is considered an additional lien on the property; this means that if the loan goes into default, the homeowner may suffer the consequences, like possible foreclosure. The lender may also exercise their right to sell the equity in the home to another financial institution to make up for their loss.

Both types of loans can serve your purpose, but if you are not looking to add any additional debt to your current home, you may want to work with the construction loan. The repayment process may be a little tougher than that of a home-equity loan, but you will be able to satisfy your debt faster.

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