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Tom Kelly
Tom Kelly
The Real Estate Adviser

November 8, 1996

GETTING A MORTGAGE HAS CHANGED

BY TOM KELLY
The Real Estate Advisor

Are prepayment penalties really coming back? Are you qualified for more than one loan program? Are late charges tacked on to just the principal portion of the loan? Many aspects of mortgage banking have changed. The mortgage a borrower took out years ago is a distant cousin to the one they would sign today.

With so many low-downpayment and shared downpayment programs now available, the requirements of the lender often change. This is a continual need to inform, train and develop that the housing industry usually underestimates.

First-time homebuyers, so critical to the steady flow of traffic needed on the housing ladder, have begun to receive the thoughtful training and financing programs necessary to achieve what many people have curiously labeled the American Dream. But what about the retirees, move-ups and recreational buyers? Are they being served as well?

Here are some mortgage tips for the veteran and the newcomer. If you haven't borrowed money for a home in several years what was "taboo" in the home-loan game can sometimes now be labeled "optional."

-- How long will you remain in the home? This is far and away the first question to ask yourself before you borrow. Obviously, it's impossible to predict your future, but take your best guess at longevity factor. Remember, shorter term means less risk, and thus, a lower interest rate. If you expect to sell within three to five years, a fixed-rate loan may not be the wisest choice. Most adjustable-rate mortgages may be assumed by the new buyer while fixed-rate loans cannot. Loan analysts foresee no real reason for huge interest-rate swings in the near future.

-- Do I qualify for other loan programs? If you can't be with the one you love, love the one you're with -- or in this case, can get. Your loan officer is supposed to tell you which programs you qualify for and offer to take your application. You may qualify for special low-downpayment programs and may not know it. Allowable median incomes in specific regions have been inching up. When in doubt, don't leave it out of your "to ask" list.

-- Is there a prepayment penalty? After years of this being a non-issue, the practice has surfaced again due to the number of loans refinanced -- twice -- in the past few years. Some lenders now are charging fees for prepaying within the first few years of the loan, especially on "no up-front cost" loans. Very few are assessing a charge for small prepayment amounts (less than 10 percent of the remaining balance) in any given year.

-- Does it matter where loan payments are made? Loans can be sold or the servicing rights to the loan can be sold. Because a majority of fixed-rate loans are sold to long-term investors, expect at least one change in address to where you mail your monthly payment. New laws require your lender to notify you well in advance of any change in payment location.

-- What about late charges? Find out how many days' grace period is allowed. For example, some lenders give you until the 15th of each month to pay your mortgage. That's received by the 15th -- not postmarked by the 15th. However, some lenders have shortened the grace period to 10 days. Late charges typically are a percentage of the overdue payment of principal and interest. Be careful that you are not charged a late fee on your full combined payment of principal, interest, taxes and insurance.

-- When can I cancel mortgage insurance? As mentioned, most loans are sold to investors. The benefit of this in regard to mortgage insurance is that these investors (secondary market) have specific guidelines about dropping mortgage insurance. If your loan is not being sold, but rather kept in "portfolio" ask the lender for mortgage insurance specifics in writing. FHA mortgage insurance is required until the loan is repaid (not to be confused with assumed).

-- How will my payments be applied? Ask to see your loan documents. The Note or Deed of Trust should contain a formula that applies to your monthly installment payments. This formula tells you how the lender will use your money to repay the debt.

When checking your loan options, don't be afraid to ask the same question twice. Ask your loan officer to "explain that in a different way" if you find yourself confused or clueless. Loans may be mandatory for most consumers but rarely easy to completely understand.



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