Complete with a detailed worksheet allowing readers to determine how much house they can really afford, rather than how much they can quality for, this book can help homebuyers and homeowners make smart choices and avoid disaster.
Contents
Acknowledgments xiii
Introduction: Educated Borrowers Are Our Best Protection
Against Bad Business Practices 1
Chapter 1: Take Charge of Your Mortgage Process 7
Balancing Risk and Reward in a Mortgage 8
Assessing the Lender’s Risk 10
Assessing Your Risks 13
The Elements of a Mortgage 15
Common Mortgage Definitions 15
Adjustable-Rate Mortgage Definitions 17
Payment Options 20
The Mortgage Process 21
Eight Things to Keep in Mind When Searching for a Mortgage 26
1. The Cost of Owning a Home Is More than the Cost of the
Mortgage, Taxes, and Insurance 26
2. Just Because You Qualify for a Loan Doesn’t Mean You Can
Afford It 27
3. Lenders Are in the Mortgage Business to Make a Profit 27
4. Things Change, and Sometimes You Have Control and
Sometimes You Don’t 28
5. The Best Mortgage Is Not Necessarily the One with the Lowest
Interest Rate and Points 28
6. Lenders Get Their Money from the Same Sources 29
7. You Are in Charge 30
8. No Is Not Forever 31
Chapter 2: Be Realistic About Being Able to Afford
a Home 33
Set a Realistic Budget and Stick to It 34
How a Lender Sees Your Finances 37
Take Advantage of Prequalification and Preapproval Services 39
Know the True Cost of Home Ownership 40
Down Payment 40
Costs Related to Financing 42
One-Time Costs 42
New Monthly Expenses 43
Maintenance 44
Chapter 3: Know How Much Your Property Is Worth 47
Distinguishing Between the Price of a Home and Its Market
Value 48
How Value Is Determined for Purposes of a Mortgage 49
What Happens If the Appraisal Is Too Low for the Loan Amount? 54
The Value of a Home Inspection 55
Inspections for Specific Conditions That Could Affect the Value of
Your Home 56
Self-Assessment for Refinancing 58
Factors That Can Affect Future Property Value 59
Economic Influences 59
Neighborhood Influences 60
Personal Influences 61
Chapter 4: Weigh Your Refinancing Opportunities 63
Why Refinance Your Home? 64
Refinance to Improve Your Cash Flow 65
Refinance to Fund Major Expenses 70
Refinance to Prepare for Life-Changing Events 74
Weighing Short-Term Savings by Refinancing Against Longand
Short-Term Costs 74
Adding Costs, Fees, and Points to the Equation 78
Chapter 5: Know Your Credit Score 81
Understanding Your Credit Report and Credit Score 82
Requesting Your Credit Report 84
What Determines Your Credit Score 86
How to Read Your Credit Report 88
Correcting Your Credit Report 90
How to Improve Your Credit Score 92
Chapter 6: Recognize Which Loan Product Is Right
for You 93
Fixed-Rate or Adjustable-Rate: Which Is Better for You? 94
How Long Will You Keep the Mortgage? 94
Are You Averse to Risk? 95
Payment Choices 96
Should You Pay Points? 96
Flexible Monthly Payment Options: Short- and Long-Term
Benefits and Risks 97
When Are I-Os and Option Payment Mortgages Good Choices? 100
Accelerated Payments 101
Balloon Payments and Two-Step Mortgages 102
Special Mortgages for Those Who Qualify 103
FHA Loans 103
Veteran’s Administration Loans 105
Special Features of Mortgages and What They Cost 106
Rate Locks 106
Jumbo Mortgages 107
Loans for New Construction 108
No Escrow Loans 109
Income, Asset, and Employment Documentation 109
Chapter 7: Know Your Boundaries 113
Defining What You Need 113
Assessing Your Current Financial Situation 119
Describing What You Want 121
Other Questions You Should Ask 124
Calculating the Annual Percentage Rate 124
Beware of Advertised APR 125
Compute Your Own Comparison 126
Chapter 8: Shop for a Provider You Can Trust 127
Who Sells Mortgages? 128
Retail Lenders 128
Brokers 129
Using the Internet to Find a Lender 131
Seller-Provided Direct Financing 132
Who Should You Trust? 133
Mortgage Advertising 134
Referrals 136
Licensing and Regulation 137
Your Rights and Protections 138
Services That Add Value to Your Mortgage Experience 140
Accelerator Programs 141
Rate Watch/ARM Alerts 142
Position Improvement Programs 143
New Product Alerts 143
Periodic Checkups 144
Regular Communication and Live Interaction 144
Chapter 9: Take Charge of the Loan Application
Process 145
The Uniform Residential Loan Application 146
Borrower Information 147
Employment Information 148
Income 149
Housing Expense 150
Assets 151
Declarations 152
The Next Steps in the Loan Application Process 153
Good Faith Estimate 154
What Happens Behind the Scenes 155
Chapter 10: Understand Your Insurance Obligations 159
Private Mortgage Insurance 160
Conditions Under Which PMI Can Be Cancelled 160
Another Form of Mortgage Insurance: FHA Loans 162
Hazard Insurance 163
Homeowner’s Insurance 163
Condos and Co-Ops 165
Flood and Earthquake Insurance 166
Title Insurance 167
Credit Life Insurance 168
Chapter 11: Read the Fine Print Before Closing 171
What Happens at the Closing 172
Reading and Understanding a HUD-1 Settlement Statement 173
The Elements of the Mortgage Note 175
Borrower’s Promise to Pay 176
Interest 176
Interest Rate and Monthly Payment Charges (ARMs Only) 176
Payments 178
Borrower’s Right to Prepay 178
Loan Charges 179
Borrower’s Failure to Pay as Required 179
Giving of Notices 180
Obligations of Persons Under This Note 180
Waivers 180
Uniform Secured Note 180
Signatures 181
The Purpose and Importance of the Mortgage Deed 181
What Happens If You Are in Default 182
Other Documents in the Closing Package 183
Truth in Lending Agreement 183
Monthly Payment Letter 184
Loan Closing Disclosure Acknowledgment 184
First Lien Letter 184
Hazard Insurance Authorization and Requirements 184
Hold Harmless Mortgage Survey 185
Tax Information Sheet 185
Flood Insurance Notification 185
Hazard Insurance Notification 186
RESPA Servicing Disclosure 186
Affidavit of Occupancy 187
Borrower’s Certification and Authorization 187
Privacy Notice 187
Chapter 12: Stay Abreast of Changes Regarding Your
Mortgage 189
Commonly Occurring Changes After Closing That Can Affect
You 190
Changes to Your Escrow Accounts 193
Real Estate Taxes 193
Insurance 195
Chapter 13: Watch Market Trends 201
What the Dow Jones Average Has to Do with Your Home 202
How Inflation Can Affect Your Mortgage Rate 204
Other Financial Indicators for You to Watch 205
Business Activity and Interest Rates 205
Prime Rate and Other Indices 206
Trends in Real Estate Values 206
The Housing and Economic Recovery Act of 2008 and What
It Means to You 207
Federal Housing Finance Regulatory Reform Act of 2008 207
FHA HOPE for Homeowners Act of 2008 208
Foreclosure Prevention Act of 2008 209
The Emergency Economic Stabilization Act of 2008 and How
It Affects You 210
Chapter 14: What Can Go Wrong, and How to Fix It 207
Relief During Temporary Disruptions 207
Natural Disaster Relief 208
Active Military Duty 208
What to Do If You Are Facing Financial Hardship 209
Go Back to the Basics of Budgeting 209
Loss Mitigation Options 210
If All Else Fails 215
Concluding Comments 217
Appendix A: Loan Comparison Worksheet 219
Index 223