What are discount points?
Discount points are equal to the percent of the mortgage amount. So if you have 2.5 discount points that is equal to 2.5% of the mortgage. If your mortgage is $150,000 and you have 2.5 discount points that is equal to $3,750. The more discount points you pay the lower your interest rate will be.
What is a credit score?
Credit score is a number credit bureau's use to keep track of your credit. They keep track based on how you pay your bills, if you pay them on time, how much you pay or if you pay them at all. A credit score ranges from 350-850. The lower the score you have, the greater risk you are. All mortgage lenders use your credit rate to determine how much your interest rate should be and if they should even offer you a loan. With the Fair Credit Reporting Act all consumers are allowed one free credit report a year, if you access more than one your credit score will be lowered each time you view it. Click here for a free credit report.
What is a debt ratio?
A debt ratio is your percentage of debt, it is determined by dividing your total debt over your total assets. A debt ratio is a determinant of your borrowing power. Banks will not accept anyone with a 38% debt ratio or higher. If you make $3,000 dollars a month and have $800 a month in debt, your debt ratio would be 26%. Since your debt ratio is 26%, the bank will only allow you to have a mortgage up to $360 a month, or 12% because that would equal the 38% maximum. Banks usually want people in the 16-19% debt ratio range.
Why should I get an interest only mortgage?
An interest only mortgage makes since if you expect your income to decrease. You could take out a larger mortgage then you normally would, pay less for the first ten years and by the time the interest only portion of the mortgage is up you will have enough income to pay the increased costs. This only works if your income will increase in the future.
How large of a down payment should I make?
Mortgages with a larger down payments have less to pay off over the length of the loan. However much you are comfortable putting down now will help you in the long run.
What is better, a 15 year mortgage or a 30 year mortgage?
This depends on what suits you the best. 15 year mortgages usually have lower interest rates but higher monthly payments. 30 year mortgage rates take longer to pay off, but that means lower monthly interest rates. There is also the likelihood that your income will increase during the time of your mortgage, meaning it could be easier to pay in twenty years then it would to be in the first fifteen years.
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