Q & A with Dottie Herman

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Q1 - What is a temporary mortgage buy down and how do I know if it is the right choice for me?

A - A mortgage buy down is when you pay monies upfront in the form of prepaid interest. This is referred to as points.  Temporary buy downs will reduce the loan interest rate for a limited period of time.  The most common form of a temporary buy down is a 3-2-1 Buydown.  This means that the initial interest rate on the fixed rate mortgage is reduced 3% year one, 2% year two, 1% year 3, and from year 4 on it remains at the actual rate.  These programs are great of you need some help qualifying, or you need to reduce your expenses in the first few years of your loan.  A very common use of these programs is when the seller pays the cost of the Buydown as part of the purchase agreement. This is something you can negotiate when making offers.  There are many options and ways to maximize the benefit of buy downs.  Get in touch with a mortgage professional that has these programs and learn more about how they may fit your needs.

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Q2 - I have been in my house for 17 years and I want to begin to pay more money toward my mortgage. Is there any penalty for doing this? Is there an advantage as far as the interest I will not have to pay?  

A - Prepayment penalties are terms of a mortgage that do not allow you to prepay principal early.  These do exist and the only way to be sure is to call your lender and ask.  Most loans that have such a penalty normally only have them for the first few years. In many states they are not permitted under the law and, for the most part, they are rare on fixed rate loans.  Prepayment penalties were very common on mortgages with very low introductory rates, and even some Home Equity loans. Again the best way to know is call your current lender.

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Q3 - I have a jumbo mortgage with about five years remaining with a relatively low rate that is fixed for 10 years. After those 10 years I have about another 10 years on the loan. It is a relatively low rate so should I keep that for the next five years and then see what is available or should I refinance now since rates are so low? 

A - This is a very common question and the answer is: it depends. If your loan can change and is fixed for the next 10 years at a rate comparable to the current refinance then staying with it works and you avoid the cost of a refinancing.  Should the next ten years have a variable rate (such as the rate can adjust once a year) then you need to consider the longer term scenario.  If this is the case, the rate may be very low and appealing at first.  But as rates move up, which they will sometime in the future, your rate will also go up.  So if you have a variable rate, you should consider a refinance now that locks in the rate for the life of the loan. Today as I write this, a 15 year fixed rate is around 4%, so I would suggest you explore the options.

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Q4 - My wife and I are looking to buy our first home- we have very little cash down as we are both students still with small loans but decent jobs at night. Would an FHA loan be best for us?

A - An FHA loan is the best option for smaller down payments.  What will be more important is being able to qualify for the loan based on income.  Lenders require enough income to cover your home payment and all other debts. In addition they require a minimum of 2-year employment history that is stable and expected to continue.  A student may not be required to have a two-year work history, but the stability and amount of income required will not be negotiable.  Your best option now is to speak to a mortgage lender and have yourselves Pre-Qualified.  During this process you will learn if you are ready to proceed with a purchase and also understand what is involved so you can better plan and prepare yourselves.  Good luck!!

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If you have a real estate question for Dottie, please send it to; Dottie@RealEstateChannel.com

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