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Copyright © 2007 • LendingTree • All Rights ReservedThe LendingTree Smart Borrower Center offers a range of articles about mortgages and home equity loans and can help you decide which type of loan best meets your needs.

MORTGAGES• How to choose

the loan that’sbest for you

• Take control ofyour mortgageand save money

• How to choosethe loan that’sbest for you

• Take control ofyour mortgageand save money

guideto:

1Copyright © 2007 LendingTree. All rights reserved.

There are many different mortgage productsavailable today, and choosing the best onecan be almost as challenging as finding theright house. This guide explains commontypes of mortgages to help you decide whichone will best meet your financial needs.

Before you get a mortgage, consider:• what you can afford to pay each monthbased on your current income.(see Worksheet 1: How Much House CanYou Afford?)

• whether you expect your income to rise, fallor stay the same over time.

• whether you plan to stay in the house long-term or move in a few years.

• your tolerance for risk.

• whether you expect interest rates to rise, fallor stay about the same.

TYPES OF MORTGAGES

Understanding the pros and cons of differenttypes of mortgages is the first step in findingthe loan that’s right for you. Here’s a look atthe options available.

Fixed rate mortgagesWith a fixed rate mortgage, the interest rate andmonthly payments stay the same for the life of theloan.

These mortgages are usually fully amortizing,meaning that your payments combine interest andprincipal in such a way that the loan will be fullypaid off in a specified number of years. A 30-yearterm is the most common, although if you want tobuild equity more quickly, you might opt for a 15- or20-year term, which usually carries a lower interestrate. For homebuyers seeking the lowest possiblemonthly payment, 40- and 50-year terms areavailable with a higher interest rate.

Consider a fixed rate mortgage if you:

• are planning to stay in your home for several years.

• want the security of regular payments and anunchanging interest rate.

• believe interest rates are likely to rise.

Adjustable rate mortgages (ARMs)With an adjustable rate mortgage (ARM), theinterest rate changes periodically, and payments maygo up or down accordingly. Adjustment periods onan ARM can vary, but it’s usually one year.

All ARMs are tied to an index, which is anindependently published rate (such as those set bythe Federal Reserve) that changes regularly to reflecteconomic conditions. Common indexes you’ll

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encounter include COFI (11th District Cost ofFunds Index), LIBOR (London Interbank OfferedRate), MTA (12-month Treasury Average, also calledMAT) and CMT (Constant Maturity Treasury). Ateach adjustment period, the lender adds a specifiednumber of percentage points, called a margin, todetermine the new interest rate on your mortgage.For example, if the index is at 5 percent and yourARM has a margin of 2.5 percent, your “fullyindexed” rate would be 7.5 percent.

While you don’t need to understand the economictheory behind your mortgage’s index, you should askyour lender for a chart or graph of its historical ratesso you get an idea of how quickly it can change.Mortgages that are tied to fast-moving indexes tendto have smaller margins, but your rate may changemore frequently or drastically.

ARMs usually have caps that prevent the rate orpayment from rising beyond a certain level betweenadjustment periods, as well as over the life of theloan. Typical rate caps might be 2 percent in anyyear, and 6 percent overall.

Using the cap information above as an example, ifyour initial interest rate is 4.5 percent, even if yourindex rate rose 2.5 percent, the highest your ratewould rise to would be 6.5 percent. However, youdon’t escape the rest of the rate increase; your ratewould likely rise the other half percent immediatelyin the second year, to 7 percent. Over the life ofyour loan, your rate would not be able to rise tomore than 10.5 percent.

ARMs usually offer a lower initial rate than fixedrate mortgages, and if interest rates remain steady ordecrease, they may be less expensive over time.However, if interest rates increase, you’ll be facedwith higher monthly payments in the future.

Consider a traditional adjustable rate mortgage ifyou:

• are planning to be in your home for less than threeyears.

• want the lowest interest rate possible and are willingto tolerate some risk to achieve it.

• believe interest rates are likely to go down.

Option ARMsAlso called “flex ARMs,” these are adjustable ratemortgages with a twist. Each month, rather thanpaying a set amount, you’ll receive a statement withup to four payment options, ranging from a smallminimum to a fully amortized payment. You selectthe amount you want to pay each month.

Option ARMs entice borrowers by offering initiallow minimum payments, but after an introductoryperiod, the required minimum can rise substantially.In addition, if you choose the minimum payment,you won’t cover all the interest you owe for apayment period. This unpaid interest is added toyour loan amount, meaning that even if you’vemade a payment, you could owe more on your loan,not less, than when your loan began. This is callednegative amortization, and is something you shouldavoid.

Consider an option ARM if you:

• want flexibility because you have a fluctuatingincome – for example, if you’re self-employed orwork on commission.

• are financially disciplined and won’t be tempted tosimply pay the minimum every month.

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Balloon mortgages also offer low regular paymentsfor a number of years (often just slightly below whatyou’d pay for a 30-year fixed rate mortgage). Afterthis fixed period, the principal must be repaid as alump sum, which generally means refinancing.Because very little of the principal has been paiddown, once again, your payments will increase.

These loans can be helpful temporarily, but theydon’t allow you to build equity in your home, andthey can cause serious financial strain when theprincipal comes due.

Consider an interest-only or balloon mortgage if you:

• are buying a home with the expectation of animprovement in your financial situation – forexample, you have a large debt that will be paid offin a few years.

• want to stay in your current home but areexperiencing a temporary financial squeeze – forexample, you are going back to school, or taking afew years off to stay home with your children.

Copyright © 2007 LendingTree. All rights reserved.

Hybrid mortgagesA hybrid mortgage combines the features of fixedrate and adjustable rate loans. It starts off with astable interest rate for several years, after which itconverts to an ARM, with the rate being adjustedevery year for the remaining life of the loan.

Hybrid mortgages are often referred to as 3/1 or 5/1,and so on. The first number is the length of thefixed term – usually three, five, seven or ten years.The second is the adjustment interval that applieswhen the fixed term is over. So with a 7/1 hybrid,you pay a fixed rate of interest for seven years; afterthat, the interest rate will change annually.

Consider a hybrid mortgage if you:

• would like the peace of mind that comes with aconsistent monthly payment for three or more years,with an interest rate that’s only slightly higher thanan annually adjusted ARM.

• are planning to sell your home or refinance shortlyafter the fixed term is over.

Interest-only and balloon mortgagesUnlike an amortized mortgage where you pay acombination of interest and principal each month,with an interest-only mortgage you pay only interestfor a fixed period – usually from five to 10 years.This means the principal never goes down, and afterthis period has elapsed you have to either pay theentire principal off or start paying down theprincipal, which results in much higher monthlypayments.

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SPECIAL TYPES OF MORTGAGES

Some types of government-insured loans areavailable to borrowers who have specialcircumstances. These may be structured aseither fixed rate or adjustable rate loans.

VA home loansVA (Veterans Administration) loans are available tothose who have served in the armed forces for arequired period of time. They are provided throughprivate lenders, but because the federal governmentguarantees a portion of the principal, they can beobtained with little or no down payment. (Forinformation visit http://www.homeloans.va.gov)

FHA-insured mortgagesFHA-insured loans are also obtained through anapproved private lender and are guaranteed by theFederal Housing Administration, part of theDepartment of Housing and Urban Development(HUD). You pay an insurance premium, but yourtotal monthly payment may still be lower than whatyou would otherwise be able to secure, especially forborrowers with less than stellar credit and without ahigh income. (For complete information visithttp://www.hud.gov)

Freddie MacFreddie Mac, a corporation chartered by the federalgovernment, also has many products designed forpeople who might find it difficult to obtain aconventional mortgage. Some are aimed at certainprofessions – such as police officers, firefighters,teachers and health care workers – while others areopen to everyone. Freddie Mac products areavailable through a network of approved lenders.(For complete information visithttp://www.freddiemac.com)

Low down payment optionsThere are many special programs available for thosewho have trouble coming up with a 20 percentdown payment on a home. A lender may approve amortgage with a low down payment if you agree topay for private mortgage insurance (PMI) to coverthe amount of the loan in the case of default. Thecost of PMI varies but, in general, it’s about one-halfof one percent of the mortgage amount per year, or$1,000 for a $200,000 loan. That would add $83 permonth to your mortgage payment. It’s possible topay private mortgage insurance by financing it whenyou set up your mortgage, Going this route willgenerally increase your interest rate—possibly byone-half of 1 percent.

Another option is a second trust or “piggyback”loan. It involves paying part of the down payment bytaking out a second loan that closes at the sametime as your mortgage. The most commonpiggyback loan is an 80/10/10. It provides 80 percentof the financing through a first mortgage and theremaining 20 percent is equally divided between asecond, piggyback, loan (10 percent) and the downpayment (10 percent).

There are also down-payment assistance programsthat enlist the participation of nonprofitorganizations to help low-income families cover thecost of a down payment. Contact your lender orREALTOR®‚ for information on these or other lowdown payment programs.*

* REALTOR® – A registered collective membership mark thatidentifies a real estate professional who is a member of the NationalAssociation of REALTORS® and subscribes to its strict Code ofEthics.


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COMPARING RATES, POINTS AND FEES

Choosing the best mortgage isn’t simply amatter of picking the one with the lowestmonthly payment, or even the best postedrate.

Suppose one lender offers a mortgage at 6percent, plus two points, while another offersa similar product at 6.5 percent, but nopoints. Or perhaps one lender offers amortgage with a manageable monthlypayment, but you discover later that you alsohave to pay private mortgage insurance thatadds hundreds of dollars to the annual cost.In each case, it’s important to do the math todetermine which is the better deal.

Mortgages may express their interest rates invarious ways, and may carry hidden fees.Homeowners need to consider all of these asthey shop around for the best loan.

Introductory ratesMany adjustable rate mortgages offer lowintroductory or “teaser” rates. It’s important toremember that these rates usually apply for only afew months, after which they go up significantly. Ifyou take advantage of introductory rates, you willneed to budget for the inevitable rise in yourmonthly payment. If you agree to a loan with anintroductory rate, make sure you understand howlong the rate will last. Some rates are good for only30 days; make sure you read all disclosures so you’renot surprised when your mortgage bill arrives.


Discount pointsDiscount points are fees paid up front to obtain alower interest rate. One point equals one percent ofthe loan amount and will typically lower the rate by0.25 percent. Paying points may be worthwhile ifyou plan on keeping your mortgage for an extendedperiod of time. If you intend to hold the mortgagefor only a few years, however, the cost may exceedthe benefit you’ll receive from a lower rate.

For example, if you are considering a $150,000mortgage at 7 percent, you may be able to lower therate to 6.5 percent by purchasing two points at a costof $3,000 (two percent of $150,000). Next, find outhow much you’ll save per month by paying points.In this example, if the loan is a 30-year fixedmortgage, the difference in monthly payments is$50 per month. Divide your cost by the monthlysavings ($3,000 ÷ $50) to determine your break-evenpoint (60 months, or 5 years). This means you willhave to stay in your mortgage at least 5 years torecoup the cost of paying for points.

You can use the Discount Points calculator in theLendingTree.com Smart Borrower Center to help youdo the math to decide whether paying points makessense for you.

Private mortgage insuranceIf you are borrowing with a down payment of lessthan 20 percent, you may be required to haveprivate mortgage insurance (PMI), which protectsthe lender if you are unable to pay back the loan. Inthis case, you may be required to pay annual ormonthly premiums, or have a one-time fee added toyour loan amount. Be sure to include this expensein your comparison. You should notify your lenderto cancel the insurance once you have paid 20percent of the principal on the loan.

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FeesMortgage lenders may charge for a range of services,including fees for processing your application,conducting a title search, having your homeappraised, obtaining your credit report, and otheradministrative or legal services. Borrowers maychoose to pay these costs by adding the amount totheir loan principal. In other cases, lenders maywaive the fees in exchange for a higher interest rate.

Lenders may give different terms for these fees, ormay combine several under a single name, makingit difficult to know what you’re paying for. Yourlender must provide you with a written good faithestimate (GFE) of these costs within three days ofreceiving your loan application. Your lender is alsorequired to provide you with a Truth in Lending(TIL) form. Read this closely; it will tell your annualpercentage rate, if your loan is adjustable or not,and if there is a pre-payment penalty associated withyour loan.

Annual percentage rate (APR)To help homebuyers evaluate mortgages on a levelfield, the federal government requires lenders topublish the loan’s annual percentage rate (APR).This figure is designed to express the true cost of theloan by taking into account the base interest rateand several other fees charged by the lender. (Notall fees associated with a mortgage are included inthe APR.)

Unfortunately, comparing mortgage costs over themedium and long term is not as simple as looking atthe APR. You should not, for example, look only atthe APR when comparing mortgages with differentterms, such as a 15-year versus a 30-year mortgage.Nor is it possible to project future costs of anadjustable rate mortgage. Nevertheless, the APR is auseful starting point for comparing the cost of loans.


LOCK-INS

Once you’ve decided on a lender and a mortgagethat suits your needs, you should request a lock-in,or rate commitment. This is a lender’s promise tohold a certain interest rate and number of points fora specified period, often 30 to 60 days. Sometimesyou can lock in only the rate and let the points“float” or move up and down with the market.Depending upon the lender, you may be able tolock in when you apply for the mortgage, duringprocessing, when it gets approved, or at some laterdate.

The benefit of a lock-in is that it protects you againstrate increases while your application is beingprocessed. Some lenders charge a fee for locking in(generally, the longer the guaranteed period, thehigher the fee), but this may be refundable if you goahead with the loan. Be sure to get the ratecommitment in writing.

CREDIT SCORES AND MORTGAGES

When lenders review your application and set theinterest rate for your mortgage, one of the mostimportant factors they consider is your credit score.

The three major credit bureaus – Equifax,TransUnion and Experian – collect information onconsumers from financial institutions and othersources. If you have a good credit history – you payyour accounts on time and don’t overextend yourborrowing – that information is in their files. On theother hand, if you’ve missed payments on your carloan, maxed out your credit cards or had your creditaccounts turned over to a collection agency, thatwill also be reflected in your credit file.

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To generate your credit score, the bureaus take theinformation in your file and run it through amathematical formula. Your score will fallsomewhere between 300 to 850, although most arein the 600s and 700s. A high credit score means youwill likely have no trouble being approved for amortgage and securing a low interest rate. A lowerscore, however, makes it harder to find a lender, andyour interest rate may be higher if you do qualify.

Let’s say you are looking for a $200,000 fixed-ratemortgage with a 30-year term. Here’s an illustrationof how your credit score may affect your interest rateand payment:

Credit Score Interest rate Monthly payment

800 6% $1,200

750 6.25% $1,230

690 6.5% $1,265

630 7.3% $1,370

580 8.8% $1,580

520 9.6% $1,700

HOW LENDERS CHECKING YOURCREDIT AFFECTS YOUR SCORE

Some borrowers worry about shopping around forthe best loan because they are worried how it willaffect their credit score. Lenders are interested inthe number of inquiries to your credit reportbecause multiple inquiries are an indication thatyou are requesting new credit. The credit scoringagencies have found that borrowers who requestcredit frequently tend to be higher-risk borrowers.


Thus, frequent inquiries on your credit report thatresult from frequent requests for new credit (creditcards, loans, etc.) can lower your credit score.

However, credit reporting agencies understand thatborrowers need to shop around to find the best loan,which can create multiple inquiries over a shortperiod of time. To address this, the scoring formuladoesn’t penalize borrowers for shopping around.The score is set up to take into account that eventhough you are looking for only one loan, multiplelenders may request your credit report. Here’s whatFair Isaac, the company behind your FICO score,says about rate shopping:

“The score ignores all mortgage and auto inquiriesmade in the 30 days prior to scoring. So if you find aloan within 30 days, the inquiries won’t affect yourscore while you’re rate shopping. In addition, thescore looks on your credit report for auto or mortgageinquiries older than 30 days. If it finds some, it countsall those inquiries that fall in a typical shoppingperiod as just one inquiry when determining yourscore. For FICO scores calculated from older versionsof the scoring formula, this shopping period is any14-day span. For FICO scores calculated from thenewest versions of the scoring formula, this shoppingperiod is any 45-day span. Each lender chooses whichversion of the FICO scoring formula it wants thecredit reporting agency to use to calculate your FICOscore.”*

*Copyright© Fair Isaac Corporation. Used with permission. Fair Isaac,myFICO, the Fair Isaac logos, and the Fair Isaac product and servicenames are trademarks or registered trademarks of Fair IsaacCorporation.

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In any event, inquiries are likely to be an issue onlyif there is little other information in your file. If youhave a long credit history and several currentaccounts, a single inquiry will not significantly affectyour score.

Since your credit score is so important, it’s wise tocheck your own file regularly to ensure that theinformation is accurate. You can do so for free usingthe Annual Credit Report Request Service: call1-877-322-8228 or visit www.annualcreditreport.com.

You might consider staggering your annual requests.For example, you can request an annual copy ofyour Equifax report in January, your TransUnionreport in May, and your Experian report inSeptember. That way you’ll receive an up-to-datecredit report every four months. Or you can requestyour:

Free Credit Report and Score fromwww.lendingtree.com

PROTECT YOURSELF

A mortgage loan is secured with your mostvaluable possession, so it’s important to beaware of circumstances that can put yourhome in jeopardy. Here are some commonpitfalls to avoid:

Predatory lendingPredatory lending is any practice in which lendersfool or bully people into taking out loans that areultimately unaffordable. Lenders may chargeunnecessary fees and excessive interest, or convincehomeowners to continually refinance to obtain alower monthly payment in exchange for a higherinterest rate and longer term.


Teaser ratesA “teaser rate” is a very low starting interest rate onan ARM. However, the rate is applicable for only ashort time.

Lenders may offer an initial rate that is below thefully indexed rate. While teaser rates can reducehousing costs in the early years of a mortgage, yourpayments can rise significantly at the firstadjustment date. Always understand what your indexrate is, so you know whether what you’re offered istoo good to be true.

SteeringSome predatory lenders use “bait-and-switch” tacticsto steer you into a higher-rate loan when you couldqualify for a lower-interest one.

Negative amortizationSome mortgages that offer very low monthlypayments do not cover all of the interest owing onthe mortgage. This means that over time, yourprincipal will go up rather than down, a situationcalled negative amortization. While this type ofmortgage may be helpful in the short term forpeople in specific circumstances, they can bedevastating to those who enter them unwittingly.

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KEEPING YOUR MORTGAGE ON TRACK

One of the most confusing stages of themortgage process comes after yourapplication is pre-approved and before theloan closes.

Once lenders have checked your credit andagreed to lend you money, they still mustreview the paperwork you’ve provided tomake sure everything in the application canbe validated with supporting documentation.This can be complicated, time-consumingand occasionally fraught with surprises. If anunforeseen problem arises – especially onethat’s the result of incorrect information – youmay be faced with alternatives such as: Thelender may not approve the full amount yourequested, your interest rate and/or closingcosts may be adjusted or in some instances,the loan application may be declined.

You can avoid delays and disappointmentsby anticipating these common issues:


• Your down payment is not “seasoned”.Many people believe that the source of their downpayment – whether it came from years of diligentsavings or was a gift from Mom and Dad – isunimportant. Lenders, however, have found thatborrowers tend to be lower risk if their downpayment comes out of their own pockets. As a result,these home buyers often receive the best possiblerates.

Your mortgage lender will usually ask for your assetstatements covering the last two months. Any moneythat has been in your account for the entire 60 daysis considered “seasoned” – that is, the lender willassume that it is yours. If a large lump-sum depositwas made during this period, however, you’ll beasked to document where it came from. If you soldstocks or cashed in bonds to raise the cash, forexample, make sure you keep the statements fromthose transactions.

Receiving family help with your down payment willcertainly not prevent you from getting a goodmortgage, but you must disclose the gift to thelender. The person supplying the money may haveto supply a letter confirming that the money isindeed a gift, not a loan, as well as bank statementsindicating that the giver is in a financial position tomake such a gift.

• You do not have enough reserve assets.Anyone can run into short-term financial troublefrom a job loss, medical expenses, or otherunforeseen life event. In the event of such a crisis,your lender wants to know whether you have assetsyou can draw on to continue to pay your mortgage.

In general, you should have enough liquid assets tocover at least two or three months of mortgage, tax

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and insurance payments. For some loan programs, alender may require you to have enough to cover asmuch as six months. Liquid assets are those thancan be easily converted to cash – such as stocks,bonds or mutual funds, as opposed to non-liquidassets such as equity in a car, boat or real estate.Borrowers with a lot of liquid assets may be able tosecure better loan terms than those with fewerassets. Keep in mind, if the assets you are using arefrom a 401K account, you can use only 70 percentof the vested value to put towards your mortgage.

When documentation of your reserve assets isrequired, statements from your investment accountsare usually sufficient. Again, lenders will check tomake sure these assets are seasoned, and not fundsthat you’ve shuffled from a family member or friend.

• Your appraisal comes in low.If you’re applying for a mortgage, lenders willusually require an appraisal of your new home’svalue. They want to determine the ratio of yourrequested loan to the value of the house.

Let’s say you’ve found the perfect home and you’vesubmitted a conditional offer that matches theseller’s asking price of $320,000. You intend tofinance 80 percent of that amount, or $256,000.Then the lender does an appraisal and determinesthat the home’s true market value is just $305,000.Now the most you can borrow at an 80 percent loanto value ratio is $244,000. Even if you are able tocome up with the $12,000 shortfall, you shouldstrongly consider whether you want to pay more fora home than the lender considers it is worth.

A low appraisal won’t necessarily scuttle yourmortgage loan request, however. You may be able toconvince the seller to lower the price, or ask thelender to agree to a second opinion on the appraisedvalue. If these methods fail, you may still be


approved for a loan that represents more than 80percent of the home’s value, but you will likely berequired to pay for private mortgage insurance orconsider other loan options that may have higherrates and/or fees.

• You fail to disclose debts or otherobligations.To see whether you have enough cash flow to coverall of your monthly payments, lenders look at yourdebt-to-income ratio. Most lenders like to see thatyour total debt payments including mortgage,property taxes, insurance, car loans and credit cardsdo not exceed 36 percent of your pre-tax income. Ifyour debt-to-income ratio exceeds 36 percent, youmay still qualify for a mortgage, however you willlikely be charged a higher interest rate.

If you have any loans or other financial obligations,such as alimony or child support payments, youmust disclose these to your lender. If you aredishonest about your debts because you want to stayunder the required threshold, you risk having yourmortgage application turned down. (Note that if youare receiving alimony or child support payments,you are not obligated to disclose this, unless you areusing this income source to qualify for the loan.)

• The title search comes back with a blemish.Before approving your mortgage application, thelender will do a title search on the property you arebuying. This involves checking the necessary legaldocuments to make sure that the seller actuallyowns the home, and that there are no liens orunpaid taxes that would prevent a clean transfer ofthe title to you. If the title search turns up aproblem, your closing may be delayed until the

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issue is resolved.

• You have neglected to obtain adequatehomeowners or flood insurance coverage.Any property that is mortgaged needs to be insuredto protect the lender as well the homeowner. Beforeclosing, you will need to show your lender that youhave adequate homeowner’s insurance covering fireand other hazards. In some areas, you may berequired to have flood insurance as well. Make sureto ask about the coverage you need so you canupdate your policy if necessary.

• You changed or modified your loan request.Unless you are willing to accept delays, it’simportant not to make changes to your loan requestafter submitting the application. For example, youmight decide to add $10,000 to the principal, or youmight request a home-equity line of credit to goalong with your primary mortgage. Both of theseactions – even if you are not intending to draw onthe line of credit immediately – may affect your loanqualification by increasing your debt to incomeratio. They may also push your total loan amountover 80 percent of the home’s value. As a result, thelender will have to reassess your application, and


this may slow down the process.

Why closing costs may be higher thanyour good-faith estimate

Lenders are required by law to give you a good-faithestimate of the costs associated with your mortgagewithin three days of your application. Beforeclosing, you’ll receive another document thatoutlines the actual settlement costs. The final pricetag is usually very close to the estimate, butoccasionally it may be different.

While lenders can quote a firm amount for theirown fees (usually called origination fees), theycannot necessarily do the same for services done bythird parties. For example, the appraisal, title search,title insurance, prepaid property taxes, recordingand legal fees are all out of the lender’s directcontrol. Lenders do their best to estimate theseexpenses accurately, but the exact final cost maysometimes vary slightly from their initial estimate.

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WORKSHEET 1:

How Much House Can You Afford?

Before getting pre-approved for a mortgage, home buyers need to determinehow much they can afford without overextending themselves.

Start by recording your income and expenses related to other debts:

Annual income (before taxes) Annual debt expenses

Employment income: Vehicle payment:

Investment income: Student loans:

Other income: Credit card payment:

Other debt:

TOTAL TOTAL

Now, use the Home Affordability calculator in the LendingTree.com Smart Borrower Center to get anestimate of the mortgage amount you can comfortably carry. (Lenders often recommend this be somewherebetween 25 and 33 percent of your gross income.)

Remember, however, that in addition to your mortgage payment, you’ll also need to cover homeowner’sinsurance and property taxes, as well as private mortgage insurance if your down payment is less than 20percent. Ask your real estate agent and lender to help you estimate these costs.

Annual new home costs

Mortgage payments:

Homeowner’s insurance:

Property taxes:

Private mortgage insurance:

TOTAL


WORKSHEET 2:

What to Ask Your Lender

What is the base interest rate and the APR,and how will it change over the term of theloan?

Is this the best rate that I qualify for?

Do I have to pay points to achieve this rate?

Will you lock in the interest rate and pointsyou have quoted, and is there a charge? Willyou put this in writing?

What is the term of the loan?

Will there be a lump sum payment (a balloon)due at the end of the term?

What is the minimum down payment yourequire?

What will my monthly payment be?

Will I need to pay private mortgageinsurance?

Is there a penalty if I pay off the mortgagebefore the end of the term?

What fees are associated with the mortgage,and what is your good faith estimate of theirtotal?

What documentation do I need to provide(employment record, homeowners’ insurance,etc.)?

How long will the approval process take?

It’s crucial that you understand the terms of your contract before you sign. Have thisworksheet with you when you talk to prospective lenders and use it to help you comparetheir offers.

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1. Check your creditYour prospective lenders will be doing this, so it’s agood idea to look at your own credit report severalmonths before applying for a mortgage. Fix anyerrors and put off large purchases to ensure yourcredit score is as high as possible.

LendingTree links:Free online credit reportWhy should I check my credit report?Correcting your credit report

2. Determine what you can afford to borrowDetermine your annual income, your current levelof debt and the fixed costs of a new home, includingproperty taxes and insurance. Consider the downpayment you’ve saved and determine the size of theloan you can comfortably afford.

LendingTree links:Calculating your debt-to-income ratioDown-payment assistance programsCalculator: How much will your payments be?Calculator: What price home can you afford?

3. Determine what type of mortgage is rightfor youConsider your individual financial goals, how longyou plan to be in the home and your comfort levelwith risk. Look at the variety of mortgages available(including fixed rate versus adjustable rate) anddetermine the one that’s right for you.

LendingTree links:How to choose the right loanFinding the best mortgage

4. Pre-qualify for a mortgageYou can get pre-qualified at LendingTree.com.

Request a mortgage now.

Mortgage Roadmap


5. Compare the offeringsWhen comparing your offers, don’t simply look atthe interest rate -- make sure you understand exactlywhat up-front and ongoing fees you’ll be charged.

LendingTree links:Discount pointsCalculator: Which loan is better?

6. Get pre-approvedGetting pre-approved can give you negotiatingleverage when shopping for a home. Supply all thenecessary documentation and have your income,assets and credit information verified and have yourloan approved, subject to an appraisal of theproperty and other conditions.

LendingTree links:Checklist: Documentation for your lenderQualifying for a home loan

7. Lock in rate and pointsDetermine whether you want to lock in the interestrate and points, the length of the guarantee, and thefee for this lock-in.

LendingTree links:Setting the mortgage terms

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Adjustable rate mortgage (ARM): A mortgage inwhich the interest rate is adjusted periodically basedon an index.

Amortization: The gradual reduction of a debt byperiodic payments of interest and principal that arelarge enough to pay off a loan at maturity. The loanis repaid through regular, monthly payments ofprincipal and interest paid for a predeterminedamount of time.

Annual percentage rate (APR): The annual cost ofa loan to a borrower. Like an interest rate, the APRis expressed as a percentage of the loan amount.Unlike an interest rate, however, it includes othercharges or fees to reflect the total cost of the loan.The Federal Truth in Lending Act requires thatevery consumer loan agreement disclose the APR inlarge, bold print. Since all lenders must follow thesame rules to ensure the accuracy of the APR,borrowers can use the APR as a good basis forcomparing the cost of loans.

Caps: Consumer safeguards that limit the amountthe interest rate may change per year and/or overthe life of a loan. Payment caps limit the amountmonthly payments on an ARM may change.

Good Faith Estimate (GFE): This document setsout all the costs associated with a mortgage,including the interest rate, lender fees, title charges,pre-paid interest and insurance. The governmentrequires that your lender give you a GFE withinthree days of receiving your loan application. TheGFE is only an estimate; some fees can changebefore closing. The lender fees, however, should notchange; ask your lender to guarantee those fees inwriting.

Glossary


Home equity: The difference between the marketvalue of a home and any outstanding mortgagebalance. A person who has a $50,000 mortgage on a$150,000 home has accumulated $100,000 in homeequity.

Index: A published interest rate against whichlenders measure the difference between the currentinterest rate on an adjustable rate mortgage and thatearned by other investments (such as one-, three-,and five-year U.S. Treasury Security yields, themonthly average interest rate on loans closed bysavings and loan institutions, and the monthlyaverage Costs-of-Funds incurred by savings andloans). This is used to adjust the interest rate on themortgage up or down.

Margin: The amount a lender adds to the index onan adjustable rate mortgage to establish the adjustedinterest rate.

Mortgage: A lien or claim against real propertygiven by the buyer to the lender as security formoney borrowed. Under government-insured orloan-guarantee provisions, the payments mayinclude escrow amounts covering taxes, hazardinsurance, water charges, and special assessments.Mortgages generally run from 10 to 30 years, duringwhich the loan is to be paid off.

Negative amortization: Occurs when your monthlypayments are not large enough to pay all the interestdue on the loan. This unpaid interest is added tothe unpaid balance of the loan. The danger ofnegative amortization is that the buyer ends upowing more than the original amount of the loan.

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Points: A borrower may lower the interest rate on aloan at closing by buying points. Each point is equalto 1 percent of the loan amount -- for example, twopoints on a $100,000 mortgage would cost $2,000.Also referred to as discount points. Points may be taxdeductible; consult a tax advisor for details.

Principal: The amount of debt, not countinginterest, left on a loan.

Private mortgage insurance (PMI): Insurance thatis usually required by the mortgage lender if theborrower has a down payment of less than 20percent of the home’s value. PMI requires an initialpremium payment of one to five percent of themortgage amount and may require an additionalmonthly fee.

Truth in Lending (TIL): A federal law requiringdisclosure of the annual percentage rate tohomebuyers shortly after they apply for the loan.The form is often referred to as the “TIL” and it alsolists the total finance fees, the amount financed, thetotal amount you’ll pay over the life of the loan, thetotal number and amount of your payments, andwhen they’re due each month. It contains otherimportant details, such as whether the mortgage isassumable if you sell the home, and whether there isa penalty for prepaying the mortgage.

Glossary


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The LendingTree® Advantage


Thanks for trusting LendingTree to help youfind a loan. We put you in control of yourloan by asking lenders to compete for yourbusiness. Comparing real loan offers fromdifferent lenders just makes sense. Just likeyou comparison shop for other largepurchases, smart consumers know a loan isno different. Except at LendingTree, we do allthe work, and you reap the benefits.

WHY IS LENDINGTREE BETTER?

• Low rates: Up to four offers that could lower yourmonthly payments.

• Personal service: 24/7 customer service andonline tools to help you make a smart borrowingdecision. Our Customer Care Consultants willhelp you understand your options, and help youselect the best loan for you.

• Our Network: Our Lender Network has morethan 200 lenders. Some are household names,while others are smaller, with regional, product orcustomer segment specialties that may make themideal for you.

• Trust: Join the 20 million people who started theirsearch for a better loan through LendingTree.

LendingTree. When Banks Compete, You Win®

Contact us:1-800-555-TREEwww.lendingtree.com

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Additional Resources


WHERE TO LEARN MORE

www.LendingTree.com/smartborrower

The LendingTree Smart Borrower Centeroffers a range of articles about mortgagesand refinancing and can help you decidewhich type of loan best meets your needs.

Additional sources of information:The Federal Reserve Board:www.federalreserve.gov/consumers.htm

Federal Citizen Information Center:www.pueblo.gsa.gov

Department of Housing and Urban Development:www.hud.gov

Center for Responsible Lending:www.responsiblelending.org

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