Nolo's Essential Guide to Buying Your First Home (26 page)

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Tax professional.
You may want to consult an accountant or other tax pro to make sure you’re taking advantage of all the tax benefits of buying a home. This is particularly important in the year you buy, when many of your expenses may be deductible.

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Insurance agent or broker.
You’re going to need to purchase homeowners’ insurance for your house (the lender will require coverage of physical hazards, at a minimum, as described in Chapter 13). To do that, you’ll probably work with an insurance broker. Your other option is to directly contact representatives of insurance agencies whose services come highly recommended.

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Contractor.
If you’re considering remodeling, it’s worth getting recommendations for a good contractor early on. That way, you can have the contractor look at the house and tell you how much the remodel would cost, or whether it’s worth buying in the first place.

• the basics of mortgage financing—interest rates, points, and more

• different loan options—fixed rates, adjustable rates, and everything in between

• how much to borrow versus how much to put down

• where to research mortgages, and

• the mechanics of applying for and getting a loan.

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The type of mortgage you choose.
You’ll typically be offered a lower initial interest rate on an adjustable rate mortgage (ARM) than on a fixed rate mortgage. Notice we said
initial
—stay tuned for more on that later in this chapter.

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How risky you are as a borrower.
If you have a history of paying bills on time, a steady high salary or other significant income, low debt, plan to make a hefty down payment, and request a loan that doesn’t break the bank, you’ll probably be offered a comparatively low interest rate. If the opposite is true, your rate may be higher, to compensate the lender for the added risk.

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The loan-to-value ratio.
A large down payment tells the lender that you’re not likely to walk away from your investment. A small one, however, makes the lender nervous. If you default, the lender will spend time and money chasing you down and may have to initiate foreclosure proceedings. Also, the lender could lose money, if you owe more than the house is worth. It protects itself from such risks by charging you higher interest.

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Whether the loan can be resold.
Lenders often resell loans on the secondary mortgage market, discussed below. That frees up the lender’s capital to make more loans (meaning make more money). If your loan doesn’t qualify for resale, it’s less desirable for the lender. You’ll pay a premium to make up for that.

The Secondary Mortgage Market and Jumbo Loans

 

A whole market exists in which original lenders sell loans to secondary lenders. Usually the original lender is paid a flat fee upon sale, and the new lender gets to collect the rest of your mortgage payments, including interest.

Why does this matter to you? Because the primary players in this secondary market, Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation), buy only those loans that meet certain financial criteria, including that the mortgage doesn’t exceed a certain amount (which varies by location and is regularly adjusted: for 2008, it was $417,000 in most places, but as high as $625,500 in high-cost areas). If your loan won’t qualify for sale to Fannie or Freddie (a given if it’s a “jumbo” loan—over the monetary limit), you’ll probably be offered a higher interest rate.

 

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Whether the loan has points.
Loans with points (an optional up-front fee) will normally come with a lower interest rate.