Although we've covered the key players for most homebuyers' teams, there are a few other professionals whom you'll either want to consider bringing in or probably interact with along the way. These include: * Tax professional. 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. 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.* Insurance agent or broker. 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. 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.* Contractor. 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. 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.

What's Next?

With a team of professionals beside you, you're ready to really launch your home search. In the next chapter, we'll discuss one of the most important parts of homebuying: financing your mortgage.

CHAPTER 6 6.

Bring Home the Bacon: Getting a Mortgage

Meet Your Adviser Fred S. Steingold, an attorney and author based in Ann Arbor, Michigan.

What he doesFreds legal expertise includes real estate and business matters. He has helped hundreds of homebuyers with key tasks like drafting and reviewing sales contracts, checking title insurance commitments, and looking over closing documents. Fred is a coauthor of the Nolo book Negotiate the Best Lease for Your Business Negotiate the Best Lease for Your Business and the author of several other Nolo books. and the author of several other Nolo books.

First houseA 1,000-square-foot ranch house in an Ann Arbor subdivision, with just enough room for our two young children. I fondly remember sitting on the back porch during long summer evenings and walking to nearby University of Michigan football games. But I dont miss the small size of that house, and the crank-open windows with gears that were always getting stripped.

Fantasy houseAny house designed by Sarah Susanka would be fun to live in. Shes an architect in Minnesota and the author of a series of books on not-so-big houses-theyre sparkling gems with alcoves, woodwork, and interesting lighting. She knows how people want to live. (Note to readers: Check out Sarahs work at www.notsobighouse.com.) Likes best about his workThe range of people I get to work with. My first-time homebuyer clients are always so excited-and often more than a little nervous. I like walking them through the process and helping them overcome problems with the seller, the lender, and sometimes with their own real estate agent. Once in while, a purchase is about to fall apart over some knotty detail, and I can come up with a creative solution to save it. Its all part of helping these (usually) young buyers move up in the world.

Top tip for first-time homebuyersYoure probably expecting me to give law-related advice, but Id say have a thorough inspection! Most us dont know how to spot a potentially leaky basement or roof, or other expensive problems. But an experienced inspector can give you a heads up so you can opt out of the deal or have repairs made on the sellers dime. And if youre having a house built for you, make sure to learn about the builders reputation. Youll be extremely frustrated if the new house isnt ready until eight months after the promised date-or if you have to chase the builder to get postclosing warranty work done.

If you're like most homebuyers (over 90% of them, according to NAR statistics), you simply won't have the cash on hand to buy a home outright. Thankfully, there are plenty of lenders willing to front you the money you'll probably need.

If you've already started researching mortgages, you may have discovered the downside of consumer choice-so many options! People start out promising themselves, "I'm going to learn all about mortgages," and end up saying, "I'll take whatever's available; I just want to buy this house."

But you don't need to swing to either extreme-with a little buyer's savvy, you can avoid a mortgage that's just plain wrong for you or costs more than it should. We'll show you how by looking at: * 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.

Let's Talk Terms: The Basics of Mortgage Financing

Before you start mortgage shopping, let's cover the basics: what a mortgage is and how it works. A mortgage is a loan to purchase property, with the property as collateral. That means that if you buy your dream home, and you don't make the payments, the mortgagor (the lender, in common parlance) can recover what it's owed by foreclosing on the property-that is, taking possession of and selling it.

Naturally, the lender gets into this risky business to make money. It does that primarily by charging interest and points (one-time fees when you take out the loan). The variety of mortgage options means you can borrow the same amount of money but with different terms and end up paying very different amounts back. While interest rates and points look like tiny numbers and percentages in the beginning, they add up to real dollars later.

EXAMPLE: Rob and Amy found their dream house but don't have a mortgage yet. The local bank offers them a $350,000, 30-year, fixed-rate mortgage at 7% interest, with no points. The monthly principal and interest payment would be about $2,300, and they'd pay about $488,000 in interest over the life of the loan. Rob and Amy found their dream house but don't have a mortgage yet. The local bank offers them a $350,000, 30-year, fixed-rate mortgage at 7% interest, with no points. The monthly principal and interest payment would be about $2,300, and they'd pay about $488,000 in interest over the life of the loan.

Meanwhile, Jimmy and Devon are interested in the same house. They go to a broker to discuss their options. She finds them a $350,000, 30-year, fixed rate mortgage at 6.25% interest, with one point. The point will cost them $3,500, but their monthly payment will be about $2,155, and they'll pay about $426,000 in interest over the life of the loan, $62,000 less than Rob and Amy.

All About Interest Rates

Most of us have been borrowing long enough-either to buy a car, go to college, or get this season's fashion must-haves-to understand what interest rates are and that we don't like them. An interest rate is an amount charged by a lender, calculated as a percentage of the loan amount. Interest rates are usually high on credit cards (sometimes above 20%), but thankfully lower on other forms of credit, like mortgages. And as we discussed in Chapter 1, interest paid on your mortgage is tax-deductible.

In the early 2000s, home mortgage interest rates hit record lows, dipping below 5% in 2004. When this this book went to print, they'd climbed back up to just above 6%, though still remaining below historic averages. In any case, they're unlikely to climb toward early 1980s levels (15% and up) anytime soon.

And you're not stuck with your first mortgage for life. If you sell the house, you'll get a new mortgage when you buy your next one. And if you decide to stay put, you can refinance your mortgage (essentially, trade it in for a better one) if rates drop and the value of your house holds steady or climbs. Though you'll pay fees to refinance, it could be well worth it.

Monthly Payments for a $100,000 Fixed Rate Mortgage This chart shows the variation among monthly payments for a 30-year, $100,000 fixed rate mortgage at different interest rates.

What Those Percentages Really Mean

Unfortunately, mortgage interest rates aren't always as straightforward as they appear. For one thing, you may see them expressed two different ways: as a base rate and as an annual percentage rate ("APR"). Those two numbers aren't going to be the same. The base rate is the actual rate used to calculate your payment, while the APR is the total cost of taking out the loan, factored out over the life of the loan and taking into account any fees you pay, like appraisal fees and credit reports. Lenders provide the APR because they're legally required to.

The APR should be a good indicator of what a loan really costs, except that it factors the costs over the life of the loan over the life of the loan-and the chances of living in the same place for the whole term of a mortgage, without refinancing, are pretty low. However, the APR can be informative-like when a loan is advertised at a very low interest rate, but a slew of additional fees increase the cost dramatically.

Why You Might Not Be Offered the Advertised Interest Rate

To complicate matters, the rates you see advertised aren't necessarily what you'll be offered personally. For starters, interest rates change daily, so if you're looking at the Sunday paper, by Monday the rates may be higher or lower. And the rates you're offered will depend on some factors unique to you, such as: * The type of mortgage you choose. 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 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 initial-stay tuned for more on that later in this chapter.* How risky you are as a borrower. 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. 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.* The loan-to-value ratio. 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. 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.* Whether the loan can be resold. 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. 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 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.

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

You can't be certain of the interest rate and the exact terms of your mortgage until you've selected and applied for it. But knowing what affects the rate will help you view all options with a critical eye.

All About Points

No, this isn't some obscure score in the homebuying game. A point is a loan fee equal to 1% of the principal on the loan (so one point on a $100,000 mortgage is $1,000). Points are added to the cost of some mortgages in exchange for a lower interest rate. You probably won't be offered more than two or three points on a loan, because the lender would have to significantly reduce your interest rate to make it financially beneficial to you.

Since points are paid up front, they're a major source of immediate profit for the lender, and if your loan is resold on the secondary market, points are often the main main source of the lender's profit. That doesn't mean they're bad for you-in fact, the lowered interest rate means it's often beneficial to get a loan with points, particularly if you have the cash, are planning to stay in your place for awhile, and don't plan to refinance soon. (You may source of the lender's profit. That doesn't mean they're bad for you-in fact, the lowered interest rate means it's often beneficial to get a loan with points, particularly if you have the cash, are planning to stay in your place for awhile, and don't plan to refinance soon. (You may need need the lower interest rate, because you don't qualify for a loan at the higher rate.) If you want to pay points but don't have the cash up front, you may be able to amortize the points into your loan. That means they'll be added to the principal and paid off over the life of your loan. Of course, that also means you'll be paying interest on that money. the lower interest rate, because you don't qualify for a loan at the higher rate.) If you want to pay points but don't have the cash up front, you may be able to amortize the points into your loan. That means they'll be added to the principal and paid off over the life of your loan. Of course, that also means you'll be paying interest on that money.

EXAMPLE: Kelly and Brit need a $450,000 mortgage. They have two options, both 30-year fixed rates: one at 7.5% interest with no points, and one at 7% interest with two points. Kelly and Brit need a $450,000 mortgage. They have two options, both 30-year fixed rates: one at 7.5% interest with no points, and one at 7% interest with two points.

If they take the first loan, their monthly principal and interest payments will be approximately $3,146. If they keep this house and loan for 30 years, they'll pay about $682,722 in interest, plus the $450,000 principal, for a total of about $1.13 million.

With the second loan, Kelly and Brit are going to have to cough up $9,000 right away, to pay the points. Their monthly payments will be $2,994-around $150 less per month. Over the life of the 30-year loan, they'll pay around $636,791 in interest and points, which, plus the $450,000 principal, comes to about $1.09 million. The second loan offers them a long-term savings of almost $46,000.

But what if they don't keep the house for the full 30 years? If they decide to take the loan with points but a lower interest rate, it will take Kelly and Brit a long time before their lowered interest makes up for the $9,000 they paid. To figure out how long, they divide the $9,000 in points by the $150 in monthly savings. The answer is 60 months, or five years.

As you can see in the example, if Kelly and Brit choose the loan with two points and then stay in their place for more than five years, they'll start to see some serious savings. On the other hand, if two years after choosing the loan with points, they decide that the cottage that seemed so charming is actually too small for their two dogs and three cats, they will, upon selling, say goodbye to the extra money that they spent by taking the loan with points ($5,400, because they've recouped $3,600 of the originally $9,000 in the first two years, when their monthly mortgage payments were $150 less). It sort of makes that loan ... pointless. Not exactly, but you get our bad joke. The longer you plan to stay, the more seriously you should consider a loan with points.

To do this calculation with your own numbers, use the table below or an online mortgage calculator.

When to Pay Additional Points for a Lower Interest Rate Use this chart to determine how many years you should stay in a house to recoup the cost of points.

CHECK IT OUT.

Ready to run some numbers? These websites have calculators that allow you to figure out whether a points or no-points loan works best for you: These websites have calculators that allow you to figure out whether a points or no-points loan works best for you:* www.nolo.com/calculators * * www.mtgprofessor.com * * www.dinkytown.net.

If you're not sure how long you'll stay in a place, you may just have to guesstimate. If you want flexibility and think it's possible you'll move in the next few years, get a no-points loan. But if you expect to stay put for awhile, a loan with points might be worth it. And if you hate guessing, you can also compromise-points aren't all or nothing. There are many choices between zero points and several (broken down by eighths of a percentage point, even).

A final advantage to points it that they're tax-deductible in the year you pay them. In slow markets, sellers sometimes pay for points as an incentive to the buyer, and you can even deduct those. In the first year, when money is tight, this might be a significant advantage.

Watch Out for Prepayment Penalties Many loans come with prepayment penalties, which don't permit you to pay your debt off early without paying a fee. Read loan terms carefully-this may be buried in the fine print. (It will also be included on your Truth in Lending (TIL) disclosure statement, a form your lender is required to give you.) Prepayment penalties can limit your flexibility to refinance or sell your home-a particular drag if interest rates drop.Many loans with prepayment penalties limit the length of time you're bound by this restriction (usually five years or less), limit the amount of the penalty (state laws often impose these limits), or make exceptions for refinancing or selling the property. Still, prepayment penalties are usually worth avoiding altogether.

Who's Got the Cash? Where to Get a Mortgage

There are two major players in the mortgage game, both of whom can help you get the loan you need. You may work with a mortgage broker, who will help you find the best available mortgage from among a variety of lenders. Or you may go straight to a lender (sometimes called a mortgage banker), which will probably mean fewer options, but possibly a better deal. For more information on choosing a mortgage broker or lender, look back at Chapter 5.

Narrowing the Field: Which Type of Mortgage Is Best for You?

Mortgages come in two basic flavors: fixed rate mortgages and adjustable rate mortgages (also called ARMs). There are many variations on these two types, and some are better for certain kinds of buyers than others. Though you'll discuss your unique situation with your broker or lender, you can first educate yourself about the options.

CHECK IT OUT.

Mortgages have their own lingo-use the following glossaries if you need help decoding: * * www.mtgprofessor.com (click "Glossary") (click "Glossary")* www.bankrate.com (click "Glossary") (click "Glossary")* www.fanniemae.com (under "For Home Buyers & Homeowners," click "Resources," then "Key Mortgage and Foreclosure Terms"). (under "For Home Buyers & Homeowners," click "Resources," then "Key Mortgage and Foreclosure Terms").

Fixed Rate Mortgages

If you like predictability and stability, you'll probably like fixed rate mortgages. The interest rate is set when you get the loan and never changes. If you borrow $250,000 at 6% interest, you'll continue to pay 6% interest until you've paid off the loan.

TIP.