Mortgage Management for Dummies

Quickly make sense of mortgages

Taking out a mortgage to purchase real estate is a huge decision, one that could affect your family's finances for years to come. This easy-to-follow guide explains how to secure the best and lowest-cost mortgage for your unique situation. Whether you select a 15- or 30-year mortgage, you'll get all the tips and tricks you need to pay it off faster—shortening your payment schedule and saving your hard-earned cash.

• Fine-tune your finances
• Qualify for a mortgage
• Secure the best loan
• Find your best lender
• Refinance your mortgage
• Pay down your loan quicker
• Must-knows about foreclosure
• Top mortgage no-nos

Eric Tyson, MBA, is a financial counselor and the bestselling author of Investing For Dummies, Personal Finance For Dummies, and Home Buying Kit For Dummies.

Robert S. Griswold, MSBA, is a successful real estate investor, hands-on property manager, and the author of Property Management Kit For Dummies.

Introduction 1

How This Book is Different 1

Foolish Assumptions 2

Icons Used in This Book 3

Beyond the Book 3

Where to Go from Here 3

Part 1: Getting Started with Mortgages 5

Chapter 1: Determining Your Borrowing Power 7

Only You Can Determine the Mortgage Debt You Can Afford 8

Acknowledge your need to save 8

Collect your spending data 9

Determine Your Potential Homeownership Expenses 10

Making your mortgage payments 10

Paying property taxes 12

Tracking your tax write-offs 13

Investing in insurance 14

Budgeting for closing costs 14

Managing maintenance costs 17

Financing home improvements and such 17

Consider the Impact of a New House on Your Financial Future 17

Acting upon your spending analysis 21

Establishing financial goals 22

Making down-payment decisions 23

Chapter 2: Qualifying for a Mortgage 25

Getting Preapproved for a Loan 25

The worst-case scenario 26

Loan prequalification usually isn’t good enough 26

Loan preapproval is the way to go 27

Evaluating Your Creditworthiness: The Underwriting Process 28

Traditional underwriting guidelines 29

New underwriting technology 32

Eyeing Predicament-Solving Strategies 34

Insufficient cash for a down payment 34

Excessive indebtedness 38

Insufficient income 39

Credit blemishes 40

Low appraisals 41

Problem properties 45

Chapter 3: Scoping Out Your Credit Score 47

Defining Credit Scores 48

Assessing Your Credit History 48

What goes into your credit report 49

Check your credit report 50

Understanding How Scores Work 51

FICO scores can differ between bureaus 51

What a FICO score considers 52

What FICO scores ignore 60

Interpreting scores 61

Getting your score 61

Managing your score 62

Part 2: Locating a Loan 63

Chapter 4: Fathoming the Fundamentals 65

Grasping Loan Basics: Principal, Interest, Term, and Amortization 66

Deciphering Mortgage Lingo 67

So what’s a mortgage? 67

How to scrutinize security instruments 68

Eyeing Classic Mortgage Jargon Duets 70

Fixed or adjustable loans 70

Government or conventional loans 71

Primary or secondary mortgage market 72

Conforming or jumbo loans 74

Long-term or short-term mortgages 75

Introducing the Punitive Ps 76

Prepayment penalties 76

Private mortgage insurance (PMI) 78

Chapter 5: Selecting the Best Home Purchase Loan 81

Three Questions to Help You Pick the Right Mortgage 82

How long do you plan to keep your mortgage? 82

How much financial risk can you accept? 83

How much money do you need? 84

Fixed-Rate Mortgages: No Surprises 85

Adjustable-Rate Mortgages (ARMs) 87

How an ARM’s interest rate is determined 88

How often does the interest rate adjust? 92

What are the limits on rate adjustments? 92

Does the loan have negative amortization? 93

Fine-Tuning Your Thought Process 96

Finding funds 96

Making the 30-year versus 15-year mortgage decision 97

Getting a Loan When Rates Are High 98

Chapter 6: Surveying Special Situation Loans 99

Understanding Home Equity Loans 100

Using home equity loans 100

Operating instructions 101

Considering tax consequences 103

Eyeing 100 Percent Home Equity Loans 104

Taking a Closer Look at Co-Op Loans 107

Identifying the legal structure of co-op loans 107

Dealing with deal-killing directors 108

Tracking down a loan 109

Grasping Balloon Loans 110

80-10-10 financing 110

Bridge loans 114

Construction loans 115

Renovation/remodel loans 116

Part 3: Landing a Lender 117

Chapter 7: Finding Your Best Lender 119

Going with a Mortgage Broker or Direct Lender? 120

Considerations when using brokers 120

Developing a list of brokers and lenders 122

Interviewing and working with mortgage brokers 124

Figuring out how to interview lenders 125

Seller Financing: The Trials and Tribulations 127

Considering/soliciting seller financing 127

Overcoming borrower problems 128

Negotiating loan terms 128

Deciding whether to provide seller financing 129

Chapter 8: Searching for Mortgage Information Online 131

Obeying Our Safe Surfing Tips 132

Shop to find out about rates and programs 132

Quality control is often insufficient 133

Beware simplistic affordability calculators 133

Don’t reveal confidential information unless 133

Be sure to shop offline 134

Beware of paid advertising masquerading as directories 135

Perusing Our Recommended Mortgage Websites 136

Useful government sites 136

Mortgage information and shopping sites 138

Chapter 9: Choosing Your Preferred Mortgage 141

Taking a Look at Loan Fees 142

The point and interest rate tradeoff 142

Annual percentage rates 144

Other lender fees 145

Avoiding Dangerous Loan Features 147

Prepayment penalties 147

Negative amortization 148

Comparing Lenders’ Programs 149

Fixed-rate mortgages interview worksheet 149

Adjustable-rate mortgages interview worksheet 153

Applying with One or More Lenders 158

Chapter 10: Managing Mortgage Paperwork 159

Pounding the Paperwork 159

Filling Out the Uniform Residential Loan Application 162

1 Borrower information 162

2 Financial information — assets and liabilities 166

3 Financial information — real estate 167

4 Loan and property information 168

5 Declarations 170

6 Acknowledgments and agreements 170

7 Demographic information 172

Introducing Other Typical Documents 173

Your right to receive a copy of the appraisal 173

Equal Credit Opportunity Act 175

Part 4: Profiting from Smart Mortgage Strategies 177

Chapter 11: Refinancing Your Mortgage 179

Refinancing Rationales 180

Cost-Cutting Refinances 181

Applying the 2 percent rule 182

Crunching the numbers 183

Restructuring Refinances 186

Restructuring when you need to 186

Getting a fixed-rate to avoid ARM phobia 188

Resetting ARM caps 188

Choosing the fast-forward mortgage 190

Cash-Out Refinances 190

Expediting Your Refi 192

Beating Borrower’s Remorse 194

Phase I borrower’s remorse 194

Phase II borrower’s remorse 195

Chapter 12: Paying Down Your Mortgage Quicker 197

One Size Doesn’t Fit All 198

Interest savings: The benefit of paying off your mortgage quicker 198

Quantifying the missed opportunity to invest those extra payments 198

Taxes matter but less than you think 199

Deciding Whether to Repay Your Mortgage Faster 200

Does your mortgage have a prepayment penalty? 201

How liquid are your assets? 201

Have you funded retirement savings accounts? 201

How aggressive an investor are you? 202

What are your refinancing options? 203

Considering psychological and nonfinancial issues 203

Developing Your Payoff Plan 204

Chapter 13: Reverse Mortgages for Retirement Income 205

Grasping the Reverse Mortgage Basics 205

Considering common objections 207

Who can get a reverse mortgage? 208

How much money can you get and when? 209

When do you pay the money back? 210

What do you owe? 211

How is the loan repaid? 212

What’s the out-of-pocket cost of getting a reverse mortgage? 212

What are the other reverse mortgage costs? 213

What’s the total annual rate? 214

How do reverse mortgages affect your government-sponsored benefits? 215

Shopping for a Reverse Mortgage 215

Making major choices 216

Counseling 217

Deciding Whether You Want a Reverse Mortgage 217

Part 5: The Part of Tens 219

Chapter 14: Ten-Plus “Must-Knows” About Foreclosure 221

Deal with Reality 222

Review Your Spending and Debts 223

Beware of Foreclosure Scams 223

Consider Tapping Other Assets 223

Make Use of Objective Counseling 224

Negotiate with Your Lender 224

Understand Short Sales 225

Seek Legal and Tax Advice 225

Understand Bankruptcy 226

Consider the Future Impact to Your Credit Report 226

Understand the Realities of Investing in Foreclosed Property 228

Chapter 15: Ten Mortgage No-Nos 229

Don’t Let Lenders Tell You What You Can Afford 229

Never Confuse Loan Prequalification with Preapproval 230

Avoid Loans with Prepayment Penalties 231

Don’t Reflexively Grab a Fixed-Rate Mortgage 231

Steer Clear of Toxic 100 Percent Home Equity Loans 232

Watch Out for Mortgage Brokers with Hidden Agendas 233

Shun Negative Amortization Mortgages 234

Don’t Let the 2 Percent Rule Bully You When Refinancing 234

Don’t Assume That All Reverse Mortgages Are the Same or Bad 235

Avoid Mortgage Life Insurance 235

Part 6: Appendixes 237

Appendix A: Loan Amortization Table 239

Appendix B: Remaining Balance Tables 245

Appendix C: Glossary 271

Index 281

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