By Stella Payne, KERA News
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Dallas, TX –
Some homebuyers struggling to pay their mortgages might not be in trouble if they'd financed their home differently. In today's weekly economic segment KERA's Stella Payne looks at options to discuss with your lender.
Music teachers Brian and Adrienne Conklin have settled into their first home. It's the perfect place to practice their music. They never thought they could afford to buy but now they own a part of the American dream.
"We looked at 20 to 25 homes," says Brian Conklin. "We put a bid on one home that we missed out on. We had actually seen this home previous to that and it was actually the same floor plan, but a little less updated and so our realtor suggested that we come back and look at this one again and we managed to get this one and got a much better price on it."
But finding the ideal home wasn't nearly as complex as making the right choices for financing it. They had to make a lot of big decisions. The Conklins had to decide how big their down payment would be and whether they wanted a 15 or 30 year loan. They had to learn about "points" and other fees that are added to the cost when the sale is finalized. But most importantly the Conklins had to choose between a loan with a little higher interest rate that was fixed and a loan with an adjustable rate that initially charges less interest.
Navigate the recession with KERA! Get tips on avoiding foreclosure, access job resources and more at kera.org/economy.
Joyce Brown advises homebuyers like the Conklins at the home loan counseling center in Dallas.
"The difference between the fixed and adjustable rate has to do with the monthly payment," says Brown. "If you have a fixed-rate interest rate that means your monthly payment is going to remain the same throughout the term of the loan. If you have an adjustable rate your principal and interest will adjust and it will depend on the type of loan you've gotten."
Brown says mortgage loans with adjustable or changing interest rates come in many forms. With some the interest rate is linked to U-S Treasury bills. The homeowner's monthly payment goes up or down depending on the financial market's rate of return for treasury bills. Brown usually advises against adjustable rate loans because they're more risky.
"One of the problems that caused all the foreclosures is that a lot of people had adjustable rates," she says. "With that adjustable rate it would be fixed for two years and at the end of the two-year period the interest rate would increase. That would cause the payment to increase and a lot of times people would not be able to handle that payment."
Brown says lenders usually expect a down payment of 10 to 20 percent of the house's price. Buyers may find added costs rolled into their mortgages if they pay less upfront. Brown says closing costs with so-called points usually add another three to six percent of the home's sale price to the loan. She says the combined cost of the interest rate, points and mortgage insurance is called to Annual Percent Rate, and the APR is something homebuyers need to know.
"It's really important for you to look and see what the interest rate of the loan is as well as the Annual Percentage Rate," she says. "Now, the Annual Percentage Rate includes the expenses that the lender is charging you to get the loan. So if you were loan shopping then you could talk with the lender about their APR and shop apples to apples."
Brian and Adrienne Conklin opted for predictable payments, with a fixed rate mortgage they'll pay back over 30 years.
While some homebuyers don't use a realtor, the Conklins did.
The home buying process took months, but the Conklins say they had a good experience. Their advice: find a reputable professional to advise you as you make the many important mortgage loan choices.
Dallas and some other cities offer Housing Assistance Programs that educate homebuyers about the experience and may cover some lending costs. Thousands of first-time homebuyers have taken advantage of the $8,000 federal tax credit being offered. But be aware: the tax credit expires November 30, so most purchasing agreements would have to be signed within the next two months to meet that deadline. It is unclear whether Congress will extend the $8,000 housing credit.
We know this is a complicated issue so we've posted additional information on qualifying for the tax credit and financing a home at kera.org/economy