1. MoneyCounts: A Financial Literacy Series
Mortgage – Financial Process
11-A Grange Building
University Park, PA 16802
financialliteracy.psu.edu

2. Description
Nothing can fully prepare you for new experiences. Top of that list is the experience of purchasing your first home and getting your first mortgage!
Getting a mortgage is a long- term commitment to turn acquired debt into an asset over time. It is critical you get the best return on your investment.
It is one of the most important financial decisions you will have to make in your life. You should fully understand the financial process of owning a home.

3. Learning Outcome Define key terms Discuss components of a mortgage
Explore the search process for a mortgage
Evaluate ways to improve your chances of getting a good mortgage
Understand the financial life of a mortgage, and the amortization process

4. Home Sweet Home! MY
home
Mortgage

5. What is a Mortgage? ? A long tem loan used to purchase a home
A debt instrument that is secured by the collateral of specified real estate property and that the borrower is obliged to pay back with a predetermined set of payments
Used by individuals and businesses to make large purchases of real estate without paying the entire value of the purchase up front.
Also known as “liens against property” or “claims on property”

6. Components of a mortgage
Property Taxes
Principal
Interest
Mortgage
Insurances
Private Mortgage Insurance (PMI if < 20% down payment)
*Tip: Some lenders allow you to pay your own property taxes and home insurance premiums, but they could also raise your interest rate to compensate! need to understand escrow arrangement

7. Key Terms Mortgage Closing cost Down payment Pre-payment penalties
Interest
Escrow
Principal
Truth in Lending Act
Interest rate
Refinancing
Credit rating
Delinquent
Fixed interest rate
Variable interest rate
Equity
Amortization schedule
Foreclosure

8. First things first!
Prepare a budget (housing is between 25% -30% of net income)
How much of a mortgage can you afford to carry for years?

9. Ask the right financial questions!
How much house can you afford?
How much down payment have you saved?
How much mortgage can your carry for a long time?
Can you afford maintenance?
Your total mortgage should not exceed 2.5% your total yearly net income
When your yearly net income is $60,000, your mortgage should not exceed $150,000

10. Will you get a good mortgage?
What is your FICO Credit Score?
How clean is your credit report?
Range of interest rate you hope to get?
Pay your debts balances in full and on time for at least 6-9 months before you start the process of buying a home
Equifax, Experian and TransUnion
Annual Credit Report.com
Call

11. Getting your “docs” in a row!
First-time Home Buyer!
Getting your “docs” in a row!
Application Fee (cost of appraisal and credit report)
Sales contract signed by buyers and sellers
Social Security numbers of all applicants
Complete address for the past 2 years (Landlord info)
Employment information for past 2 years
W-2 for the last 2 years
Most recent year to date pay stub /current pay stub
Banking information, saving accounts, checking accounts for the last 3 months
Loans and LOC information
Family help and assistance (letter)
Tax information for the last 2 years

12. Approval letter for estimated amount of loan
Know the differences!
Pre-qualification
Pre-approval
Approval letter for estimated amount of loan

13. Variable-rate mortgage
Fixed-rate mortgage
Variable-rate mortgage
A loan that charges a set rate of interest that does not change throughout the life of the loan
The traditional loan used to finance the purchase of a home
What most people have in mind when they think about a mortgage
Also known as an adjustable-rate mortgage or a floating-rate mortgage
The rate of interest is subject to change. When such a change occurs, the monthly payment is “adjusted” to reflect the new interest rate.
Over long periods of time, interest rates generally increase. An increase in interest rates will cause the monthly payment on a variable-rate mortgage to move higher

14. Amortization Schedule
Loan amount: $165,000
Interest rate: 4.25%
Mortgage term: 30 years
Number of payments: 360
Monthly payment: $811.70
Total interest paid: $127,212.30
Amortization Schedule
Date
Payment
Principal
Interest
Balance
July 2013
$811.70
$227.32
$584.38
$164,772.67
Aug 2013
$228.13
$583.57
$164,544.54
Sep 2013
$228.94
$582.76
$164,315.60
Oct 2013
$229.75
$581.95
$164,085.85
Nov 2013
$230.56
$581.14
$163,855.29
Dec 2013
$231.38
$580.32
$163,623.91
Jan 2014
$232.20
$579.50
$163,391.71
Feb 2014
$233.02
$578.68
$163,158.69

15. The Search Process! First-time Home Buyer! Define search parameters
Internet search
In person search
Type of home and neighborhood
How long should it take to buy your first home?
How long do you want to spend searching?
How many homes are you willing to see?
How do you decide this is the home?

16. The Search Process! (2) First-time Home Buyer!
Take pictures, take notes, check the surroundings, rate each home on a scale of 1 to 10 and pick top choices
Visit top choices again to re-evaluate with open eyes and mind
Research the real estate tax and required insurance
Do not allow real estate agents to pressure you
work with a real agent you trust and comfortable with or hire your own agent
Keep searching till you are satisfied with your top choice
Resist falling in love with the house!
Making the offer, negotiating the terms, price, closing cost
Sticking to your budget/price range

17. The Search Process! (3) First-time Home Buyer!
*Tip: Make a list of what you are looking for including location, type of a home, features, age, school district, neighborhood, real estate tax, insurance requirements, etc., and adjust as needed. *Tip: Shop for a loan before you shop for a property! this will guide you to make sound financial decisions.

18. The Art of Negotiation! First-time Home Buyer!
Your offer is presented to the seller who could either accept it, reject it or counter offer it.
Now, it is your turn to do the same! Negotiation can be rough and time sensitive. So stay calm, remain flexible within your budget, always do the math.
Consider what you are willing to accept and what a deal breaker is to you.
Make a list of terms (pros & cons)
Keep your list handy and re-evaluate throughout the process.
Once an offer is accepted, an agreement is reached, the contract is signed.

19. Things you must do throughout the process
Carefully review the good faith estimate
Get a house inspection
Understand any restrictive covenants or association rules
Do a final walk before you take possession to make sure no damage happened after closing date
Ask questions and do your own research for every step in the way

20. Overview the cost Down payment (20% of purchase price)
If not, expect .05% PMI
Closing cost (3%-5%)
If not, negotiate with seller
Inspection of the house (varies)
Insurance (varies)
Taxes (varies)
Application fee for loan
Moving expense into the new house
Set a budget, avoid using credit cards
*Tip: Conduct a garage sale before you move into your new home to clean clutter and make extra money to help with the move

21. Budgeting Tips (1)
Increase your emergency fund saving by at least 5% to allow for unexpected house maintenance cost (15% instead of recommended 10%)
Trim your spending budget to allow for the increase
Live in your home at least 6 month to a year before you start making any major changes to your house
Do not acquire credit card debt to accommodate additional spending on the new house

22. Budgeting Tips (2)
Instead of making a monthly mortgage payment, send 1/2 of your mortgage payment every 2 weeks, you end up making 13 payments in the year instead of 12 payments. you reduce the life of your loan by 5 years
Prepare different scenarios of payment to accommodate your long term goal, use online mortgage calculators to help you decide the best payment option for you and your family
Mortgage Calculator [Bankrate]

23. Budgeting Tips (3)
Pursue a 30 year mortgage, but make your own plans to pay it in 15 years (run your own amortization schedule). Make sure there is NO prepayment penalty in your loan documents
This approach guarantees you a lower monthly payment just in case life throws you a surprise.
This takes discipline and a commitment to meet the goal of owning your home in less than 30 years.

24. MoneyCounts: A Financial Literacy Series
Comments and questions
11A Grange Building
University Park, PA 16802
financialliteracy.psu.edu