Explain: By the end of this session, you will be able to explain how to choose a financial institution that best meets your needs and determine your options when shopping for a mortgage.

These objectives cover two very important decisions you will have to make as a home buyer. The financial institution you choose will greatly affect your home buying experience, and the type of mortgage you apply for will have a big impact on your financial success. Let's begin by choosing a financial institution with which to do business.

Question: To whom would you turn for recommendations?

Instructor Note: The bulleted suggestions will appear upon a second mouse click after the class discussion.

Explain: You have many options when looking for a mortgage loan. Begin with your current bank. Determine what loan products they have and if they meet your needs. Locally, you also can visit the Better Business Bureau, or ask friends, neighbors, family members and recent home buyers. These individuals can tell you about their experiences with various institutions.

Explain: When talking to individuals about their experiences with an institution, ask them questions like:

Instructor Note: Read the questions listed on Slide #4.

Question: What other questions might you have for an individual who has done business with an institution you are considering?

Instructor Note: Create a list of questions developed by the participants.

Question: What can you do to determine if an institution is reputable?

Instructor Note: The bulleted suggestions will appear upon a second mouse click after the class discussion.

Explain: There are "For-Profit" institutions and "Non-Profit" institutions.

Let's start by looking at the "For-Profit" options that home buyers have.

• Offer consumer loans, credit cards, debit cards and mortgage loans.
• Make short-term loans to good customers.
• Often require items for security
• Offer interest rates that vary according to the loan type.
• Offer rates that may be lower than other lenders because they take fewer risks and have money from customers' savings to lend.

• Completely rebuild the house in the event it is destroyed by fire or other insured disaster
• Replace everything in it
• Protect yourself by including liability insurance in case someone is injured on your property and sues you

• Offer consumer loans, credit cards, debit cards and mortgage loans.
• Rates may be lower than other lenders because they loan members' money, are eligible for federal tax exemptions and generally take fewer risks.

• Programs that require little or no down payment.
• Programs offering 0% interest for the full term
  • Self-help programs
  • Home-rehab programs
  • Programs for rural areas
  • Programs for low to moderate income households
• Certified housing counselors that provide free one-on-one assistance for the purchase of a home.

Explain: Habitat for Humanity International is a Christian housing ministry that seeks to eliminate sub-standard housing and homelessness from the world. This ministry is made up of volunteers who help a few qualified low-to-moderate income families build a house each year. The homes are sold to the partner families through no-profit, no-interest mortgages. The house payments that families make are then "recycled" to build more homes for others in need.

Explain: Both "For-Profit" Financial Institutions and "Not-For-Profit" Organizations offer different loan options. It is VERY important to realize that not all institutions offer the SAME programs.

Activity: Now that you are familiar with several types of financial institutions, you are ready to compare their services to your needs and wants.

After getting recommendations and researching your options, we suggest visiting at least three of your selected institutions. If you did not receive this Choosing A Financial Institution Work Sheet during the Money Management sessions, you should fill it out now to help you compare your options.

• Flexibility — Some loan programs offer more flexibility for people with low-to-moderate income levels or first-time home buyers.
• Interest rates — Some have higher or lower interest rates with different loan options. One loan may be offered at 6% interest, while another is 7.5%.
• Fees — Lenders have a variety of fees that are charged for different services.
• Credit requirements — Institutions have different credit requirements. Some will qualify people with poor credit, usually offering a loan with a higher interest rate.
• Down payment requirements — Some loan programs offer low or no down payment.
Others require a certain percentage of the loan as a down payment (possibly 10 - 20 %).
• Income levels — With some loans, your payments are determined by your income levels at different times of life (college student versus full-time employee) (Ex: balloon mortgage).
• Reputation — Strongly consider the lender. Does this institution have a reputation of delivering quality loan products or not? Research the company, as discussed earlier.

Explain: Unless you pay cash for a house, you will need to obtain financing. The most common way to purchase a house is financing it through a mortgage.

When you obtain a mortgage, your house becomes the security for the loan until you pay off the mortgage. Then you retain full ownership of the house.

If you fail to make payments, the lender has a legal right to take possession of the house.

Mortgage loans are repaid in monthly installments over a set period, and are typically 15- to 30-year loans.

Explain: There are many choices available when financing your house. The most common types of mortgage loans are fixed-rate mortgage loans, adjustable-rate mortgage loans and balloon mortgage loans.

The determining factor for which mortgage you choose depends on your financial situation and/or your stage of life. Someone who is just getting out of college and needs a consistent mortgage will want a fixed-rate mortgage, while someone who is willing to take risk and allow the rates to fluctuate with the market may be interested in an adjustable rate mortgage.

Transition Statement: Let's discuss these three types of mortgages in detail, beginning with fixed-rate mortgages.

Explain: The fixed-rate mortgage loan is the most common type of loan.

Instructor Note: The determining factor for which mortgage you choose depends on your financial situation and/or your stage of life. Someone who is just getting out of college and needs a consistent mortgage will want a fixed-rate mortgage, while someone who is willing to take risk and allow the rates to fluctuate with the market may be interested in an adjustable rate mortgage.

Transition Statement: Highlight the four points listed on Slide #13.

Explain: During the life of a loan, you will pay much more interest with a 30-year mortgage than with a 15-year mortgage. This chart illustrates the difference of a $100,000 loan paid off monthly with a 15-year loan and a 30-year loan.

You can see that on a $100,000 loan with a 15-year term you will pay a total of $156,799, considering that you make no additional payments throughout the term. With a 30-year loan, the total payback will be $227,545. The difference in the two loan options is $70,746!

You can calculate the total cost of your loan by using the amortization calculator on the Home of My Own Website.

• Make more than the minimum monthly payment, if prepayment is allowed.
• Make payments as if it were a 15-year term. This allows you to pay off your loan in 15 years. But if something happens and you cannot make the higher payment, you can make the 30-year term payment until you get back on track.
• Make an additional payment each year.
• Pay an extra 1/12 each month, which adds up to an extra payment each year.

Question: Are there any questions about fixed-rate mortgages?

Transition Statement: The next type of mortgage is an adjustable-rate mortgage

Question: What do you think an adjustable-rate mortgage will offer a homeowner?

Explain: Adjustable-Rate Mortgages often are called ARMs. With this loan option the interest rate can increase or decrease during the term of the loan.

• The loan may have a low rate at the beginning of the term, but the rate can increase significantly throughout the term of the loan. The rate also can decrease over the period of the loan.
• An example: A 3/1 ARM loan would have a fixed rate for the first three years and be adjusted once a year thereafter.

Instructor Note: Highlight the four points listed on Slide #16.

Explain: ARMs are not right for every homeowner. A person who plans to stay in a house only a few years may consider an adjustable rate mortgage. It is possible to get a low interest rate for the first three years, then sell the house before the rates are adjusted. In this case, the borrower could finance more house for his/her money.

However, the typical homeowner planning to live in the house for many years should be very cautious about an adjustable rate mortgage. Interest rates can vary greatly, and this type of loan is only for those who are willing to take risk.

Explain: A third loan option is a balloon mortgage.

This loan offers the buyer the option to pay small monthly payments for the first several years and, at the end of the initial time period, pay off the outstanding balance with a lump sum payment or refinance the loan. The usual strategy is to refinance before the balloon note becomes due.

Again, balloon mortgages are not right for every homeowner. This mortgage might be an option if you plan to stay in the house only for a few years and are confident you can resell the property when you move out. You also may consider a balloon mortgage if you are expecting a large increase in income in the next few years. However, it is very important to research your loan options, and before taking any loan, make sure it best meets your needs.

Transition Statement: In addition to these three common mortgages, you also may qualify for special loan programs or government-insured loans. Some of you may be familiar with these special loan programs.

Explain: Although none of these organizations make loans directly to consumers, they do work with local financial institutions so the local institutions can offer more affordable and flexible loan options.

It is important to realize that not all lenders work with these special programs. For more information, you can contact any of these organizations directly and find out what lenders they work with in your area. You also can call your local loan officer to see in which programs he/she participates.

Transition Statement: There is another option when buying a house if you choose not to finance your house through a mortgage. You also can purchase the house using a real estate contract. This is not nearly as common as mortgages, but is an option and is sometimes used when buying directly from the seller.

With a real estate contract, the seller remains the legal owner of the house until the full price is paid. If you default during the period specified in the contract, the seller can evict you and you will forfeit all the payments on the principal that you have made.

Lesson Summary: Congratulations! You have completed Financial Options in this Home Buying Process series of classes.

Today we have explained how to choose a financial institution and determine what your mortgage loan options are.