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What is a mortgage?
In general, a mortgage is a loan acquired for the purpose of purchasing real estate. The mortgage is a lien (a legal claim) on the real estate that secures the assurance to pay the loan. All mortgages have two mutual features: principal and interest.
What is a loan to value (LTV)? How does it determine the size of my loan?
The LTV ratio is the sum of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a 95% LTV loan on a home priced at $100,000, you could borrow up to $95,000 (95% of $100,000), and would have to pay, $5,000 as a down payment.
The LTV ratio is used when considering the amount of equity borrowers have in their homes. The lower the LTV the more cash homebuyers are required to payout of their own funds. To protect lenders against loss in case of non-payment, higher LTV loans (80% or more) generally require mortgage insurance.
What types of loans are available and what are the advantages of each?
Fixed Rate Mortgages: Payments remain the same for the life of the loan
Types:
Advantages:
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Predictable
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Housing cost remains unaffected by interest rate changes and inflation.
Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits.
Types:
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Balloon Mortgage- Offers very low rates for an initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is due or refinanced (though not automatically).
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Two-step Mortgage- Interest rate adjusts only once and remains the same for the life of the loan.
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ARMs linked to a specific index or margin.
Advantages:
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Generally offer lower initial interest rates.
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Monthly payments can be lower.
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May allow borrower to qualify for a larger loan amount.
When do ARMs make sense?
An ARM may make sense if you are certain that your income will grow steadily through time or if you foresee moving in the near future and are not alarmed over potential interest rate increases.
What are the advantages of 15- and 30-year loan terms?
30-Year:
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In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions.
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As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.
15-Year:
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Loan is usually made at a lower interest rate.
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Equity is built faster because early payments pay more principal.
Can I pay off my loan ahead of schedule?
Absolutely. If you choose to send in more money each month or make an extra payment sometime throughout the year, you can speed up the process of repaying the loan. Be sure to state that the excess payment is to be applied toward the principal. Many lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Discuss this with your lender in advance.
Are there special mortgages for first-time homebuyers?
Lenders now offer several affordable mortgage choices which can help first-time homebuyers overcome obstacles that made purchasing a home challenging in the past. Borrowers who don't have a lot of money saved for the down payment and closing costs, have either no credit or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities now have more programs available to them.
How large of a down payment do I need?
There are now mortgage options that offer 100% financing which typically means no down payment is needed. But the larger the down payment you put down, the less you have to borrow, and the more equity you'll have. Home loans with less than a 20% down payment require a mortgage insurance policy to secure the loan. When taking into account the size of your down payment, consider that you'll also need money for closing costs, moving expenses, furniture and appliances.
What is included in a monthly loan payment?
Your monthly loan payment mainly pays off principal and interest. Most lenders include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable).
What factors affect mortgage payments?
The amount of the down payment, loan amount, interest rate, repayment term, and payment schedule will all affect the size of your mortgage payment.
How does the interest rate factor in securing a mortgage loan?
Lower interest rates allow you to borrow more money than a high rate. Interest rates can vary as you look for a loan, so ask lenders if they can "lock-in" you rate which will guarantee a specific interest rate for a certain time period. Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. Your APR shows the cost of a mortgage loan by conveying it in terms of a yearly interest rate. It is higher than the actual interest rate because it includes the cost of points, mortgage insurance, and other fees included in the loan.
What happens if interest rates decrease and I have a fixed rate loan?
If interest rates drop significantly, you will want to consider refinancing. Many experts agree that if you plan to be in your home for at least 18 months and you can get a rate 2% less than your current one, refinancing is a good idea. Keep in mind that refinancing may involve paying many of the same fees paid at the original closing, plus origination and application fees.
What are discount points?
You can lower your interest rate with discount points. By paying points you are essentially prepaying the interest, with each point equaling 1% of the total loan amount. For every point paid on a 30-year mortgage, the interest rate is reduced by 1/8 (or .125) of a percentage point. When shopping for home loans ask lenders for an interest rate with 0 points and see how much it decreases with every point paid. Discount points are smart if you plan to stay in a home for a while since they can lower the monthly loan payment. Don’t forget that points paid are usually tax deductible when you purchase a home.
What is an impound account? Do I need one?
Impound accounts can be set up by your lender to put aside money. This money is usually set aside for monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance, and property taxes. Impound accounts are a great way to set aside money so that you know they are always there when the bill comes.
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