GENERAL FINANCING QUESTIONS: THE BASICS
WHAT IS A MORTGAGE?
Answer: Generally
speaking, a mortgage is a loan obtained to purchase real estate.
The "mortgage" itself is a lien (a legal claim) on the
home or property that secures the promise to pay the debt. All mortgages
have two features in common: principal and interest.
SEARCH MORTGAGE LOAN BY STATE:
WHAT IS A LOAN TO VALUE (LTV) HOW DOES IT DETERMINE THE SIZE OF
MY LOAN?
Answer: The
loan to value ratio is the amount 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 $50,000, you could borrow up to $47,500 (95%
of $50,000), and would have to pay,$2,500 as a down payment.
The
LTV ratio reflects the amount of equity borrowers have in their
homes. The higher the LTV the less cash homebuyers are required
to pay out of their own funds. So, to protect lenders against potential
loss in case of default, higher LTV loans (80% or more) usually
require mortgage insurance policy.
WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES OF
EACH?
Answer: Fixed
Rate Mortgages: Payments remain the same for the the life of the
loan
Types
| 15-year | |
| 30-year |
Advantages
| Predictable | |
| 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
| 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 clue or refinanced (though not automatically) | |
| Two-Step Mortgage- Interest rate adjusts only once and remains the same for the life of the loan | |
| ARMS linked to a specific index or margin |
Advantages
| Generally offer lower initial interest rates | |
| Monthly payments can be lower | |
| May allow borrower to qualify for a larger loan amount |
WHEN DO ARMS MAKE SENSE?
Answer: An
ARM may make sense If you are confident that your income will increase
steadily over the years or if you anticipate a move in the near
future and aren't concerned about potential increases in interest
rates.
WHAT ARE THE ADVANTAGES OF 15- AND 30-YEAR LOAN TERMS?
30-Year:
| In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions. | |
| As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses. |
15-year:
| Loan is usually made at a lower interest rate. | |
| Equity is built faster because early payments pay more principal. |
ARE THERE SPECIAL MORTGAGES FOR FIRST-TIME HOMEBUYERS?
Answer: Yes.
Lenders now offer several affordable mortgage options which can
help first-time homebuyers overcome obstacles that made purchasing
a home difficult in the past. Lenders may now be able to help borrowers
who don't have a lot of money saved for the down payment and closing
costs, have no or a poor credit history, have quite a bit of long-term
debt, or have experienced income irregularities.
CAN I PAY OFF MY LOAN AHEAD OF SCHEDULE?
Answer: Yes.
By sending in extra money each month or making an extra payment
at the end of the year, you can accelerate the process of paying
off the loan. When you send extra money, be sure to indicate that
the excess payment is to be applied to the principal. Most lenders
allow loan prepayment, though you may have to pay a prepayment penalty
to do so. Ask your lender for details.
HOW LARGE OF A DOWN PAYMENT DO I NEED?
Answer: There
are mortgage options now available that only require a down payment
of 5% or less of the purchase price. But the larger the down payment,
the less you have to borrow, and the more equity you'll have. Mortgages
with less than a 20% down payment generally require a mortgage insurance
policy to secure the loan. When considering the size of your down
payment, consider that you'll also need money for closing costs,
moving expenses, and - possibly -repairs and decorating.
WHAT IS INCLUDED IN A MONTHLY MORTGAGE PAYMENT?
Answer: The
monthly mortgage payment mainly pays off principal and interest.
But most lenders also include local real estate taxes, homeowner's
insurance, and mortgage insurance (if applicable).
HOW DOES THE INTEREST RATE FACTOR IN SECURING A MORTGAGE LOAN?
Answer: A
lower interest rate allows you to borrow more money than a high
rate with the some monthly payment. Interest rates can fluctuate
as you shop for a loan, so ask-lenders if they offer a rate "lock-in"which
guarantees a specific interest rate for a certain period of time.
Remember that a lender must disclose the Annual Percentage Rate
(APR) of a loan to you. The APR shows the cost of a mortgage loan
by expressing it in terms of a yearly interest rate. It is generally
higher than the interest rate because it also includes the cost
of points, mortgage insurance, and other fees included in the loan.
WHAT FACTORS AFFECT MORTGAGE PAYMENTS?
Answer: The
amount of the down payment, the size of the mortgage loan, the interest
rate, the length of the repayment term and payment schedule will
all affect the size of your mortgage payment.
WHAT HAPPENS IF INTEREST RATES DECREASE AND I HAVE A FIXED RATE
LOAN?
Answer: If
interest rates drop significantly, you may want to investigate refinancing.
Most experts agree that if you plan to be in your house for at least
18 months and you can get a rate 2% less than your current one,
refinancing is smart. Refinancing may, however, involve paying many
of the same fees paid at the original closing, plus origination
and application fees.
WHAT IS AN ESCROW ACCOUNT? DO I NEED ONE?
Answer: Established
by your lender, an escrow account is a place to set aside a portion
of your monthly mortgage payment to cover annual charges for homeowner's
insurance, mortgage insurance (if applicable), and property taxes.
Escrow accounts are a good idea because they assure money will always
be available for these payments. If you use an escrow account to
pay property tax or homeowner's insurance, make sure you are not
penalized for late payments since it is the lender's responsibility
to make those payments.
WHAT ARE DISCOUNT POINTS?
Answer: Discount
points allow you to lower your interest rate. They are essentially
prepaid interest, With each point equaling 1% of the total loan
amount. Generally, for each point paid on a 30-year mortgage, the
interest rate is reduced by 1/8 (or.125) of a percentage point.
When shopping for loans, ask lenders for an interest rate with 0
points and then see how much the rate decreases With each point
paid. Discount points are smart if you plan to stay in a home for
some time since they can lower the monthly loan payment. Points
are tax deductible when you purchase a home and you may be able
to negotiate for the seller to pay for some of them.
