| Mortgage FAQ | 24 items found |
What is a mortgage?
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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. |
What is a Loan-To-Value (LTV) ratio?
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What is a Loan-To-Value (LTV) ratio? How does it determine the size of the loan? | 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 ratio, 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 a mortgage insurance policy.
What is a Fixed Rate Mortgage
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Fixed Rate Mortgages: Payments remain the same for 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 What are the advantages of 15 AND 30-year loan terms? 15-year: • Loan is usually made at a lower interest rate. • Equity is built faster because early payments pay more principal. 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.
What is a Balloon Mortgage
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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) |
What is a Two-Step Mortgage
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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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What is an ARM
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• ARMS (Adjustable Rate Mortgages) are linked to a specific index | • 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? 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.
Can I pay off my loan ahead of schedule?
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Can I pay off my loan ahead of schedule? | 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.
Are there special mortgages for first time homebuyers?
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Are there special mortgages for first time homebuyers? | 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.
How large of a down payment do I need?
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How large of a down payment do I need? | 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?
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What is included in a monthly mortgage payment? | 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).
What factors effect mortgage payments?
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What factors effect mortgage payments? | 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.
How does the interest rate factor in securing a mortgage loan?
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How does the interest rate factor in securing a mortgage loan? | A lower interest rate allows you to borrow more money than a high rate with the same 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 and other fees included in the loan.
What happens if interest rates decrease and I have afixed rate loan?
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What happens if interest rates decrease and I have afixed rate loan? | 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 are discount points?
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What are discount points? | 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.
What is an escrow account?
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What is an escrow account? | 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 taxes 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 is a Reverse Mortgage
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Reverse Mortgages | A reverse mortgage is a home loan that you do not have to pay back for as long as you live in your home. It can be paid to you in one lump sum, as a regular monthly income, or at the times and in the amounts you want. The loan and interest are repaid only when you sell your home, permanently move away, or die.
What is a COFI?
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COFI? | One type of ARM is a COFI loan. COFI stands for "cost of funds index." This loan doesn't have any caps, and adjusts monthly. It is, in a sense, the most adjustable ARM of all, since it isn't fixed for a certain time. But, the index to which it is tied is, in many ways, the most stable index of them all: It is tied to the rate that banks have to pay their depositors to keep their money (i.e., checking accounts, savings accounts, certificates of deposit). It tends to be a slow-moving index. The COFI loan has certain advantages in that you can vary the amount of your payments as you wish (paying off more or less each month). If this suits your temperament and your budget, inquire about it since it is often not brought up as an option.
What is a Hybrid Loan
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Hybrid Loan | Just as in a candy store, why have two flavors when we can have a mix and make three? Sure, your hands might get sticky and your tongue can turn green, but we like freedom of choice. Typically a hybrid loan is fixed for 1, 3, 5, 7, or 10 years and then converts to an ARM. This means you get stability for a given amount of time, and then your fate is cast to the winds of the prevailing interest rates. If you imagine a fixed-rate mortgage as a motorboat, and an ARM as a sailboat, then you get to run the ship under its own engines for a time before you unfurl those sails and hope for favorable winds.
What are Two-Step Loans
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Two-Step Loans | These loans attempt to provide the best of both worlds: the stability of a fixed loan with the lower rates of an ARM. They appear in their most common forms as 5/25 or 7/23 loans. Math buffs among you will note that the numbers straddling those slashes add up to 30, as in a 30-year loan. This means that your interest rate will be fixed for the first five or seven years, then the loan adjusts in one of two ways: It will either become an ARM, adjusting annually, or a fixed-rate loan. The beginning interest rate for these loans is generally lower than that of a standard 30-year fixed loan.
What are Balloon Loans
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Balloon Loans | These tend to be short-term loans. You borrow money for, say, three or seven years, and the loan is amortized as though it were a 30-year loan. At the end of the three- or seven-year period, you owe the bank all of the remaining principal, in one lump sum -- like a big balloon. Again, these loans tend to have lower interest rates than the standard 30-year mortgage. If you're not planning to stay too long in your house, you might be interested in such a loan. The reasoning goes like this: You pay less in interest over the course of the loan than you would with a 30-year fixed loan -- saving potentially thousands of dollars. So, you're less out-of-pocket when it comes time to sell. Keep in mind, though, that if for some reason your plans change and you want to stay in the house, you're going to have to pay off the loan in full -- by getting another loan, at the prevailing interest rates and with the attendant costs of getting that new loan. So, it isn't for the faint of heart or irresolute of mind. Regardless of what type of mortgage you're interested in, you also need to figure out where you'll get it from: a bank or a mortgage broker. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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