is a mortgage?
A mortgage is
a loan obtained to purchase real estate. The "mortgage"
itself is a lien on the home or property that secures the
promise to pay the debt. All mortgages have two features in
common: principal and interest.
is a loan to value(LTV)? How does it determine the size of
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 u 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
payout 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.
types of loans are available and what are the advantages of
Fixed Rate Mortgages:
Payments remain the same for the the life of the loan
- Housing cost
remains unaffected by interest rate changes and inflation.
Mortgages (ARMS): Payments increase or decrease on a regular
schedule with changes in interest rates; increases subject
- 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
offer lower initial interest rates
- Monthly payments
can be lower
- May allow
borrower to qualify for a larger loan amount
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.
are the advantages of 15- and 30- year laon terms?
- 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.
- Loan is usually
made at a lower interest rate.
- Equity is
built faster because early payments pay more principal.
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.
special mortgages for first-time homebuyers?
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
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.
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).
factors affect 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.
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 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.
happens if interest rates decrease and I have a fixed rate
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.
are 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.
is an escrow account? Do I need one?
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.