Although each individual home financing package has its own set of variables, the definition of a mortgage remains the same: a mortgage is a long-term loan that a borrower obtains to help finance a home, obtained from a bank, independent mortgage broker, online lender or even the property seller. The lender you select advances this amount of money, which you repay over a specified period, usually 15 to 30 years..
Rates, Points & Loan Fees
The total of your mortgage is influenced by a number of different determinations involving the interest rate of the loan, discount points, and loan fees. The expense factors that contribute to the cost of your loan are reflective in the annual percentage rate, or APR
Interest Rate refers to the percentage of your outstanding loan balance that you pay the lender each month as part of the cost of borrowing money. Today, interest rates are governed solely by the financial markets and by Federal Reserve Board actions well as your financial profile and the specific features of your loan.
Discount Points allow you to “buy down” your interest rate at closing the prepaid interest assessed at closing by the lender. The amount of your rate decrease with each discount point you pay depends on your specific loan.
Loan Fees are the fees charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the face value of the loan
When considering loan pricing, keep in mind that rates, points and fees should be considered together.
Your Monthly Mortgage Payment
Mortgage Payments can be dissected into the following four sections: principal, interest, taxes, and insurance, commonly referred to with the acronym PITI.
Principal refers to the amount of debt you assume to buy a home, and to the amount of debt, not counting interest, left on a loan.
Interest is the cost of borrowing money from the selected lender. The amount of interest you pay each month is determined by your interest rate.
Taxes are levied by the local government and are collected by your lender as part of your monthly payments, and then paid on your behalf, also known as an escrow.
Insurance, like property taxes and the like, are normally collected and assumed as part of the escrow account. Insurance offers in the event of a loss, financial protection, and is divided into two major components:
Homeowner's Insurance is a form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like.
Mortgage Insurance is money paid to the lender that insures the mortgage and it protects your lender in the event that you fail to repay your mortgage. Whether you must pay mortgage insurance usually depends on the loan program and the size of your down payment. Selecting the right mortgage is imperative in the process of acquiring your home. It is of particular importance to educate yourself regarding your options. From the beginning you will need to consider two things: which loan type best meets your homebuying needs, and which loan term offers the ideal repayment schedule.
Most home loans are either fixed-rate mortgages or adjustable-rate mortgages (ARMs).
Fixed-Rate Mortgages have interest rates that will remain the same on these mortgages throughout the term of the mortgage for the original borrower
Your monthly payments remain the same throughout the life of the loan.
You are insulated from rising rates, with no increase whatsoever on the principal and interest portion of your mortgage regardless of how high interest rates rise.
Government loans come in two types: FHA and VA
Adjustable-Rate Mortgages is a mortgage in which the interest rate is adjusted periodically based on a preselected index. The rate is fixed for an introductory period (usually one to ten years), and is typically lower than for a fixed-rate mortgage.
Government loans come in two types: FHA and VA
FHA Loans are generated by a division of the Department of Housing and Urban Development. Its main activity is the insuring of residential mortgage loans made by private lenders. These loans are designed to assist low-to-moderate income homebuyers by offering low down payment requirements and flexible qualifying guidelines.
VA Loans are generated by the Department of Veterans Affairs (formerly the Veterans Administration), and are made available to qualified veterans and active-duty military personnel and their spouses. They are usually comparable to FHA loans.
There are also numerous programs designed for borrowers with less-than-stellar credit histories, excessive debt or other mitigating factors.
The “term” of a loan is the life of the loan. The most common loan payment term is thirty years, but other periods include twenty, fifteen, or ten years. You must consider carefully the benefits of the loan term for homebuying process, in particular your monthly income and long-term financial goals.
Longer mortgage terms offer lowest monthly payments and are perfect if you are trying to maintain as much cash flow as possible to reach your long-term goals.