 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.
There are a few types of loans available
to home buyers, and regardless of factors,
you should always speak to a Professional
Financial Partner before deciding
which is best for you.
WHAT
TYPES OF LOANS ARE AVAILABLE AND WHAT ARE
THE ADVANTAGES OF EACH?
Fixed Rate Mortgages, and Variable Rate
Mortgages
Fixed Rate Mortgages: Payments remain the
same for the life of the loan
Types:15-year, 30-year
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.
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.
WHAT
ARE THE ADVANTAGES OF 15 - AND 30-YEAR LOANS
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.
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?
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?
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?
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 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.
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 A FIXED 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.
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? DO I NEED ONE?
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.
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