33. WHAT IS A MORTGAGE?
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.
34. WHAT IS A LOAN-TO-VALUE (LTV) RATIO? HOW DOES IT DETERMINE THE
SIZE OF THE LOAN?
The LTV 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.
35. WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES
OF EACH? Fixed Rate Mortgages: Payments remain the same for the life of the
loan
Types
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 due
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
36. 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.
37. 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.
38. 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.
39. 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.
40. 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.
41. 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).
42. WHAT FACTORS AFFECT MORTGAGE PAYMENTS?
The amount of the down payment, the size of the mortgage loan, the
interest rate, the repayment term and payment schedule will all affect the size
of your mortgage payment.
43. 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 a
mortgage loan by expressing it in terms of a yearly interest rate. It is higher
than the interest rate because it also includes the cost of points, mortgage
and other fees included in the loan.
44. 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
Ieast 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.
45. 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.
46. 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. |