Mortgage Info

Everything You Wanted To Know About Mortgages

What is a mortgage?

A mortgage is a loan which is secured by real property. Most people use mortgages to purchase or refinance their home. As with other loans, you must apply for a mortgage and get approval. The amount you can borrow depends on several things, such as your income, your total debt and your monthly expenses.

Once your mortgage is closed, you receive the total amount of the loan at once, which is used to pay the seller (in a sale transaction) or pay off any existing loans on the property (in a refinance transaction). You then repay the loan in monthly payments according to a predetermined schedule. Most mortgages today are for periods of 15, 20, or 30 years.

To determine the right type of mortgage for your needs, you should consider:

Two key definitions to understand:

Closing Costs: There are several kind of fees associated with a mortgage. Many lenders charge an origination fee and a processing fee. Other fees associated with loan closing include, but are not limited to, your attorney's fees, filing fees, mortgage taxes, title search and title insurance. You may also be asked to pay real estate taxes and /or establish escrow accounts for real estate taxes and home owner's insurance.

Annual percentage rate or APR is the actual cost you are paying for the mortgage loan. The APR reflects the cost of your mortgage loan as a yearly rate. It will generally be higher than the interest rate. All fees that are paid directly to your lender, the interest rate paid on the mortgage, and any mortgage insurance premiums are considered when calculating APR.

Today, there are a wide variety of mortgages to fit every home buyer's needs. The most common types are:

Features:

The interest rate on a fixed rate mortgage remains constant over the life of the loan. Your monthly principal and interest payment will always remain the same through the term of the loan.

Fixed rate mortgages are especially suited for those who expect to remain in their homes for a number of years. You can provide a down payment as low as 5% of the purchase price. And, if you don't qualify for this 5% down program, many lenders have a program that allows a down payment of as little as 3% from your own funds. The remaining 2% down must, however be a gift from a relative, an employer-sponsored loan, or a grant from a non-profit organization.

Your mortgage payment is unaffected if interest rates in the general market go up

Your monthly payments are set, so you can more easily budget your finances.

Generally, the initial interest rate is lower than that of a fixed rate mortgage. The lender bases its calculations on the index and margin of the mortgage. The index is a base rate that the lender adds to the index at each adjustment period to determine a new interest rate. Be sure to check the type of index your mortgage lender is using, because some fluctuate more than others.

The interest rate you pay will generally drop if prevailing interest rates go down. Low start rates can reduce your initial payments.

Principal and interest payment remain constant for the term of a balloon mortgage which is usually 5-7 years, although principal and interest are amortized over 30 years.

At the end of the 5-7 years, you can pay off the mortgage or apply to refinance.

Balloon mortgages are typically offered at lower interest rates than other fixed rate products, making them more affordable. If you know you'll be in your home for less than the term of the mortgage, this may be a product you should consider.

Conventional mortgages are mortgages that are not obtained under a government insured or guaranteed program such as FHA or VA. Some of these loans may also be defined as conventional conforming loans which means they are eligible for purchase by one of the two government chartered corporations created to support the secondary mortgage market. These corporations are the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) and the Federal National Mortgage Association (FNMA or Fannie Mae).

A Federal Housing Administration (FHA) insured loan allows you to buy a home with a low down payment, ranging from 3% to 5% depending on the price of the home. This may provide you with more buying power.

If you are currently in the United States military, or if you have ever served in U.S. armed forces, you may be eligible to get a loan guaranteed by the Veterans Administration (VA). If you qualify, this special government benefit to veterans might be a good option for you as it allows you to purchase a home with a low down payment.