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Understand
What the
Mortgage Loan Is
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Getting Started - What Is A Mortgage Loan?
A mortgage
requires you to pledge your home as the lender's security for repayment
of your loan. The lender agrees to hold the
title
or deed
to your property (or in some states, to hold a
lien
on your title or deed) until you have paid back your loan plus
interest.
** Mortgage Amount and Term
The mortgage amount is the amount of money you borrow from a lender
to pay for your house. The term is the number of years over which
you can pay back the amount you borrow.
The length of your mortgage repayment period
will directly affect your monthly mortgage payments. For the same
mortgage principal
amount, you will find that the shorter your repayment period is,
the higher your monthly payments will be, but the total interest
you pay over the life of the loan will be less. On the other hand,
the longer your repayment period is, the lower your monthly payments
will be, but the total interest you pay over the life of the loan
will be more.
The most popular mortgage term is 30 years. By extending payment
over 30 years, you keep your monthly housing costs low. If you can
afford higher monthly payments, you can select a mortgage term that
is shorter, such as a 15-year term.
** Amortization
Over time, you will repay your mortgage through regular monthly
payments of principal
and amortization.
** Fixed Interest
Rate
You can choose a mortgage with an interest
rate that is fixed for the entire term of the loan. A fixed-rate
loan gives you the security of knowing that your interest rate will
never change during the entire term of the loan, and that your payments
will remain the same.
** Adjustable Interest Rate
An adjustable-rate mortgage (called an ARM) has an interest rate
that will vary during the life of the loan, with the possibility
of both increases and decreases to the interest rate and consequently
to your mortgage payments.
** Down Payment
The down payment is the part of the purchase price that the buyer
pays in cash and does not finance with a mortgage. Your down payment
will reduce the amount you’ll need to borrow. So, the more
cash you put down, the smaller the size of your loan, and the smaller
the amount of your mortgage payments.
Lenders often view mortgages with larger down payments as more
secure because you have more of your own money invested in the property.
Lower down payments help many people afford homes of their own sooner.
** Closing Costs
The closing (or, in some parts of the country, settlement) is the
final step, during which ownership of the home is transferred to
you. The purpose of the closing is to make sure the property is
ready and able to be transferred to you from the seller. Items to
be paid at closing vary from state to state and may include
transfer
taxes and recordation taxes. Other closing costs are
title
insurance, the site survey
fee, attorney fees, loan discount points,
and document preparation fees. Usually, closing costs are expressed
as a percentage of the sales price or loan amount. Typically, costs
range from 3 percent to 6 percent of the sales price of your home.
Sometimes you can negotiate to have the seller pay some of your
closing costs.
** Discount Points
In the special vocabulary of mortgage lending, “points”
are often used to describe a type of fee that lenders charge. (The
full term to describe this fee is “discount points.”)
Simply put, 1 point equals 1 percent of the loan amount. So, if
you take out a $100,000 loan, one point equals $1,000. If you take
out a $50,000 loan, one point equals $500. Discount points represent
additional money you pay to the lender at closing. In return, the
lender will provide you with a lower interest rate on your loan.
Usually, for each point you pay for a 30-year loan, your interest
rate is reduced by about 1/8th (or .125) of a percentage point.
So, if the current interest rate on a 30-year mortgage is 8.5 percent,
paying 1 point means you could get that mortgage for an interest
rate of 8.375 percent.
For example, you are shopping for a 30-year mortgage loan. A lender
quotes you an interest rate for a 30-year, $50,000 mortgage at 8.5
percent with no discount points. If you like that rate, you can
choose not to pay any discount points at closing and pay 8.5 percent
interest. If you want to pay less interest, ask the lender to quote
you interest rates with your paying 1, 2, or 3 discount points.
Usually, the longer you plan to stay in your home, the more sense
it makes to pay discount points.
** Conforming and Nonconforming Loans
The term “conforming,” as opposed to “nonconforming,”
is sometimes used to explain loans that offer terms and conditions
that follow the guidelines set forth by Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac are two private, secondary mortgage market
companies that buy mortgage loans from lenders, thereby ensuring
that mortgage funds are available at all times in all locations
around the country.
The most important difference between a loan
that conforms to Fannie Mae/Freddie Mac guidelines and one that
doesn't is its loan limit. Fannie Mae and Freddie Mac will purchase
loans only up to a certain loan limit (currently $359,650) for a
single family residence.
So, if your loan amount will be for more than
the conforming loan limit of $359,650, you may be asked to pay a
higher interest rate on your mortgage. Your mortgage loan may also
follow slightly different underwriting requirements, particularly
in regard to your required down
payment amount. Check with your lender about this if you
are taking out a large loan amount. Nonconforming loans are sometimes
called jumbo
loans.
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