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General Financing Questions
Q: What Is A Mortgage?
A: 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.
Q: What Is A Loan To Value (LTV) Ratio? How
Does It Determine The Size Of My Loan?
A: The loan to value
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 the less cash homebuyers are required to payout of their
own funds. So, to protect lenders against potential loss in case of default,
higher LTV loans (80% or more) usually require mortgage insurance policy.
Q: What Types Of Loans Are Available And What Are The Advantages
Of Each?
A:
Fixed Rate Mortgages. Payments remain the same for the life of the loan.
Types: (i) 15-year; and (ii) 30-year. Advantages: predictable and 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:
(i) Balloon Mortgage, which 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); and (ii) Two-Step Mortgage
in which the Interest rate adjusts only once and remains the same for the
life of the loan. Advantages: generally offer lower initial interest rates,
monthly payments can be lower, and may allow borrower to qualify for a larger
loan amount.
Q: When Do ARMs Make Sense?
A:
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.
Q: What Are The Advantages Of 15-Year And 30-Year Loan Terms?
A:
30-Year: In the first 23 years of the loan, more interest is paid off than
principal, meaning larger tax deductions and as inflation and costs of living
increase, mortgage payments become a smaller part of overall expenses.
15-year: The loan is usually made at a lower interest rate and Equity is
built faster because early payments pay more principal.
Q:
Can I Pay Off My Loan Ahead Of Schedule?
A: 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.
Q:
Are There Special Mortgages For First-Time Homebuyers?
A:
Yes. Lenders now offer several affordable mortgage options that 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.
Q: How Large Of A Down Payment
Do I Need?
A: 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.
Q:
What Is Included In A Monthly Mortgage Payment?
A: 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).
Q: What Factors Affect Mortgage
Payments?
A: 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.
Q: How Does The Interest Rate Factor In Securing A Mortgage
Loan?
A: 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 insurance, and
other fees included in the loan.
Q: What Happens If
Interest Rates Decrease And I Have A Fixed Rate Loan?
A:
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.
Q: What Are Discount Points?
A: 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.
Q: What Is An
Escrow Account? Do I Need One?
A: 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 tax 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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