A mortgage (loan) makes home ownership possible for most of us. Without our mortgage, well…we’d just be renters. When we buy a home, we buy security. It doesn’t matter whether this is our first mortgage or only one of several; each time we take ownership of our home, we take greater control of our life.
What makes home ownership the most desirable of all debt? Everyone must live somewhere. With a traditional, fixed interest rate mortgage, we reduce our debt with each payment, increase our equity or our “assets,” and have a viable tax deduction.
What is a mortgage? A mortgage is a loan made to you by a mortgage lender, for the purchase of a piece of property. The lender holds the title to the property until the loan is repaid in full. If you cannot make your mortgage payment, the lender has the right to sell your home to pay-off your loan.
Why is a credit score so important? Credit scores begin at the low level of 300 and range to a high of 800. Higher is definitely better. From the viewpoint of the lender, your three-digit credit score represents the risk level the lender absorbs by making the loan to you. The lower your credit score, the higher the risk to the lender and the higher your interest rate will be. Conversely, the higher your credit score, the lower your interest rate. A higher credit score will enable the purchase of a home, an automobile, a lake house – anything you need a loan for – to be purchased at a lesser rate of interest.
How do you know you will qualify for a mortgage? A home buyer can choose to be pre-approved for a home loan. The pre-approval process assesses your credit report and your debt-to-income ratio, along with other pertinent considerations such as employment. Pre-approval offers great peace of mind for both the buyer and a seller. Pre-approval gives the buyer an advantage over competing buyers who are not pre-approved, as the seller knows the pre-approved buyer will not be turned down for a loan, and the buyer is confident that no embarrassing details will come up with the real estate agent or seller.
Pre-approval will advise how much money you can borrow – providing a “top-of-the-range” price that you will not want to exceed. You will know your total monthly payment as well as all closing costs, based on the highest loan amount available to you.
Pre-approval is not the same as being “pre-qualified”. Pre-approval is a more in-depth process and is generally considered to be better than pre-qualification.
What is “escrow”? Some states close by “clearing escrow” and some have a “closing.” Escrow requires both buyer and seller to deposit monies and/or documents with an impartial third party, such as a title company or bank. Funds or documents are released to buyer and seller when all requirements have been met.
What are closing costs? Closing costs are due, upfront, before all documents are signed and completed. There are two cost categories: the down payment and the closing costs.
· The down payment: This is the money you invest in your home -- your equity. Your loan amount is the money needed to buy the home, less your down payment. The more money you “pay down,” the less your monthly payments will be. Down payments can be very little…maybe 5 percent or less, or as much as you want to pay.
· The closing costs: This is the total of all fees due other than the down payment. These costs can include property taxes, homeowner’s insurance, fees for appraisals, surveys, electrical, mechanical, plumbing and pest inspections, and attorney and realtor fees, if applicable. Private mortgage insurance (PMI) is a part of closing costs if your down payment is less than 20 percent of the value of your property. The lender will have loan origination and processing fees, and you may choose to buy discount points.
What documents are needed for mortgage-approval? While this may vary from lender to lender, the most common are: a sales contract signed by all parties, proofs of monies available for escrow or closing, a list of current and past residences (two year period) with contact information for landlords, W-2 forms for the past two years and a recent pay stub showing year-to-date earned income,
balances on all loans, credit cards – all debts owed with account numbers, and account numbers for bank accounts, savings accounts, stocks and bond, etc.
What are “points” or “discount points”? A point is one percent of the amount of the loan. A discount point on a $100,000.00 loan costs $1,000.00 at the time of escrow or closing. When a buyer purchases a point, it reduces the amount of interest due over the life of the loan, which reduces the amount of your monthly payment. The upfront cost of the discount point(s) is tax deductible.
What is Private Mortgage Insurance (PMI)? The lender requires Private Mortgage Insurance when a buyer pays less than 20 percent down on the property. This insurance reimburses the lender if the buyer defaults on the loan. If the real estate market “drops” for a short while or if the property has fallen into a state of disrepair, the lender may not be able to fully recover the amount of the loan. The PMI insurance steps-in and secures the debt. The PMI insurance is a part of each monthly payment. When the buyer achieves a 20 percent equity or ownership in the property, the PMI insurance is dropped from the payment.
Why is homeowner’s insurance important? First, the lender requires the property to be sufficiently insured – you cannot close the loan or escrow, without it. Your insurance company will be required to show proof of coverage to the mortgage lender. Second, depending on the type of coverage, property insurance replaces your home in the event of specified disasters.
What determines property taxes? Property taxes differ from city to city and neighborhood to neighborhood. Property taxes are included in each monthly payment, so it is wise to discuss and compare specific “neighborhoods” with your real estate agent or get the information from your City Hall.
What determines the interest rate? Generally, lenders begin with the current prime rate set by the U. S. Federal Reserve. The lender considers your credit report and overall credit worthiness, and adds to the set prime rate, but a reputable lender will always be competitive in the marketplace. Depending on your credit history, your interest rate may be better or worse than your neighbors.
What is included in a monthly mortgage payment? A traditional fixed-rate, monthly mortgage payment consists of the:
- Principal payment - the amount of the loan after the down payment.
- Interest payment - the money the lender charges you for the loan.
- Taxes - usually property taxes and, perhaps, Private Mortgage Insurance.
What is an amortization schedule? At loan closing, you should receive an amortization schedule showing every payment, by month and year, through the end of your loan. A thirty-year loan will have 360 payments shown, detailing each monthly payment by the amount paid toward the principal (your equity) and the amount paid to interest, taxes and insurance.
What types of mortgages are available to the home buyer? Among the most popular are the:
- Fixed Rate Mortgage (FRM): Considered the “traditional” mortgage, it is repaid over a period of thirty years with a “fixed” rate of interest. The interest rate is “locked-in” (cannot be raised and will not be lowered) for the life of the loan. The same concept can be applied to fifteen-year loans or any other period approved by the lender.
- Interest Only Loan: This loan is actually an “option” that is considered a part of or, attached to, a mortgage. The buyer pays interest-only each month for a specified period of time, usually seven years or less. After the specified period, payments increase dramatically for the life of the loan.
- Adjustable Rate Mortgage (ARM): An adjustable rate mortgage is set for a specific term, maybe 30 years, but will typically have a lower rate of interest than the current fixed rate mortgage. This lower interest rate is for an initial period of time. An example is a three-year ARM, also known as a 3/1 ARM, with a fixed rate for the first three years, then adjusting each year thereafter. The adjustment can be based on several indexes, such as U.S. Treasury Bills and Certificates of Deposit, and will likely “cap” or limit the interest rate you can be charged over the length of the loan. An ARM can be a 1/1, a 5/1, etc., depending on the lender.
- Balloon Mortgage: This mortgage offers a lower rate of interest for up to seven years or so, amortized at the lower interest rate. At the end of the specified time period, the total amount of the loan is due in one large “balloon” payment.
- Reverse Mortgage: This mortgage is usually available only to a person who owns full equity in a home and is 62 years old, or older. A lender “buys” the property from the homeowner but allows the homeowner to continue living in the home. The homeowner may receive payment in several ways: a single lump sum, as a credit line or as a monthly payment deposited into the homeowners bank account. If you move or when you die, ownership reverts to the lender, and is not a part of your estate.
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July 20th, 2006 
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