A Mortgage Is More Than An Interest Rate
Mortgage packages often include other variables in addition to the interest rate. These variables may include points which are prepaid interest assessed by the lender at settlement. Hence, it may be less expensive to pay a slightly higher interest rate with fewer points than to pay a lower interest rate and more points. The most important features to consider are the types and the terms of mortgage, such as whether it is adjustable rate mortgage, fixed rate mortgage or a hybrid of the two, and what the length of the term is, i.e., 3, 5, 15 or 30 years. Below we have gathered many of the common terms used in lending to give you a basic understanding how your loan works
Fixed-Rate versus Adjustable-Rate
The two most common types of mortgages are fixed-rate and adjustable-rate mortgages (ARMS). The interest rate with a fixed-rate mortgage remains the same for the life of the loan. With ARMS, the rate varies according to the term, for example, a 5/1 ARM is an adjustable rate mortgage with a 30 year term that is fixed for the first five years and adjustable for the remaining 25 based on the going mortgage index rate.
Other Mortgage Types
Some mortgages offer fixed rates for a period of time, then adjust the interest rate later to fit market conditions. While they usually offer a lower market rate to begin with, the interest rate may eventually rise or fall.
A “Builder/Lender Buy-Down” gives the home buyer an initially discounted interest rate which gradually increases to an agreed upon fixed rate over a certain period of time.
“Convertible” mortgages offer the option to change the mortgage type after a specified period of time. This allows you to begin with a lower mortgage rate, then to “catch up” to your future higher income with a higher rate later.
15Year versus 30Year Mortgages
15year mortgages allow homeowners to own their home in half the time for significantly lower total interest costs, however, a 30year mortgage has lower monthly payments.
Which mortgage is best for you?
First, compare the APR (annual percentage rate) of different mortgages. The APR indicates the “effective rate of interest” paid per year, including points and other charges, and spread them over the life of the loan. Next, compare points and other fees. Finally, analyze the terms of the mortgage. Check whether it allows prepayment without a penalty. If it’s an ARM, compare yearly and “life-of-loan” caps. Then assess the payment schedule and determine what best fits your present and future needs.
Refinancing a mortgage is simply taking out a new mortgage to pay off the old one. You may wish to do so if rates drop significantly, or if you want to change the terms of your mortgage.
Because you can write off the interest payments and real estate taxes on a primary residence, owning a home offers tremendous tax savings. These savings may be factored in when your loan processor determines the mortgage amount you can afford. At the beginning of a loan, the payments are mostly interest, so you have larger tax savings than later in the life of the loan, where most of the amount you pay is applied to principal. Because of this unique tax break, you may be able to afford the home you want sooner than you think.
Annual Percentage Rate (APR): An interest rate reflecting the cost of a mortgage at a yearly rate.
Assumability: Taking the loan over from the holder (seller) and becoming liable for the repayment.
Balloon Mortgage: A type of mortgage usually used for a short-term, fixed-rate loan which involves small payments for a set period of time and one large payment for the remaining amount at a time specified in the contract.
Buy Down: A mortgage in which the seller and/or homebuilder subsidizes the mortgage by lowering interest rates during the first few years. Payments may increase when the subsidy expires.
Caps: Usually found on adjustable rate mortgages, these limit the amount that the interest can rise.
Down Payment: Money paid to make up the difference between the purchase price and the mortgage amount.
Escrow: A neutral third party who carries out the instructions of both the buyer and the seller to handle all the paperwork of closing. Escrow may also refer to an account held by the lender into which the home buyer pays money for tax or insurance reasons.
FHA Loan: A loan that is insured by the Federal Housing Administration and is open to all qualified home purchasers.
Origination Fee: Fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually computed as a percentage of the loan.
PITI: Principal, interest, taxes and insurance. Also called monthly housing expense.
Points: Prepaid interest assessed at closing by the lender. Each point is equal to 1% of the loan amount.
Principal: The part of your mortgage payment that directly pays off your loan. This does not include the interest, taxes or insurance that may be a part of your loan payment.
Title: Document which gives evidence of ownership.
Refinancing: Is simply taking out a new mortgage to pay off the old one. You may wish to do so if rates drop significantly, or if you want to change the terms of your mortgage.
VA Loan: Long-term, low or no-down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements.