Here, we will cover an outline which gives you a
quick overview, however, you can save this posting and use it later to research
and read certain points in greater detail where desired.
First, what does the word “mortgage” even mean?
A mortgage, also referred to as a mortgage loan, is an
agreement between you (the borrower) and a mortgage lender to buy or refinance
a home without having all the cash up-front. This agreement gives lenders the
legal rights to repossess a property if you fail to meet the terms of your
mortgage by not repaying the money you have borrowed plus interest.
Who Gets a Mortgage?
Most people who buy a home do so with a mortgage. A mortgage
is a necessity if you cannot pay the full cost of a home out of pocket.
To qualify for the loan, you must meet certain eligibility
requirements. Therefore, a person who gets a mortgage will be someone with a
stable and reliable income, a debt-to-income ratio of less than 50% and a
decent credit score (at least 580 for FHA loans or 620 for conventional loans).
What’s The Difference Between a Loan and A Mortgage?
The term “loan” can be used to describe any financial
transaction where one party receives a lump sum and agrees to pay the money
back.
A mortgage is a type of loan that is used to finance
property. A mortgage is a type of loan, but not all loans are mortgages.
Mortgages are “secured” loans. With a secured loan, the
borrower promises collateral to the lender in the event that they stop making
payments. In the case of a mortgage, the collateral is the home.
When you get a mortgage, your lender gives you a set amount
of money to buy the home. You agree to pay back your loan – with interest –
over a period of several years. You do not fully own the home until the
mortgage is paid off.
Interest Rates
The interest rate is determined by two things: current market
rates and the level of risk the lender takes to lend you money. You cannot
control current market rates, but you can have some control over how the lender
views you as a borrower. The higher your credit score and the fewer red flags
you have on your credit report, the more you will look like a responsible
lender.
The amount of money you can borrow will depend on what you
can afford and, most importantly, the reasonable value of the home, determined
through an appraisal. This is important because the lender cannot lend an
amount higher than the appraised value of the home.
Parties Involved in A Mortgage
Mortgage Broker, Lenders (wholesale and retail), Credit Unions,
and the Borrower
The Mortgage Broker works with many reputable lenders, many
to compare in order to secure the best program and lowest rate possible! TrustLendingSolutions.com,
dba of The Bani Group, Inc.
Borrower
The borrower is the individual seeking the loan to buy a
home. You may be able to apply as the only borrower on a loan, or you may apply
with a co-borrower. Adding more borrowers with income to your loan may allow
you to qualify for a more expensive home.
Mortgage Terminology
When you shop for a home, you might hear a bit of industry
lingo with which you are not familiar. I have created an easy-to-understand
directory of the most common mortgage terms.
Amortization
Part of each monthly mortgage payment will go toward paying
interest to your lender, while another part goes toward paying down your loan
balance (also known as your loan’s principal). Amortization refers to how those
payments are broken up over the life of the loan. During the earlier years, a
higher portion of your payment goes toward interest. As time goes on, more of
your payment goes toward paying down the balance of your loan.
Down Payment
The down payment is the money you pay upfront to purchase a
home. In most cases, you have to put money down to get a mortgage.
The size of the down payment you will need will vary based on
the type of loan you are getting, but a larger down payment means better loan
terms and a cheaper monthly payment. For example, conventional loans require as
little as 3% down, but you will have to pay a monthly fee known as private
mortgage insurance (PMI), to compensate for the small down payment. On the
other hand, if you put 20% down, you would get a better interest rate, and you would
not have to pay for PMI.
A mortgage calculator can help you see how your down payment
amount affects your monthly payments.
Escrow – Impound Account (your monthly payment includes a
monthly installment of Insurance and Property Taxes)
Part of owning a home is paying for property taxes and homeowners’
insurance. To make it easy for you, lenders set up an escrow account to pay
these expenses. Your escrow account is managed by your lender and functions like
a checking account. No one earns interest on the funds held there, but the
account is used to collect money so your lender can send payments for your
taxes and insurance on your behalf. To fund your account, escrow payments are
added to your monthly mortgage payment.
Not all mortgages come with an escrow account. If your loan does
not have one, you have to pay your property taxes and homeowners insurance
bills yourself. However, most lenders offer this option because it allows them
to make sure the property tax and insurance bills get paid. If your down
payment is less than 20%, an escrow account is required. If you make a down
payment of 20% or more, you may opt to pay these expenses on your own or pay
them as part of your monthly mortgage payment.
Interest Rate
An interest rate is a percentage that shows how much you will
pay your lender each month as a fee for borrowing money.
There are two types of mortgage interest rates: fixed rates
and adjustable rates.
Fixed Rates. Fixed interest rates stay the same for the
entire length of your mortgage. If you have a 30-year fixed-rate loan with a 4%
interest rate, you will pay 4% interest until you pay off or refinance your
loan. Fixed-rate loans offer a predictable payment each month, which makes
budgeting easier.
Adjustable Rates. Adjustable rates are interest rates that
change based on the market. Most adjustable-rate mortgages begin with a fixed
interest rate period, which usually lasts 5, 7 or 10 years. During this time,
your interest rate remains the same. After your fixed interest rate period
ends, your interest rate adjusts up or down every 6 months to a year. This
means your monthly payment can change based on your interest payment.
ARMs are right for some borrowers. If you plan to move or
refinance before the end of your fixed-rate period, an adjustable-rate mortgage
can give you access to lower interest rates than you would typically find with
a fixed-rate loan.
Loan Servicer
The loan servicer is the company that is in charge of
providing monthly mortgage statements, processing payments, managing your
escrow account, and responding to your inquiries.
Your servicer is sometimes the same company that you got the
mortgage from, but not always. Lenders may sell the servicing rights of your
loan and you may not get to choose who services your loan.
Mortgage Loan Types
There are many types of mortgage loans. Each comes with
different requirements, interest rates and benefits. Here are some of the most
common types you might hear about when you are applying for a mortgage.
FHA Loans. FHA loans are a popular choice because they have
low down payment and credit score requirements. You can get an FHA loan with a
down payment as low as 3.5% and a credit score of just 580. These loans are
backed by the Federal Housing Administration; this means the FHA will reimburse
lenders if you default on your loan.
Conventional Loans. The phrase “conventional loan” refers to
any loan that is not backed or guaranteed by the federal government.
Conventional loans are often also “conforming loans,” which means they meet a
set of requirements defined by Fannie Mae and Freddie Mac – two
government-sponsored enterprises that buy loans from lenders so they can give
mortgages to more people. Conventional loans are a popular choice for buyers.
You can get a conventional loan with as little as 3% down. If you put down less
than 20% for a conventional loan, you will usually be required to pay a monthly
fee called private mortgage insurance, which protects your lender in case you
default on your loan. This adds to your monthly costs but allows you to get
into a new home sooner.
USDA Loans. USDA loans are only for homes in eligible rural
areas (although many homes in the suburbs qualify as “rural” according to the
USDA’s definition.). To get a USDA loan, your household income cannot exceed
115% of the area median income. USDA loans are a good option for qualified
borrowers because they allow you to buy a home with 0% down. For some, the
guarantee fees required by the USDA program cost less than the FHA mortgage
insurance premium.
VA Loans. VA loans are for active-duty military members and
veterans. Backed by the Department of Veterans Affairs, VA loans are a benefit
of service for those who have served our country. VA loans are a great option
because they let you buy a home with 0% down and no private mortgage insurance.
Mortgage Payment
Your mortgage payment is the amount you pay every month
toward your mortgage. Each monthly payment has four major parts, principal,
interest, taxes, and insurance:
Principal. Your loan principal is the amount of money you
have left to pay on the loan. For example, if you borrow $200,000 to buy a home
and you pay off $10,000, your principal is $190,000. Part of your monthly
mortgage payment will automatically go toward paying down your principal. You
may also have the option to put extra money toward your loan’s principal by
making extra payments; this is a fantastic way to reduce the amount you owe and
pay less interest on your loan overall.
Interest. The interest you pay each month is based on your
interest rate and loan principal. The money you pay for interest goes directly
to your mortgage provider. As your loan matures, you pay less in interest as
your principal decreases.
Taxes And Insurance. If your loan has an escrow account, your
monthly mortgage payment may also include payments for property taxes and homeowners’
insurance. Your lender will keep the money for those bills in your escrow
account. Then, when your taxes or insurance premiums are due, your lender will
pay those bills for you.
Mortgage Term
Your mortgage term refers to the number of years it will take
you to pay off your mortgage. The two most common terms are 30 years and 15
years. A longer term typically means lower monthly payments spread over a
longer period. A shorter term usually means larger monthly payments spread over
a shorter period, but shorter terms can result in huge interest savings.
Private Mortgage Insurance
Private mortgage insurance is a fee you pay to protect your
lender in case you default on your conventional loan. In most cases, you will
need to pay PMI if your down payment is less than 20%. The cost of PMI can be
added to your monthly mortgage payment, covered via a one-time upfront payment
at closing or a combination of both. There is also a lender-paid PMI, in which
you pay a slightly higher interest rate on the mortgage instead of paying the
monthly fee.
Mortgage Note
A mortgage note (or promissory note) is a written document
that details the agreed-upon terms for the repayment of the loan being used to
purchase a property. It is like an IOU that includes all of the guidelines for
repayment. These terms include:
Interest rate type (adjustable or fixed)
Interest rate percentage
Amount of time to pay back the loan (loan term)
Amount borrowed to be paid back in full
Once the loan is paid in full, the promissory note is given
back to the borrower. If you fail to uphold the responsibilities outlined in
the promissory note (i.e., pay back the money you borrowed), the lender can
take ownership of the property.
I'm here to answer any/all of your questions! Lisa/Broker/TrustLendingSolutions.com, Call direct at 818-359-4145
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