Some Common Mortgage Loan and Finance Terms Explained

The common terms used to describe a mortgage involve the “creditor,” the “debtor,” and “mortgage broker.” It may be self-explanatory as to what those terms mean, but there are other terms involved with a mortgage as well that a homeowner may not be completely familiar with. Let’s cover some of them here:

Creditor

The creditor is the financial institution, typically a bank, who provides the money in the form of a loan for the mortgage amount. The creditor is sometimes referred to as the mortgagee or lender.

Debtor

The debtor is the person or party who owes the mortgage or the loan. They may be referred to as the mortgagor.

Many homes are owned by more than one person, such as a husband and wife, or sometimes two close friends will purchase a home together, or a child with their parent, and so on. If this is the case, both persons become debtors for that loan, and not just owners of the property.

In other words, be careful of having your name put on the deed or title to any house, as this makes you legally responsible for the mortgage or loan attached to that house as well.

Mortgage broker, financial advisor

Mortgages are not always easy to come by, however, because of the demand for homes in most countries, there are many financial institutions that offer them. Banks, credit unions, Savings & Loan, and other types of institutions may offer mortgages. A mortgage broker can be used by the prospective debtor to find the best mortgage at the lowest interest rate for them; the mortgage broker also acts as an agent of the lender to find persons willing to take on these mortgages, to handle the paperwork, etc.

There are typically other parties involved in closing or obtaining a mortgage, from lawyers to financial advisors. Because a mortgage for a private home is typically the largest debt that any one person will have over the course of his or her life, they often seek out whatever legal and financial advice is available to them in order to make the right decision. A financial advisor is someone who can become very familiar with your own particular needs, income, long-term goals, etc., and then give you the best advice on what your loan needs may be.

Foreclosure

When the debtor cannot or does not meet the financial obligations of the mortgage, the property can be foreclosed on, meaning that the creditor seizes the property to recoup the remaining cost of the loan.

Typically, a home that is foreclosed upon will be sold at auction and that sale price applied to the outstanding amount of the mortgage; the debtor may still be liable for the remaining amount if the property sold for less than the outstanding balance of the mortgage.

For example, suppose a person still owes $50,000 toward their mortgage, and their home is foreclosed. At auction, the home is sold for only $45,000. The debtor is still responsible for that remaining $5,000 difference.

Most banks and financial institutions will try to avoid foreclosing on any of their debtor’s property if at all possible. Not only do they run the risk of not being able to sell the home at auction for any price, but there are also additional costs and risks incurred when the home is vacated by the previous owners. This includes vandalism, squatters (persons who trespass onto vacant land or into vacant homes and stay there until forcibly removed), fines from cities for unkempt yards, and so on.

Annual Percentage Rate (APR)

The APR is not to be confused with a mortgage’s interest rate.

The APR is a loan’s interest rate plus the added costs of obtaining the loan, such as points, origination fees, and mortgage insurance premiums (if applicable).

If there were no costs involved in obtaining a loan other than the interest rate, the APR would then equal the interest rate.

Breakeven Point

The breakeven point is the length of time it will take to recover the costs incurred to refinance a mortgage. It is calculated by dividing the amount of closing costs for refinancing by the difference between the old and new monthly payment.

For example, if it costs you $5,000 in fees, penalties, etc., to refinance your mortgage, but you save $300 per month on your payments with your new mortgage, the break-even point is after 17 months (17 months x $300 per month = $5,100).

ARM

This refers to an Adjustable Rate Mortgage; a mortgage that permits the lender to adjust its interest rate periodically.

Fixed-Rate Mortgage

A mortgage in which the interest rate does not change during the term of the loan.

Cap

ARMs have fluctuating interest rates, but those fluctuations are usually limited by law to a certain amount.

Those limitations may apply to how much the loan may adjust over a six month period, an annual period, and over the life of the loan, and are referred to as “caps.”

Index

A number used to compute the interest rate for an ARM. The index is generally a published number or percentage, such as the average interest rate or yield on U.S. Treasury Bills. A margin is added to the index to determine the interest rate that will be charged on the ARM.

Since the index may vary with ARMs, many people considering refinancing do well to keep aware of the standard interest rate as set by the federal government, as this is typically used by lending institutions to calculate that index.

Prime Rate

The interest rate that banks charge to their preferred customers. Changes in the prime rate influence changes in other rates, including mortgage interest rates.

Equity

A homeowner’s financial interest in or value of a property. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens, if that value is higher.

In other words, if the fair market value of the home is $200,000, and your mortgage (and other liens, if applicable) is only $150,000, then the home has $50,000 in equity.

Home Equity Loan

Loans secured by a specific property that were made against the “equity” of the property after it was purchased.

Using the illustration above of a home that has $50,000 in equity, a homeowner may take out a loan up to that amount, using the home as collateral for that loan. A lending institution knows that if the homeowner defaults on the loan, they can seize the property and sell it for at least that much, getting back their loan amount.

Amortization

The gradual repayment of a mortgage loan, usually by monthly installments of principal and interest.

An amortization table shows the payment amount broken out by interest, principal, and unpaid balance for the entire term of the loan. These tables are useful because when a payment is made toward a mortgage, the same amount does not get applied to the principal and interest month after month, even when the payment amount is the same. This is often a difficult concept for those not in the real estate or banking business to understand, so an amortization table that spells out how each payment is applied to the debt over the life of the loan can be very helpful.

Cash-Out Refinance

When a borrower refinances his mortgage at a higher amount than the current loan balance with the intention of pulling out money for personal use, it is referred to as a “cash out refinance.” In other words, the mortgage is not simply for the home itself but an additional amount of money is being financed as well.

Appraised Value

An opinion of a property’s fair market value, based on an appraiser’s knowledge, experience, and analysis of the property. The appraised value of the home is a key factor in how much the home can or will be mortgaged for.

Appreciation

The increase in the value of a property due to changes in market conditions, inflation, or other causes.

Depreciation

A decline in the value of property; the opposite of appreciation.

Appreciation and depreciation are important concepts to remember; as we’ve just mentioned, the appraised value of the home is a determining factor in the home’s mortgage. When refinancing, it’s important to understand that your home may have appreciated or depreciated in value since the original or first mortgage was obtained.

Lock-in

An agreement in which the lender guarantees a specified interest rate for a certain amount of time at a certain cost.

Lock-in Period

The time period during which the lender has guaranteed an interest rate to a borrower.

This is a different concept than a fixed rate mortgage, as the lock-in period for a mortgage may be temporary rather than over the life of the loan.

As we said previously, many of these terms you may already be familiar with, but it doesn’t hurt to review them and see how they are all tied in together with your mortgage and the refinancing process.

So now that you have these basic terms in mind when it comes to a mortgage and the lending process, let’s discuss the process of refinancing in greater detail.

The Benefits of a FHA Mortgage Loan

When it comes to qualifying for a home loan, there are many different types of programs available. With the many different home loan programs available, it is important to choose the best program for your particular mortgage loan needs.

One of the home programs you can choose from is a FHA mortgage. This type of program is designed for 1st time home buyers. FHA home loans can be used to purchase a primary residence or refinance an existing home loan. Below are the many benefits to the FHA program.

Reduce Down Payment

A FHA mortgage loan offers buyers a program with a lower down payment. The current minimum down payment for a FHA loan is 3.5%. The source of the funds for the down payment can also come from many different sources including a gift from a family member or church, a 401K loan or withdrawal, and any money saved up in a checking or savings account. By allowing the down payment to come from many different sources, the FHA mortgage loan program helps buyers purchase their new home.

Seller Paid Closing Cost

FHA loans also allow the seller to contribute up to 3% towards buyers closing cost. This is extremely important in assisting a client purchase a new house and reducing the amount of money needed for closing. Sellers can pay closing cost, prepaid items like taxes and home insurance as well as interest on the loan. For example, if a buyer purchases a home for $200,000, the seller can contribute $6000 towards the buyers closing cost.

Lower Mortgage Rates

For many people, FHA home mortgages offer the best rates. FHA loan rates are not tied to credit scores like the way conventional mortgage rates are. For example, if a client has a credit score of 660, the FHA home loan the rate would be same if their score was 740, but on a conventional home loan, the credit score of a 660 compared to a 740 would see an increase of about.75% to the rate.

Mortgage Insurance

Another benefit in the FHA mortgage loan program is the approval of mortgage insurance. FHA mortgage insurance is approved as long as the mortgage is approved. This is not the same when it comes to a conventional home loan. Many times, a home buyer can be approved for a conventional mortgage, but will not be approved for mortgage insurance. This results in the denial of the home loan, but with a FHA mortgage loan, as long as the loan is approved, mortgage insurance is approved. Also, the monthly mortgage insurance payment for a FHA mortgage is usually less than the private mortgage insurance offered on conventional home mortgage loans.

Mortgage Amount Limits

FHA home loans do have set loan limits that are established by HUD. To determine the loan limit in your area, contact your mortgage loan advisor. For example, in the Dallas – Fort Worth area, FHA loan limits are $271,050.

Streamline Refinances

Finally, one of the best benefits to a FHA mortgage is the ability to do a streamline refinance. A streamline refinance is when a homeowner refinances an existing FHA mortgage loan into a new FHA mortgage loan. The streamline refinance program allows the client to refinance with limited paperwork. Though, it might be in the best interest of the client to consider a full refinance over a streamline. Consult a home loan officer to see which program is best for you!

FHA loans are a great way to refinance or purchase a home. It is important to understand the benefits of each home mortgage loan program that you are applying for and to make sure you are getting the best possible mortgage loan.

Frequently Asked Questions Regarding Home Mortgage Loans – DTN Mortgage – All Types Of Home Loans

What should I know before buying a home?

Here are some tips that could save you a lot of time, money and trouble.

Plan ahead. Establish good credit and save as much as you can for the down payment and closing costs.
Get pre-approved online before you start looking. Not only do real estate agents prefer working with pre-qualified buyers; you will have more negotiating power and an edge over homebuyers who are not pre-approved.
Set a budget and stick to it.
Know what you really want in a home. How long will you live there? Is your family growing? What are the schools like? How long is your commute? Consider every angle before diving in.
Make a reasonable offer. To determine a fair value on the home, ask your real estate agent for a comparative market analysis listing all the sales prices of other houses in the neighborhood.
Choose your loan (and your lender) carefully. For some tips, see the question in this section about comparing loans.
Consult with your lender before paying off debts. You may qualify even with your existing debt, especially if it frees up more cash for a down payment.
Keep your day job. If there is a career move in your future, make the move after your loan is approved. Lenders tend to favor a stable employment history.
Do not shift money around. A lender needs to verify all sources of funds. By leaving everything where it is, the process is a lot easier on everyone involved.
Do not add to your debt. If you increase your debt by financing a new car, boat, furniture or other large purchase, it could prevent you from qualifying.
Timing is everything. If you already own a home, you may need to sell your current home to qualify for a new one. If you are renting, simply time the move to the end of the lease.

How Much House Can I Afford?
How much house you can afford depends on how much cash you can put down and how much a creditor will lend you. There are two rules of thumb:

You can afford a home that’s up to 2 1/2 times your annual gross income.

Your monthly payments (principal and interest) should be 1/4 of your gross pay, or 1/3 of your take-home pay.

The down payment and closing costs – how much cash will you need? Generally speaking, the more money you put down, the lower your mortgage. You can put as little as 3% down, depending on the loan, but you’ll have a higher interest rate. Furthermore, anything less than 20% down will require you to pay Private Mortgage Insurance (PMI) which protects the lender if you can’t make the payments. Also, expect to pay 3% to 6% of the loan amount in closing costs. These are fees required to close the loan including points, insurance, inspections and title fees. To save on closing costs you may ask the seller to pay some of them, in which case the lender simply adds that amount to the price of the house and you finance them with the mortgage. A lender may also ask you to have two months’ mortgage payments in savings when applying for a loan. The mortgage – how much can you borrow? A lender will look at your income and your existing debt when evaluating your loan application. They use two ratios as guidelines:

Housing expense ratio. Your monthly PITI payment (Principal, Interest, Taxes and Insurance) should not exceed 28% of your monthly gross income.

Debt-to-income ratio. Your long-term debt (any debt that will take over 10 months to pay off – mortgages, car loans, student loans, alimony, child support, credit cards) shouldn’t exceed 36% of your monthly gross income.

Lenders aren’t inflexible, however. These are just guidelines. If you can make a large down payment or if you’ve been paying rent that’s close to the same amount as your proposed mortgage, the lender may bend a little. Use our calculator to see how you fit into these guidelines and to find out how much home you can afford.

Why Should I Refinance?
If you have a low 30-year fixed interest rate you’re in good shape. But if any of these Five Reasons applies to your situation, you may want to look into refinancing.

1. Decrease monthly payments.
If you can get a fixed rate that’s lower than the one you currently have, you can lower your monthly payments.

2. Get cash out of your equity.
If you have enough equity you can get cash out by refinancing. Just decide how much you want to take out and increase the new loan by that amount. It’s one way to release money for major expenditures like home improvements and college tuition.

3. Switch from an adjustable to a fixed rate.
If interest rates are increasing and you want the security of a fixed rate, or, if interest rates have fallen below your current rate you can refinance your adjustable loan to get the fixed rate you’re looking for.

4. Consolidate debt.
You can refinance your mortgage to pay off debt, too. Simply increase the new loan amount by the amount you need and the lender will give you that cash to pay off creditors. You’ll still owe the lender but at a much lower interest rate – and that interest is tax-deductible.

5. Pay off your mortgage sooner.
If you switch to a shorter term or a bi-weekly payment plan, you can pay off your home earlier and save in interest. And if your current interest rate is higher than the new rate, the difference in monthly payments may not be as big as you’d expect.

Is refinancing worth it?
Refinancing costs money. Like buying a new home, there are points and fees to consider. Usually it takes at least three years to recoup the costs of refinancing your loan, so if you don’t plan to stay that long it isn’t worth the money. But if your interest rate is high it may be smart to refinance to a lower interest rate, even if it is for the short term. If your mortgage has a prepayment penalty, this is another cost you will incur if you refinance.

Use the reasons above as a guideline and determine whether or not refinancing is the right thing to do. You can also use our refinance analysis calculator to help you decide.

What Are the Costs of Refinancing?
Here’s what you can expect to pay when you refinance:

The 3-6 Percent Rule
Plan to pay between 3% and 6% of the amount of the new loan amount (if want cash-out, the loan amount will be larger). Yet some lenders offer no-cost refinancing in exchange for a higher rate.

Getting to the Points
Points play a big part in how much it’ll cost to refinance – the more points you pay, the lower your interest rate. Points are a good idea if you’re planning to stay in your home for a while, but if you’ll be moving soon you should try to avoid paying points altogether.

Negotiate the Fees
Be aggressive and investigate the fees your lender is asking you to pay. You may not need an appraisal, or your loan-to-value may be such that you no longer need Private Mortgage Insurance. Sometimes if you refinance with your current lender they won’t need a credit report. With a little research it’s amazing how much you can save.

Here, we’ve explained the different loan refinancing fees.

Application Fee: This covers the initial costs of processing your loan application and checking your credit.

Appraisal Fee: An appraisal provides an estimate or opinion of your property’s value.

Title Search and Title Insurance: A Title Search examines the public record to discover if any other party claims ownership of the property. Title Insurance covers you if any discrepancies arise in ownership. (A reissue of the title can save 70% over the cost of a new policy.)

Lender’s Attorney’s Review Fees: In any financial transaction of this scope, a lawyer’s participation ensures that the lender isn’t legally vulnerable. This fee is passed on to you.

Loan Origination Fees: This is the cost of evaluating and preparing a mortgage loan.

Points: These are basically finance charges you pay the lender. One point equals 1% of the loan amount (for example, one point on a $75,000 loan is $750). The total number of points a lender charges depends on market conditions and the loan’s interest rate.

Prepayment Penalty: Some mortgages require the borrower to pay a penalty if the mortgage is paid off before a certain time. FHA and VA loans, issued by the government, are forbidden to charge prepayment penalties.

Miscellaneous: Other fees may include costs for a VA loan guarantee, FHA mortgage insurance, private mortgage insurance, credit checks, inspections and other fees and taxes.

How to Save Money Refinancing:

Research all costs and fees.

Don’t be afraid to negotiate with your lender.

Shop around for the lowest rates.

Check with your current lender for lower rates with costs that are reduced or waived.

What Kinds of Mortgages Are Available?

Fixed-Rate Mortgage – interest rates and monthly payments remain unchanged for the life of the loan
Adjustable-Rate Mortgage – interest rates and monthly payments can go up or down, depending on the market
Hybrid Loans – a combination of fixed and adjustable mortgages
· How do you decide which loan is best? These questions may help.

How much cash do you have for a down payment?
What can you afford in monthly payments?
How might your financial situation change in the near future and beyond?
How long do you intend to keep this house?
How comfortable would you be with the possibility of your monthly payments increasing?

What is a Fixed Rate Mortgage?
This is the most common loan arrangement in the U.S. With a fixed-rate mortgage the loan’s principal and interest are amortized, or spread out evenly, over the life of the loan, giving you a predictable monthly payment.

The upside is, if rates are low, you can lock in for as long as 30 years and protect yourself against rising rates. However, if rates fall you can’t change your rate without refinancing the loan and that could cost money.

The 30-year Fixed-Rate Mortgage, the most popular and easiest to qualify for, will give you the lowest payment. But you can also get a 20-, 15- and even a 10-year fixed-rate mortgage if you wish to save interest and pay your home off sooner.

What is an Adjustable Rate Mortgage?
With Adjustable-Rate Mortgages (ARMs) interest rates are tied directly to the economy so your monthly payment could rise or fall. Because you’re essentially sharing the market risks with the lender, you are compensated with an introductory rate that is lower than the going fixed rate.

How often does the interest rate change?
That depends on the loan. Changes can occur every six months, annually, once every three years or whenever the mortgage dictates.

How much can my rate change?
Your ARM will stipulate a percentage cap for each adjustment period, which means your interest may not increase beyond that percentage point. If the market holds steady, there may be no increase at all. You may even see your payment decrease if interest rates fall.

How are the changes determined?
Every ARM loan is tied to a financial market index, such as CDs, T-Bills or LIBOR rates. Your rate is determined by adding an additional percentage (known as a margin) to that index’s rate. When the index rises or falls, your rate rises or falls with it.

Is there a limit to how much interest I’ll be charged?
Yes. It’s called a ceiling, or lifetime cap. This is a guarantee that your interest rate will never exceed a designated percentage. For instance, if your introductory rate was 5% and you have a lifetime rate cap of 6% (meaning that your interest rate can never increase more than 6% during the life of the loan) then your ceiling would be 11%.

What are the benefits of an ARM?

‘ With a lower initial interest rate (usually 2% to 3% lower than fixed-rate mortgages), qualifying is easier and the payments are more manageable at first.
‘ You may qualify for a larger loan than you would with a fixed-rate mortgage.
‘ If you’re only planning to stay a short time the interest rate is likely to stay lower than that of a fixed-rate mortgage.
‘ If you expect regular pay increases that would cover the increase in your interest, or if you believe interest rates will fall, an ARM might be the wiser choice.
· A few words of caution:

Negative Amortization -This happens when a lender allows you to make a payment that doesn’t cover the cost of principal and interest. Watch for this, it may be used as a lure to get you into a home with the promise of low initial payments. Or, a lender may give you a payment cap instead of a rate cap. In this mortgage arrangement, if interest rates increase, your monthly payments could stay the same – but the higher interest will still be charged to your loan, adding to it instead of reducing it. Either way, if you find yourself with a negative amortization ARM, you’ll be adding to your debt.

Discounted interest rates – Sometimes a lender will advertise an unusually low initial rate. This is a discounted rate, and it’s essentially a marketing tool. If your ARM offers a discounted interest rate you are certain to see an increase at your next adjustment period, even if interest rates don’t change.

What is a VA Loan?
Administered by the Department of Veterans Affairs, these special loans make housing affordable for U.S. veterans. To qualify you must be a veteran, reservist, on active duty, or a surviving spouse of a veteran with 100% entitlement.

A VA loan is simply a fixed-rate mortgage with a very competitive interest rate. Qualified buyers can also use a VA loan to purchase a home with no money down, no cash reserves, no application fee and reduced closing costs. Some states allow a VA loan for refinancing as well.

Many lenders are approved to handle VA loans. Your VA regional office can tell you if you’re qualified.

What is a FHA Loan?
FHA loans are designed to make housing more affordable for first-time home buyers and those with low to moderate income.

Both fixed- and adjustable-rate FHA loans are available, and in most states, an FHA loan can be used for refinancing. The difference is, they’re insured by the U.S. Department of Housing and Urban Development (HUD). With FHA Insurance, eligible buyers can put down as little as 3% of the FHA appraisal value or the purchase price, whichever is lower. Qualifying standards are not as strict and the rates are slightly better than with conventional loans.

Convertible ARMs
Some adjustable-rate mortgages allow you to convert to a fixed rate at certain specified times. This mitigates some of the risk of fluctuating interest rates, but there will be a substantial fee to do it. And your new fixed rate may be higher than the going fixed rate.

Two-Step Mortgages
This is an ARM that only adjusts once at five or seven years, then remains fixed for the duration of the loan. Not only will you benefit from a lower rate for the first few years, but the new fixed rate cannot increase by more than 6%. It may even be lower, depending on market conditions. Then again, you also run the risk of adjusting to a much higher rate.

Convertible Loans
Another ARM choice, the convertible loan offers a fixed rate for the first three, five or seven years then switches to a traditional ARM that fluctuates with the market. If you strongly believe that interest rates will fall a convertible loan might be a smart move.

Balloon Mortgages
These short-term loans begin with low, fixed payments. Then, in five, seven or ten years a single large payment (balloon) for all remaining principal is due. While this saves money up front, coming up with a large payment at the end of the loan may be difficult. Some lenders will allow you to refinance that payment, but some won’t, so be sure you know what you’re getting into.

Graduated Payment Mortgage (GPM)
With a GPM you pay smaller payments that gradually increase and level off after about five years. Lower payments can make it possible for you to afford a bigger home, but they’ll be interest-only payments, adding nothing to the principal. This could put you in a negative amortization situation.

How Can I save on a Fixed Rate Mortgage?
Short Term Mortgages
You don’t have to finance your home for 30 years. Granted, the payments will be lower, but you’ll be paying them longer. You could, instead, opt for a period of 20, 15 or even 10 years, pay your home off sooner and save in interest.

Furthermore, lenders offer much more attractive interest rates with short-term loans, so your payments may not be as much as you’d think.

The table below shows you the interest savings on a $100,000 loan at 8.5% interest:

30 yr

$768.91

$176,808.95

20 yr

$867.83

$108,277.58

15 yr

$984.74

$ 77,253.12

By paying $215.83 more a month on a 15-year mortgage, you’d save $99,555.83 in interest over a 30-year loan – and own the house in half the time.

What Determines the Cost of a Mortgage?
There are five factors that determine the ultimate cost of a mortgage.

The principal, or amount of the loan, is the total amount you borrow (the purchase price minus your down payment).

The interest rate adds significantly to the cost of your mortgage. Fixed or adjustable, the interest paid at the end of the loan can exceed the original cost of the home itself. For instance, a $100,000 loan balance at 8.5% for 30 years will cost you $277,000 by the time the loan is retired.

The term of the loan is the length of time until the loan is paid off. A longer term means more interest and higher cost.

Points are interest paid on the loan and they’re purely optional. You pay points at closing if you want to reduce the interest rate and make your monthly payments smaller. One point equals one percent of the loan amount.

Fees are paid to the lender at closing to cover the costs of preparing the mortgage. They can vary according to where you live and what type of loan you’re securing.

While points and fees are not financed, they still contribute to the cost of the mortgage.

What is Private Mortgage Insurance?

Private Mortgage Insurance, or PMI, is insurance purchased by the buyer to protect the lender in case the buyer defaults on the loan. PMI is generally applied when you put down less than 20% of the home’s purchase price. The reason is this:

With 20% down, you are considered a low risk. Even if you default the lender will probably come out ahead because they’ve only loaned 80% of the home’s value and they can probably recoup at least that amount when they sell the foreclosed property.

But with 5% or 10% down, the lender has a lot more invested in the loan and if you default, they will almost surely lose money. This is why lenders require buyers to purchase PMI if they put down less than 20%. It’s insurance that, no matter what happens, the lender will recoup its investment.

How does PMI increase your buying power?
In simplest terms, PMI allows you to put less money down, and the benefits are as follows:

You can read the entire article at:

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