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A mortgage
requires you to pledge your home as the lender's security
for repayment of your loan. The lender agrees to hold the title or deed
to your property (or in some states, to hold a lien on your title or deed) until you
have paid back your loan plus interest.
Mortgage
Amount and Term
The mortgage amount is the amount of money you borrow from
a lender to pay for your house. The term is the number
of years over which you can pay back the amount you
borrow.
The length of your mortgage repayment period will
directly affect your monthly mortgage payments. For the
same mortgage principal
amount, you will find that the shorter your repayment
period is, the higher your monthly payments will be, but the
total interest you pay over the life of the loan will be
less. On the other hand, the longer your repayment
period is, the lower your monthly payments will be, but the total
interest you pay over the life of the loan will be more.
The most popular mortgage term is 30 years. By
extending payment over 30 years, you keep your monthly
housing costs low. If you can afford higher monthly
payments, you can select a mortgage term that is shorter:
there are 20-year, 15-year, and even 10-year
fixed-rate mortgages
available from most mortgage lenders.
Amortization
Over time, you will repay your mortgage through
regular monthly payments of principal and interest. During the
first few years, most of your payments will be applied
toward the interest you owe. During the final years of
your loan, your payment amounts will be applied primarily
to the remaining principal. This type of
repayment method is called amortization.
Fixed Interest
Rate
You can choose a mortgage with an interest rate that
is fixed for the entire term of the loan. A fixed-rate
loan gives you the security of knowing that your interest
rate will never change during the entire term of the
loan.
Adjustable
Interest Rate
An adjustable-rate mortgage (called an ARM) has
an interest rate that will vary during the life of the
loan, with the possibility of both increases and
decreases to the interest rate and consequently to your
mortgage payments.
Down Payment
The down payment is the part of the purchase price that the
buyer pays in cash and does not finance with a mortgage.
Your down payment will reduce the amount you’ll need
to borrow. So, the more cash you put down, the smaller
the size of your loan, and the smaller the amount of your
mortgage payments.
Lenders often view mortgages with larger down payments
as more secure because you have more of your own money
invested in the property. However, you may have as little
as 3 percent to 5 percent of the purchase price for a
down payment. Lower down payments help many people afford homes
of their own sooner.
Closing Costs
The closing (or, in some parts of the country,
settlement) is the final step, during which ownership of the home
is transferred to you. The purpose of the closing is to
make sure the property is ready and able to be
transferred to you from the seller. Items to be paid at
closing vary from state to state and may include transfer taxes and
recordation taxes. Other closing costs are title
insurance, the site survey fee, attorney fees, loan discount
points, and document preparation fees. Usually, closing
costs are expressed as a percentage of the sales price or loan amount.
Typically, costs range from 3 percent to 6 percent of
the sales price of your home. Sometimes, you can negotiate to have
the seller of a property pay some of your closing
costs.
Discount
Points
In the special vocabulary of mortgage lending, “points” are often used
to describe a type of fee that lenders charge. (The full term
to describe this fee is “discount points.”)
Simply put, a point is a unit of measure that means 1
percent of the loan amount. So, if you take out a
$100,000 loan, one point equals $1,000. If you take out a
$50,000 loan, one point equals $500. Discount points
represent additional money you can pay to the lender at
closing. In return, the lender will provide you with a lower
interest rate on your loan. Usually, for each point you pay for a 30-year
loan, your interest rate is reduced by about 1/8th (or .125) of a
percentage point. So, if the current interest rate on a 30-year
mortgage is 8.5 percent, paying 1 point means you could
get that mortgage for an interest rate of 8.375 percent.
For example, you are shopping for a 30-year mortgage
loan. A lender quotes you an interest rate for a 30-year,
$50,000 mortgage at 8.5 percent with no discount points. If
you like that rate, you can choose not to pay any
discount points at closing and pay 8.5 percent interest. If
you want to pay less interest, ask the lender to quote
you interest rates with your paying 1, 2, or 3
discount points. Usually, the longer you plan to stay in your home,
the more sense it makes to pay discount points.
Conforming
and Nonconforming Loans
The term “conforming”, as opposed to “nonconforming”, is
sometimes used to explain loans that offer terms and
conditions that follow the guidelines set forth by Fannie
Mae and Freddie Mac. Fannie Mae and Freddie Mac are two private,
secondary mortgage market companies that buy mortgage loans from
lenders, thereby ensuring that mortgage funds are available at all
times in all locations around the country.
The most important difference between a loan that
conforms to Fannie Mae/Freddie Mac guidelines and one
that doesn't is its loan limit. Fannie Mae and Freddie
Mac will purchase loans only up to a certain loan limit
(currently $240,000).
So, if your loan amount will be for more than the
conforming loan limit of $240,000, you may be asked to
pay a higher interest rate on your mortgage.
Your mortgage loan may also follow slightly different
underwriting requirements, particularly in regard to your
required down payment
amount. Check with your lender about this if you are
taking out a large loan amount. Nonconforming loans are
sometimes called jumbo
loans.
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