Choosing The Right Home Mortgage Loan
Are you ready to buy a home? Most people who buy homes have to borrow money from a lender in order to purchase a home. The money received is called a mortgage loan. There are wide varieties of mortgage options available for you to choose from even if you have less than perfect credit. Be sure to research all of your financing options before you commit yourself to a mortgage that isn’t the right one for you.
Mortgage Defined
Contrary to popular belief a mortgage is not a loan. A mortgage is the lien placed on a property that secures the loan. In judicial States a mortgage is used to secure the loan. In these States the mortagee (lender) holds a lien on the property and can foreclose on the lien if the mortgagor (borrower) defaults on the loan. In non-judicial states a deed of trust secures the loan. In these States a third party (trustee) holds the lien for the lender. If the borrower defaults on the loan the lender can foreclose on the property. The word mortgage is an old English word derived from two French words, mort (dead) and gage (pledge). Under English common law if the borrower did not pay what was owed then the lender would receive the property. The borrower only had the right to live on the property, defaulting on the debt terminated their right.
Three Components Of A Mortgage Loan
- The loan amount is the total amount being financed.
- The interest rate is a monthly recurring fee that the lender charges for the borrowed funds. This fee is expressed as a percentage of the loan and is calculated yearly. The lower the interest rate agreed in the terms of your loan the lower your monthly payment.
- The term of the loan is the length of time it will take to pay off the loan. A term is expressed in months or years and is determined by the borrower and lender at the time the loan is processed.
Mortgage Loan Down Payments
Down payment requirements vary from 5% to 20%. If you put down less than 20% you will be required to purchase private mortgage insurance. The extra insurance is used to protect the lending institution in case you fail to make your mortgage payments. The cost of the insurance will be added to your monthly payments and your closing costs. FHA and VA mortgage loans do not require the borrower to purchase private Mortgage insurance. The size of your down payment affects the size of your loan. The larger the sum of money provided in your down payment, the smaller your loan and monthly payments will be. Many lenders view large down payments as secure because the borrower has invested more of their own money in the property.
Factors That Affect Your Mortgage Payments
- The amount of your down payment
- The amount of your mortgage loan
- Your mortgage interest rate
- The length of your mortgage or the repayment term of your mortgage
Mortgage Payments
Most mortgage loans are paid off in incremental payments, called amortization, which slowly decreases the principal of the loan. At the beginning of your loan most of your payment goes towards paying the interest on the loan rather than the principal. The length of time this lasts depends on the term of your loan. Mortgage payments are made up of four components:
- The principal is the total amount of money being borrowed from the lender
- Interest is the money the lender charges you for the loan and is a percentage of the total amount of the money you are borrowing. It is based on the outstanding principal balance for the past month
- Taxes are charged as a percentage and are based on the property value. A portion of your property tax is added to your monthly payment and is held in escrow until property taxes are due
- Insurance payments for hazard insurance and mortgage insurance are included in the payment. Hazard insurance protects the owner and the lender from property losses and mortgage insurance protects the lender from loss due to homeowner default
Mortgage Options
Nearly 70% of homebuyers choose Fixed Rate Mortgages (FRM) loans. The characteristic that makes this loan type so popular is its stability. A Fixed Rate Mortgage offers an interest rate that will never change over the life of the loan, regardless of any interest rate fluctuations in the future. As a result, monthly payments on the principle and interest throughout the life of the loan, whether 30, 20, or 15 years, are also fixed for the life of the loan. With a FRM mortgage the borrower will have a predictable monthly house payment for as long as they have the loan. The term of your FRM can be 30, 20, or 15 years.
- 30-year Fixed Rate Mortgage gives you the maximum tax advantage by having the highest interest deduction. Your payments will be lower and your tax deductions will be higher. For foreclosure buyers who are buying a home to live in, a 30-year FRM may be your best option
- 20-year Fixed Rate Mortgage has a lower interest rate than a 30-year FRM and shortens your mortgage by 10 years. This loan term is not widely offered by banks and lenders so you may have to shop around to find it. With a 20-year FRM your payments will be higher but your interest rates will be lower. The advantages of this term are that your mortgage will be paid-off earlier and equity in your home will increase at a faster rate then with a 30-year FRM
- 15-year Fixed Rate Mortgage has the same benefits as the 20-year FRM. Your mortgage is paid off faster, the equity in your home will increase at a faster rate, your interest rates will be lower, and your monthly payments will be higher than a 30-year FRM
Adjustable Rate Mortgages (ARMs) are loans that have an interest rate that changes periodically based on changes in a pre-selected index. As a result, the interest rate on the loan and monthly payments will fluctuate based on changing market rates and economic trends. There is always a floor cap, payment cap, and life cap on the rate. Arms initially offer lower interest rates and payments, but they don’t offer stability or a set monthly payment. While ARMs are tempting because of their initial offer of lower interest rates and monthly payments, they can prove devastating for the unprepared homebuyer. All rate increases are specified in the ARM disclosure received from the lender. Before signing an ARM agreement be sure that you read and understand all of the terms and conditions of the mortgage. An Adjustable Rate Mortgage is fine for foreclosure investors, or a short-term homebuyer but is not recommended for homeowners who plan to live in a home for a long period of time.
The Federal Housing Administration (FHA) provides mortgage insurance on loans made by FHA approved lenders. Since its inception in 1934 The Federal Housing Administration (FHA) has insured over 34 million properties. FHA mortgage insurance provides lenders protection against loses if homeowners default on their mortgage loans. The FHA will pay a claim to the lender in the event of a homeowner defaults. Loans must meet requirements established by the FHA to qualify for insurance.
- The FHA insures mortgages on single-family, multi-family, and mobile homes
- FHA insured loans have a low 3% down payment and money can come from a family member, employer, or a charitable organization as a gift
- FHA insured loans have competitive interest rates because the Federal Government insures them
- Allows a first time homebuyer, who might otherwise not qualify for a home loan, to obtain a loan because the risk is removed from the lender by the FHA mortgage insurance
- FHA insured loans are a