The Mortgage Smorgasbord

 

Knowing Your Mortgage Numbers & Terms ©

Most

 

Fixed-Rate Mortgages

Looking for stability? Found your dream home and plan to stay there for the next 15 years? Investigate a fixed-rate mortgage.  Whether you go with a 15-, 30- or the new 40-year fixed-rates, these types of mortgages are like getting an insurance policy on your interest rate — the rate stays the same, so your monthly payment also stays constant.  What is the downside of this most common type of mortgage? While the rates never go up, they also never go down, unless you refinance.

 

Adjustable Rate Mortgages

Adjustable rate mortgages, or ARMs, have become increasingly popular over the last few years because they start with an attractive, lower fixed-rate, and after an initial period, they adjust according to a specified index. They can look confusing, what with the 3/1, 5/1, 7/1, 10/1 and a handful of other options, but they’re easy to read. The first number indicates how many years your interest rate is fixed; the second number indicates how often the rate adjusts after that initial period is over. For example, in a 5/1 ARM, your interest rate stays the same for the first five years, and then adjusts every year after that, up to a cap that you and your lender agree on.  What is the downfall of these low-rate wonders?  After your initial fixed-rate period is over, if interest rates rise, so does your monthly payment. If you can live with that, or if you expect to move in the next few years, then an ARM can save you money over the short term.

 

Interest-Only Mortgages

Another increasingly popular mortgage option is an interest-only mortgage. This type of mortgage is best for people whose income comes from infrequent commissions or bonuses, or for those who expect to earn a lot of money over the next few years. With interest-only loans, you pay only the interest on your mortgage for a fixed period of time (usually 5 or 7 years). At the end of this period, you can refinance, pay off the mortgage in a lump sum, or start paying off principal (in addition to your interest payments).

 

Balloon Mortgages

These mortgages are similar to an ARM, in that you get a low initial interest rate, but after a set number of years — usually 5 or 7 — the mortgage ends and you have to either pay off the remainder (with a “balloon” payment, hence the name) or reset the mortgage at current interest rates. Payments are amortized over 30 years at an interest rate that’s typically lower than a fixed-rate mortgage, so if you plan to move before the balloon maturity date you can usually save money. But if you plan on staying put, and interest rates rise dramatically over the next few years, your payments after a reset could increase substantially as well.

 

Low-Doc / No-Doc Mortgages

If you are self-employed or have bad credit but a lot of cash, a low-doc or no-doc mortgage is a good option. When considering you for a low-doc mortgage, lenders typically look for two of three requirements: assets, income and credit.  If you meet two of the three, for the price of a higher interest rate you can get mortgage approval without having to provide a lengthy financial history, but times have changed!  Now banks and mortgage companies have tightened their criteria for all customers.  It is very important to have good credit history and money in the bank.

 

 

A Guide to General Mortgage Terms:  Sorting Out the Acronyms!

 

With all the complicated terminology, acronyms and industry lingo used in the mortgage world, even the expert linguist can sometimes be baffled.  Collected below are a few of the more common terms used in lending today.  If you feel like you and your lender are speaking different languages, reading the definitions listed below can help you get on the same page.  In addition, look to flow chart for a visual map on how the lending process works.  Most importantly, when discussing mortgages, make sure you talk to a professional that you can trust.  Lydia volunteers to go with her clients when they speak with a Mortgage Broker to help them understand the process and get their questions fully answered.  It is highly important to review your entire financial situation to make sure you will get your mortgage funded on terms you can afford to close escrow.  It is terrible to face the disappointment of being turned down by the lender in the final stages of your purchase.  Your careful preparation and the guidance of an expert mortgage broker will protect you from last minute funding problems.   I want you to have a successful home purchase with minimal stress in the process!

 

APR (Annual Percentage Rate)

APR is a number that the Federal government calculates to show                               

the total yearly cost of a mortgage as expressed by the actual rate

of interest paid. This number is calculated using a standard formula,

which includes the base interest rate, points and any other add-on fees

and costs of your mortgage.

 

Conventional Loan

Any non-government loan program is a conventional loan, most of

which are provided by banks, savings and loans, mortgage bankers

and mortgage brokers (basically, the private sector).

 

FHA (Federal Housing Administration)

An agency of the Department of Housing and Urban Development.

The FHA guarantees certain loan programs for all Americans; insure

loans that are made by approved lenders to qualified borrowers;

and allows low income and/or low down payment loan borrows the

opportunity to purchase a home that they might not have been eligible

for under conventional loan programs.

 

GFE (Good Faith Estimate)

Within 72 hours of signing a residential loan application, the federal

government requires that a good faith estimate is sent to the borrower,

outlining the costs and charges a borrower is likely to incur in

connection with the loan closing. However, the GFE is not a guarantee

that the applicant will be approved for the loan or that the final amount

will be the same figure; the amount (interest rate, terms, conditions)

may change pending final loan approval and down payment terms.

 

MIP (Mortgage Insurance Premium)

The amount that the FHA charges up front when they insure a loan

under one of their programs. The FHA pays the money into a fund where

the money is held until it is headed in the event of a default by a buyer.

 

PMI (Private Mortgage Insurance)

If a mortgage loan exceeds 80% of the sales price of a home, lenders

require insurance coverage that will protect them in the event that a

buyer defaults on their loan. The cost of PMI is typically charged to the

borrower when the loan to value ratio is greater than 80%.

 

Points

An upfront cash payment required by the lender as part of the charge

for a loan, expressed as a percent of the loan charge equal to 3% of

the loan balance.

Pre-approved

A general term that means that a borrower has completed a loan

application and provided their debt, income, and savings information

which an underwriter has reviewed and approved.

 

Prequalification

A preliminary step in the loan application process, a prequalification

is a lender’s written opinion of the ability of a borrower to qualify for

a particular loan amount. The amount pre-qualified by the lender is

determined based on inquiries into the borrower’s debt, income and

savings, and may or may not require a credit check.

 

Ratios

Ratios are used in the lending industry to determine the probability

of a borrower being able to repay a loan – usually this ratio compares

the borrower’s fixed monthly expenses to his gross monthly income.

Certain lenders have different ratio requirements; for example, the

FHA requires that a monthly mortgage payment is no more than 29%

of monthly gross income (before taxes), and that the total of mortgage

payment and non-housing debts is less than 41% of income.

In lending these two figures are represented as 29/41: 29 is the Front-

End Ratio (gross monthly income before taxes divided by monthly

mortgage payment (principal, interest, taxes and homeowners

insurance); 41 is the Back-End Ratio (gross monthly income before

taxes divided by monthly mortgage payment plus non-housing debts,

such as car loans and credit card debt).

 

TLS (Truth in Lending Statement)

A federal law that requires lenders to fully disclose, in writing, the

fees, terms and conditions associated with the loan, including the

annual percentage rate (APR) and other charges.

 

VA (Veterans Administration)

The department of the federal government that handles all programs

associated with veterans of the U.S. military; in the mortgage

industry, the agency guarantees loans that are made to veterans

(similar to mortgage insurance), thereby encouraging lenders to make

mortgages to veterans.

Loan Application

Loan Processing

 

 

Steps in the  LOAN and  LENDING  PROCESS

 

 

     1.   LOAN  APPLICATION

 

     2.   LOAN  PROCESSING

eport     Order & Check Appraisal    

Contact Escrow   Order & Check Credit Report   Order & Check Appraisal 

Order & Check Verification   Order & Check Miscellaneous Docs

Order & Check Verifications     Order & Check Misc. Docs

 

3UNDERWRITING

 Order Mortgage Insurance   Analyze Credit   Analyze Property   Assign Conditions

Order Mortgage Insurance       Analyze Credit       Analyze Property       Assign Conditions

 

 

 

4CLOSING Dept.  /  FUNDING

 Order Docs   Docs Signed & Reverified   Docs Returned & Verified

Final Conditions/Title Rendered   Funds Requested

Order Docs        Docs Signed & Re-verified       Docs Returned & Verified

 

Final Conditions/Title Rendered           Funds Requested

 

 

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