Adjustable Rates / ARMs

ARMs (adjustable rate mortgages/loans) are the easiest loans to qualify for. 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. It is important to understand how these can adjust!

After your fixed interest rate period ends, your interest rate adjusts up or down once per year (or can adjust monthly), according to the market. This means your monthly payment can change from year to year 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’d typically find with a fixed-rate loan.

The rates are tied to one of four government indexes, 6-month T-Bill, 1 Year Treasury Securities, 11th District Cost of Funds, and the LIBOR-the London loan index. The middle two are the most popular. The bank takes the index and adds on their margin, or profit. This is the interest rate you pay. The lower the margin the better. This will differ depending on what index you use.

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.

Contingencies

These are conditions to be satisfied by a certain date to the satisfaction of the person requesting them. There are usually several contingencies to be met in a sale: two major ones are loan approval and physical inspections.

Conventional Loans

The phrase “conventional loan” refers to any loan that’s not backed or guaranteed by the federal government. And are “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’ll 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.

Down Payment

This 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 will vary based on the type of loan you’re getting,. Often a larger down payment generally means better loan terms and a cheaper monthly payment. But it is also wise to keep some money on hand for unexpected expenses. Conventional loans may require as little as 3% down, but you’ll have to pay a monthly fee (known as private mortgage insurance) to compensate for the small down payment. With a higher down payment, like 20% down, most get a better interest rate, and don't pay for private mortgage insurance.

Escrow

Lenders set up an escrow account and the amount is dependent on how much your insurance and property taxes are each year. This account collects your money so the lender can help you pay property taxes and homeowners insurance on your behalf. Your escrow account is managed similar to a checking's account. To fund your account, escrow payments are added to your monthly mortgage payment. 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 property taxes and homeowners insurance bills yourself.

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. This reduces the risk lenders are taking on by lending you the money; this means lenders can offer these loans to borrowers with lower credit scores and smaller down payments.

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’ll pay 4% interest until you pay off or refinance your loan. Fixed-rate loans offer a predictable payment each month, which makes budgeting easier.

Home Inspection

It is important to get the home inspected by a licensed contractor who does professional home inspections. Get a thorough inspection from the foundation to the chimney to the main line sewer, with a written report of any problems. The home inspection, about $ 375-500, is paid for by the buyer. (Additional inspectors, such as chimney inspectors or geological inspectors, cost extra.) It’s worth it, and can really educate you about your house and problems to watch for.

Home Warranty Plan

This is a maintenance insurance plan for your home. The policy covers most of the problems that can go wrong with a home during the first year. It is very important to understand that they do not cover everything. Read the policy. They may exclude things that you think would or should be covered.

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.

Interest Rate

An interest rate is a percentage that shows how much you’ll pay your lender each month as a fee for borrowing money. There are two types of mortgage interest rates: fixed rates and adjustable rates.

Loan Info

Your loan is attached to the property through a trust deed. This is a legally recorded lien against the property. When I use the term lender, its a generic term meaning a bank, credit union, or a mortgage banker or broker. Its important that you shop for the best loan and I recommend contacting more than one lender. The lender you select should be somebody that you can “go live” with when you have questions.

Loan Servicer

The loan servicer is the company that’s 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.

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’re applying for a mortgage.

Misc. Loan Fees

Besides the points plus a few hundred dollars, lenders charge for a few other items. Appraisal, Credit Report, Tax Service, etc. are standard ones. You will receive an estimate of these costs from the lender once you have filled out your application. This is so there are no surprises just before closing. How much are these costs? Usually about 1% to 3% of your loan. You pay them at closing in one lump sum.

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.

Mortgage Term

Your mortgage term refers to how long you’ll make payments on your mortgage. The two most common terms are 30 years and 15 years. A longer term typically means lower monthly payments. A shorter term usually means larger monthly payments but huge interest savings.

Points & Loan Fees

Anytime you hear the word point, just think “percent.” 1 point means 1% of the loan amount. While discussing loan fees, you may hear “2 points plus $ 350″. This means that bank charges 2% of the loan amount and $ 350.

Private Mortgage Insurance (PMI)

Private mortgage insurance is a fee you pay to protect your lender in case you default on your conventional loan. In most cases, you’ll need to pay PMI if your down payment is less than 20% or attempt to get a loan from the bank greater than 80% of property value. This coverage protects the bank in case you default on the loan. PMI is payable until the loan-to-value lowers to 80%. PMI may be a tax-deductible expense. 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’s also a lender-paid PMI, in which you pay a slightly higher interest rate on the mortgage instead of paying the monthly fee.

Promissory Note

A promissory note (or mortgage note) is like an IOU that includes all of the guidelines for repayment. It is the written promise or agreement to pay back the loan using the agreed-upon terms. And will 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.

Principal

Your loan principal is the amount of money you have left to pay on the loan. For example, if you borrow $300,000 to buy a home and you pay off $10,000, your principal is $290,000. Part of your monthly mortgage payment will automatically go toward paying down your principal. You may often also put extra money toward your loan’s principal by making extra payments; this is a great way to reduce the amount you owe and pay less interest on your loan overall.

Short Sale

This is when the owner/seller owes more money on the property than it can be sold for. Many times (but by no means always), in situations like these, the bank will allow a “short sale” for a lower amount than what is actually owed on the loan.

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.

Termite Inspection

The home that you want to buy will likely be inspected by a licensed termite professional. This is part of the contract; check with your lender to learn if they will require it. The termite inspection will cover the sub area to the attic. The inspector will advise you of any problems with termites, dry rot, or cellulose debris (junk wood under the house that termites can eat), shower pan leakage, etc. Generally, the Seller will pay for any needed work to get a “clear” termite report, although this is negotiable.

Title Insurance

Although this is negotiable, the buyer’s title insurance is usually paid by the Seller and the lenders title insurance is paid for by the buyer to insure proper ownership of the property. The title company will search each property to uncover liens of all types, easements, and any other problems that could plague a new buyer and “cloud” the title to the property. They make sure that the property taxes are paid, the old loans are paid off, and the liens are removed.

USDA Loans

These 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 can’t exceed roughly 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’ve served our country. They let veterans buy a home with 0% down and no private mortgage insurance.