A Quick Guide to Mortgages
Basic explanations to terms used in loan applications and types of mortgages in a guide form.
The City of Houston has a website which provides assistance to people who wish to own a home. The site may not be for you, but it does have useful information on it. One downloadable file has a list of affordable lenders for home mortgages in the Houston area. Below is a list of terminology connected with mortgage loans. I found good information on the internet about lenders and mortgages, but two sites that are worth a mention are Wikipedia and About.com. They have various articles concerning this topic. I would like to stress asking a lot of questions when obtaining a loan, so you understand what is happening. Some questions you should ask are the following:
1. What expenses will the escrow account cover, and how much will you be required to put into it each month? Your property taxes and home owner’s insurance are typically paid out of this account, but you need to know. I thought my insurance was going to be paid by one lender through this account, only to find out that I had to pay for it myself.
Lenders want to set the monthly rate for this account for more than the expenses, so they will have any changes in cost covered, but they are only allowed to keep so much money in the account for next year.
2. How much will the PMI or borrower’s insurance be? When can you stop paying it? Lenders want to insure that you will be able to make loan payments, so they require that you purchase an insurance to cover the payments if something happens to you. In most cases, this insurance benefits the lender more than you, so when you have the opportunity, you may want to cancel this cost.
3. Are their any penalties for paying off the loan early? Some lenders do not want you to pay down the principal of your loan, since this will lower their profit by lowering the interest that you will need to pay. By paying a little towards the principal each month, you will save money in the long run. Usually, your loan payments will be balanced more to paying the interest than the actual amount borrowed (the principal), when you start making payments.
Look at different lenders, and find out on what items they are willing to negotiate; you may save yourself a good deal of money. Read the section below about credit scores to understand how this number will effect your mortgage payment and your insurance cost.
Types of Mortgages
Conventional fixed-rate mortgage– allows you to make a fixed monthly payment at a fixed interest rate for the life of the loan (mortgage). This type of loan offers you stability and long-term tax advantages. Interest rates are usually higher than other loans.
Variable rate mortgage (Adjustable rate mortgage)- your payment is fixed, but your interest rate floats. This is good if the rates are high and you expect them to fall soon. The changes in the rate could possibly cause changes in the monthly payment amount, the loan term, and the principal. Some plans have rate or payment caps.
Renegotiable Rate Mortgage- your interest rate and principal payments are constant for several years, and then could be renegotiated.
Balloon Mortgage- your monthly payments are based on a usually short-term fixed interest rate. The payments may cover only the interest payments, so that the principal is due at the end of the term of the loan. Offers low monthly payments, but little or no equity in your home.
Reverse Mortgage- this is a loan for people who have paid for their homes, and they wish to use their equity in the home to give them an income, so this mortgage is not for home buyers.
Interest Only Mortgages– this is where you only pay on the interest of a loan, but not the principal. You will have no equity in the house. If you are planning to sell the house soon (or live in it for a short time), and you are not concerned with building up your equity, this loan may be good for you.
Terms
Amortization- the amount of time it will you take you to pay off the loan. The longer you pay, the lower your monthly payments will be.
Annual percentage rate (APR)- the cost of borrowing, expressed as a yearly rate.
Cap- a limit on the amount the interest rate is allowed to climb on an adjustable rate mortgage, either over the life of the loan or at each rate adjustment.
Closing costs- Fees associated with the buying and selling of property and the setting up of the mortgage. These costs can be negotiated within reason.
Escrow account- an account where money is held to pay certain expenses, such as taxes and insurance. When setting up your loan, find out what will be paid from this account, so you will be prepared for an expense not covered by this account. The down payment for a property is held in this type of account.
Loan origination fee (loan application fee)- a charge from the lender to cover costs in preparing the paperwork for the mortgage.
PITI (principal, interest, taxes, and insurance)- the four components that can be included in your mortgage payment.
Points- a charge that is designed to increase the bank’s profit on your mortgage and cover closing costs.
Title charges- a title insurance required by lenders to protect them against someone making a claim to the property.
Pre-approval/Pre-qualification- If you pre-qualify for a loan, the lender has taken a general look at your credit, and they think you might be some one they could loan too. If you pre-approve for a loan, the lender has taken a close look at your credit to determine that they will lend you the money for a home.
Private mortgage insurance (PMI)- an insurance which protects the lender if you default on the loan. After you have at least twenty percent equity in your property, you can ask your lender to cancel this insurance.
Appraisal fee- a lender can require you to pay for an appraisal of the property to determine if it is worth less than what you are asking for in the loan.
Survey fee- a lender can require that a survey of the land be prepared to determine what the title to the land includes.
Property insurance- the lender will require to see proof that your house is insured. This is to ensure that if something happens to the property, it will (or could be) repaired.
Prepaid taxes or utilities- money owed to the seller if he has paid taxes or utilities beyond the closing date.
Services charges- fees connected with connecting the property services such as phone, cable, utilities.
Attorney’s fees- if you use an attorney to help with the purchase or selling of the home, you will have to negotiate their fees. An attorney is not always involved in this process.
Real estate fees- fees paid to the broker, which is built into the price of the home.
