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What is a mortgage?
Generally speaking, a mortgage is a loan obtained to purchase real
estate. The "mortgage" itself is a lien (a legal claim) on the home
or property that secures the promise to pay the debt. All mortgages
have two features in common: principal and interest.
What is LTV (Loan-to-Value)?
The loan to value ratio is the amount of loan compared with the
purchasing price or appraised value of the property.
The LTV ratio reflects the amount of equity borrowers have in
their properties. The higher the LTV the less cash homebuyers are
required to payout of their own funds. So, to protect lenders
against potential loss in case of default, higher LTV loans (80% or
more) usually require mortgage insurance policy.
What are the advantages and disadvantages of
each type of loan?
Fixed rate mortgages - 15 year and 30 year:
Advantages - an extremely stable choice. payments of principal and
interest remain the same for the life of the loan; protected from
rates going up. can refinance if rates go down.
Disadvantages - higher interest rate; rate could not change if
interest rates drop.
Advantage of a 15-year fixed mortgage is that loan is made at a
lower interest rate. Higher monthly payments pay more principal,
which means principal will be paid off sooner and save in interest
payments.
Disadvantage of 30 year fixed mortgage, in the first 23 years of
the loan, more interest is paid off than principal.
Adjustable rate mortgages - 3/1 ARM, 5/1 ARM, and 7/1
ARM:
Advantages - lower initial interest rates, lower initial monthly
payment; qualify for a larger loan amount.
Disadvantages - more risk if rates go up; payments may change
over time.
Can I pay off my loan ahead of
schedule?
Yes. By sending in extra money each month, or making an extra
payment at the end of the year, you can accelerate the process of
paying off the loan. When you send extra money, be sure to indicate
that the excess payment is to be applied to the principal.
Most lenders allow loan prepayment, though you may have to pay a
prepayment penalty to do so. Ask your lender for details.
How large of a down payment do I
need?
There are mortgage options now available that only require a down
payment of 5% or less of the purchase price. But the larger the
down payment, the less you have to borrow, and the more equity
you'll have.
Mortgages with less than a 20% down payment generally require a
mortgage insurance to secure the loan. When considering the size of
your down payment, consider that you'll also need money for closing
costs, moving expenses, ect.
What is prepaid interest?
This is interim interest that accrues on the mortgage loan from
the date of the settlement to the beginning of the period covered
by the first monthly payment. Since interest is paid in arrears, a
mortgage payment made in June actually pays for interest accrued in
the month of May. Because of this, if your closing date is
scheduled for June 15, the first mortgage payment is due August 1.
The lender will calculate an interest amount per day that is
collected at the time of closing. This amount covers the interest
accrued from June 15 to July 1.
Do I need title insurance?
The lender will check the title to the property to make sure there
are no outstanding liens or title problems. The lender requires,
and sometimes will arrange for, title insurance to protect the
property against unforeseen problems. This is called a
“lender’s” title insurance policy. You may want
to obtain title insurance to protect your own interest in the
property. This is called an “owner’s” title
insurance policy. These policies ensure that your property is free
and clear of any title defects, claims or encumbrances.
When do I have to pay PMI?
If the down payment on your home is less than 20%, your lender
will probably require that you get private mortgage insurance
(PMI). This insurance insures the lender against possible default
on the loan. It is not to be confused with mortgage life insurance
or homeowners insurance.
The cost of PMI is divided into two parts. The first part is a
payment made at the loan closing. The second part is an ongoing
payment made each month along with the principal and interest
payment.
Normally, PMI may be removed if your LTV (loan to value) is less
than 80%. It also may be removed if you have obtained an
independent appraisal stating that amount of the loan to appraised
value is 80% or lower.
Some lenders do not require PMI. Instead, they may increase
their origination fee and/or the interest rate on the loan. This
can represent a significant advantage to the borrower since PMI
premiums are not deductible for tax purposes and mortgage interest
is usually deductible.
What are closing costs?
Closing costs and procedures vary from state to state and from
county to county. In some jurisdictions, an attorney represents the
lender. In others, the title company represents the lender. There
may be state or county transfer taxes to be paid. There may also be
fees for recording certain documents. There are also standard
charges that are paid at all closings. Taxes, title insurance
premiums, and interest on the loan pro-rated from the closing date
to the end of the month.
Prior to closing, be sure to inquire if the lender requires an
escrow account set up for the payment of the real estate taxes and
homeowners insurance. Some lenders will waive the escrow
requirements if the down payment is above a certain limit.
Depending on when you close and when real estate taxes are paid in
your jurisdiction, the cash required to set up the real estate tax
escrow could represent one-half to three-quarters of the annual
real estate tax bill.
It is important that you review what the closing costs will be
with your lender and attorney. This should take place far enough in
advance of the closing to allow yourself time to obtain the
necessary funds to pay the closing costs.
What is an Escrow Account?
A n escrow account is a place to set aside a portion of your
monthly mortgage payment to cover annual charges for homeowner's
insurance, mortgage insurance (if applicable), and property
taxes.
Escrow accounts are a good idea because they assure money will
always be available for these payments. If you use an escrow
account to pay property tax or homeowner's insurance, make sure you
are not penalized for late payments since it is the lender's
responsibility to make those payments.
Who are involved at closing?
T the final step before you own your new home or complete the
refinancing of your current home. At the closing, you, the seller,
the lender and the attorneys for all involved validate, review and
sign all documents relating to the purchase or refinance. The
lender provides the check for the loan amount. You receive the
title to your property and the keys to your new home.
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