General Financing Options - Part 1

With so much talk about mortgages lately I thought it would be beneficial to review the basics of a mortgage and how you can qualify for one. This is part 1 of a 3 part series.

1. 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.
2. WHAT IS A LOAN TO VALUE (LTV)? HOW DOES IT DETERMINE THE SIZE OF MY LOAN?
The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay, $2,500 as a down payment. The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to pay out 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.
3. WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES
OF EACH?
Fixed Rate Mortgages: Payments remain the same for the life of the loan
TYPES
§ 15-year
§ 30-year
ADVANTAGES
§ Predictable
§ Housing cost remains unaffected by interest rate changes and inflation
Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits
TYPES
§ Balloon Mortgage: Offers very low rates for an Initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is due or refinanced (though not automatically).
§ Two-Step Mortgage: Interest rate adjusts only once and remains the same for the life of the loan.
§ ARMS linked to a specific index or margin.
ADVANTAGES
§ Generally offer lower initial interest rates.
§ Monthly payments can be lower.
§ May allow borrower to qualify for a larger loan amount.
4. WHEN DO ARMS MAKE SENSE?
An ARM may make sense, if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.
5. WHAT ARE THE ADVANTAGES OF 15- AND 30-YEAR LOAN TERMS?
30-Year:
In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions.
As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.
15-year:
Loan is usually made at a lower interest rate.
Equity is built faster because early payments pay more principal.
6. 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.
7. ARE THERE SPECIAL MORTGAGES FOR FIRST-TIME HOMEBUYERS?
Yes. Lenders now offer several affordable mortgage options, which can help first-time
homebuyers overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.
8. 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 policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and possibly repairs and decorating.