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Mortgage Terminology
It helps to know some of the more common mortgage terms. Have a quick look.
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Mortgage Questions & Answers
Questions
- Why use a Mortgage Broker?
- What is a Mortgage Broker?
- What do Mortgage Brokers Do?
- Got a tip?? Ten tips for anyone investing in residential real estate.
- What is a conventional mortgage?
- What is a fixed rate mortgage?
- What is a variable rate mortgage? or ARM?
- What is a pre-approval Letter?
- What is a down payment?
- How can you pay off your mortgage sooner?
- What are the costs associated with buying a home?
- What should the length of my mortgage term be?
- What are the monthly costs of owning a home?
- Should you go with a short or long-term mortgage?
- How much can I afford to pay for a home?
- What is a home inspection and should I have one done?
- What is the minimum down payment needed for a home?
- Can I use gift funds as a down payment?
- How will child support affect mortgage qualification?
- How does bankruptcy affect qualification for a mortgage?
- What is mortgage loan insurance?
Answers
Why use a Mortgage Broker?
In the past 20 years, independent mortgage brokers have had a significant positive impact on the lending industry. Today the use of a professional mortgage broker is one of the key strategies used by sophisticated Borrowers.
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What is a Mortgage Broker?
A mortgage broker is an independent real estate financing professional who specializes in the origination of residential mortgage loans. Mortgage brokers normally pass the actual funding and servicing of loans on to "Wholesale Lending Sources." A mortgage broker is also an independent contractor working with (on average) as many as 40 lenders at any one time. By combining professional expertise with direct access to hundreds of loan products, your broker provides the most efficient way to obtain financing tailored to your specific financial goals.
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What do Mortgage Brokers Do?
In the volatile home-lending market, Mortgage Brokers can serve as "police," offering their clients security, safety, and peace of mind. One of the Broker's most important functions is escorting your loan application through the entire process, constantly patrolling the component transactions for possible breakdowns. A professional mortgage broker can wade through the mountains of rate data and program options, researching current market conditions to find the most accurate and up-to-date information about cost-effective loan options.
Brokers handle the details. There are literally thousands of variables that can affect the outcome of your mortgage transaction. That's why you need a mortgage broker to act as liaison between the title and escrow company, real estate agent, lender, appraiser, credit agency, the underwriters, the processors, attorneys, and any other services which may effect your transaction. A mortgage broker also:
• Discusses and explains financing program options
• Informs you, in writing, of lock-in options
• Explains all documents of the loan application
• Explains all associated costs of the loan application
• Explains the disbursement of all loan applications
• Explains the loan process, from application to closing
• Provides you with a good faith estimate of cost and fees
• Communicates with you throughout the loan process in a timely manner
• Coordinates the final closing of your transaction
Brokers and loan officers are your resource for questions or concerns after your transaction closes.
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Got a tip?? Ten tips for anyone investing in residential real estate.
Asking these questions and/or considering these topics can save time, money and anguish.
1.Location, Location, Location
This is the gold standard of real estate valuation .The most important attribute of any real estate is its location. Choose the location of your home wisely and after considering all available information. Corner lot, Flag lot, proximity to or insulation from traffic, suburban or urban: all of these factors affect desirability and value.
2.Buy for the Future
Buying and selling real estate is expensive. Selling expenses can easily run in excess of 12% of the sales price. If you think you will need 4 bedrooms instead of 3, a three car garage instead of two, in less than five years, buy the bigger home now. In the long run, you will come out ahead in most markets.
3.New vs Used Home
For the first time home buyer, generally the most significant reason to buy a used versus a new home is the leverage of home financing. Used homes with completed landscaping, yards, fences, drapes and window coverings allow one to finance these improvements in with the purchase price of the real estate and avoid cash expenditures or additional credit card purchases.
As an example, in the used vs. new scenario, a used home with all completed improvements as mentioned above utilizing 100% financing can be acquired for closing costs and prepaid items only. The same new home with a zero down payment still requires anywhere from $10,000 to $20,000 in improvements and additions to offer the same utility and comfort as a fully accessorized used home.
4. Use Professional Assistance Unless You are the Professional
Choose your real estate broker and mortgage banker wisely. They have years of experience helping others like yourself. They will save you time and money and can assist you in the finding the right home and the right financing.
5. Always, Always Get Inspections
You are primarily responsible for your own due diligence. Never waive inspections even on a new home. The builder could have skimped in the construction, used under-sized components or worse yet, hired incompetent sub-contractors. There are countless examples of new homes which deviate significantly from plans or specifications.
The requirement of inspections and testing is even more compelling for a used home.
Don’t rely on litigation to try to solve an obvious problem. Warranties are only as good as the builder or the warranty company.
6 .Avoid Highly Stylized or Fadish Design and Architecture
If you love the design of a geodesic dome home, don’t make it your first home and make sure you’ll never want to move again. If you are a frequent transferee, avoid buying the home with elegant black and white checkerboard granite flooring and the velvet walls. Try to stay mainstream and your next move will be both easier and faster.
7. Always, Always Obtain Title Insurance
There is a reason why lenders always require a Mortgagee’s Policy of title insurance.
A simple failure can cost them the entire amount of your loan.
A buyer should always obtain an Owner’s Policy with ALTA 100 coverage to insure access (or the equivalent in your area).Unlike auto or home owner’s insurance, title insurance is a one-time expense.
8.Avoid the Temptation to Buy the Biggest/Most Expensive Home in the Area
You can benefit from the appreciation and value enhancement that accompanies a smaller or standard sized dwelling in a housing development. Misplaced or over improvements are generally penalized by the market, and sometimes severely, upon resale.
9. Don’t Count on Inflation in Housing
No one can better protect his or her real estate investment than an informed purchaser. While we have seen many years of inflation in housing prices, inflation is not a guarantee and should not be relied upon as a bail-out for a bad investment decision. In the last two decades, housing inflation has been quite uneven and unpredictable.
Having a place to call home and a sanctuary against the outside world with the significant tax benefits afforded home ownership is reason enough to buy your own home. Equity created by the inflation in housing prices is simply the “icing” on an otherwise delicious cake.
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What is a conventional mortgage?
A conventional mortgage is usually one where the down payment is equal to 25% or more of the purchase price, a loan to value of or less than 75%, and does not normally require mortgage loan insurance.
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What is a fixed rate mortgage?
The interest rate on a fixed-rate mortgage is set for a pre-determined term - usually between 6 months to 25 years. This offers the security of knowing what you will be paying for the term selected.
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What is a variable rate mortgage? or ARM?
An adjustable rate mortgage in which the interest rate can increase or decrease causing your payments to increase or decrease. Current market trends forecast interest rates to steadily move upward. If you currently have a variable rate mortgage or a short term fixed mortgage(ie 2 year fixed) you should seriously consider all of your options while rates are still low. Contact us for a free loan analysis.
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What is a pre-approval Letter?
A pre-approval letter conveys that a formal loan commitment from a lender for a specified period of time (usually 60 to 90 days) and for a set amount of money has been received. The pre-approval is calculated based on information provided by you and is generally subject to certain conditions being met before the mortgage is finalized. Conditions would usually be things like verification of employment and/or verification of down payment from your own
resources, for example.
Most successful real estate professionals will want to ensure you have a pre-approval letter in place before they take you out looking for a home. This is to ensure that they are showing you property within your affordable price range.
In summary, a pre-approval letter is one of the first steps a home buyer should take before beginning the buying process.
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What is a down payment?
Very few home buyers have the cash available to buy a home outright. Most of us will turn to a financial institution for a mortgage the first step in a potentially long-standing relationship. But even with a mortgage, you will need to raise the money for a down payment.
The down payment is that portion of the purchase price you furnish yourself. The amount of the down payment (which represents your financial stake, or the equity in your new home) should be determined well before you start house hunting.
The larger the down payment, the less your home costs in the long run. With a smaller mortgage, interest costs will be lower and over time this will add up to significant savings.
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How can you pay off your mortgage sooner?
There are ways to reduce the number of years to pay down your mortgage. You'll enjoy significant savings by:
Selecting a non-monthly or accelerated payment schedule
Increasing your payment frequency schedule
Making principal prepayments
Making Double-Up Payments
Selecting a shorter term or amortization when refinancing.
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What are the costs associated with buying a home?
First and foremost, you have to make sure you have enough money for a down payment (if needed) - the portion of the purchase price that you furnish yourself or by gift.
Secondly, you will require money for closing costs. Closing costs may be financed if the terms of the purchase contract are structured properly upfront.
If you want to have the home inspected by a professional building inspector - which we highly recommend - you will need to pay an inspection fee. The inspection may bring to light areas where repairs or maintenance are required and will assure you that the house is structurally sound. Usually the inspector will provide you with a written report. If they don't, then ask for one.
You will be responsible for paying the fees and disbursements for the escrow and title services in the purchase of your home. Traditionally, these vendors are chosen when the purchase contract is finalized. We suggest if possible you shop around before making your decision on who you are going to use, because fees for these services may vary significantly.
There are closing and adjustment costs, interest adjustment costs between buyer and seller and (depending on where you live) land transfer tax - a one-time tax based on a percentage of the purchase price of the property and/or mortgage amount.
Finally, you will be required to have property insurance in place by the closing date.
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What should the length of my mortgage term be?
The length of mortgage terms varies widely - from six months right up to 40 years. As a rule of thumb, the shorter the term, the lower the interest rate the longer the term, the higher the rate.
While three or five year mortgages are what most home buyers typically choose, you may consider a short-term mortgage if you have a higher tolerance for risk, if you have time to watch rates or are not prepared to make a long-term commitment right now.
Before selecting your mortgage term, we suggest you answer the following questions:
1. Do you plan to sell your house in the short-term without buying another? If so, a short mortgage term may be the best option.
2. Do you believe that interest rates have bottomed out and are not likely to drop more? If that's the case, a long mortgage term may be the right choice for you. Similarly, if you think rates are currently high, you may want to opt for a short to medium length mortgage term hoping that rates drop by the time your term expires.
3. Are you looking for security as a first-time home buyer? Then you may prefer a longer mortgage term, so that you can budget for and manage your monthly expenses.
4. Are you willing to follow interest rates closely and risk their being increased mortgage payments following a renewal? If that's the case, a short mortgage term may best suit your needs.
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What are the monthly costs of owning a home?
Needless to say, you'll have financial responsibilities as a home owner.
Some of them, like taxes, insurance may not be billed monthly, so do the calculations to break them down into monthly costs. Below you will find a list of these expenses.
The Mortgage Payment
For most home buyers, this is the largest monthly expense. The actual amount of the mortgage payment can vary widely since it is based on a number of variables, such as mortgage term or amortization.
Property Taxes
Property tax can be paid in two ways - remitted directly to the municipality by you, in which case you may be required to periodically show proof of payment to your financial institution; or paid as part of your monthly mortgage payment.
Hazard or Homeowners Insurance
Homeowner's Association Dues (if applicable)
Flood Insurance (if applicable)
Earthquake Insurance (optional)
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Should you go with a short or long-term mortgage?
A longer-term mortgage is worth considering if you plan on living in the home for at least 10 years. Our 3, 5 and 7 year mortgages let you take advantage of today's rates, while enjoying security knowing the rate will remain fixed for that time frame. On average, the typical homeowner will refinance or sell their home every 5-7 years.
If you want to keep your mortgage flexible right now, you can explore a shorter-term mortgage that usually allows you to take advantage of lower rates and save.
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How much can I afford to pay for a home?
To determine 'affordability' you will first need to know your gross monthly income along with the amount of any debt outstanding and the monthly payments. Assuming it is your principal residence you are purchasing, calculate 36% of your income for use toward a mortgage payment, property taxes and hazard insurance.
Second, calculate 40% of your gross monthly income and deduct all of your monthly debt payments, including car loans, credit cards, lines of credit payments. The lesser of the first or second calculation will be used to help determine how much of your income may be used towards housing related payments, including your mortgage payment. These calculations are based on lenders' standard guidelines.
In addition to considering what the ratios say you can afford, make sure you calculate how much you think you can afford. If the payment amount you are comfortable with is less than 36% of your income you may want to settle for the lower amount rather than stretch yourself financially. Make sure you don't leave yourself house poor. Structure your payments so that you can still afford simple luxuries.
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What is a home inspection and should I have one done?
A home inspection is a visual examination of the property to determine the overall condition of the home. In the process, the inspector should be checking all major components (roofs, ceilings, walls, floors, foundations, crawl spaces, attics, retaining walls, etc.) and systems (electrical, heating, plumbing, drainage, exterior weather proofing, etc.). The results
of the inspection should be provided to the purchaser in written form, in detail, generally within 24 hours of the inspection.
A pre-purchase home inspection can add peace of mind and make a difficult decision much easier. It may indicate that the home needs major structural repairs which can be factored into your buying decision. A home inspection helps remove a number of unknowns and increases the likelihood of a successful purchase. A home inspection is not the same as an appraisal. The inspection is more thorough than an appraisal.
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What is the minimum down payment needed for a home?
The minimum down payment needed for a home loan is zero. There are even programs that will lend 103%-107% Loan-to-Value in order to finance the closing costs involved with the loan and/or to payoff credit card debt thru the purchase transaction. Creative financing can be also provided to cover closing costs when 103% LTV loan programs are not an option. A knowledgeable Loan Specialist can guide you through this process.
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Can I use gift funds as a down payment?
Most lenders will accept down payment funds that are a gift from a relative as an acceptable down payment. A gift letter signed by the donor is usually required to confirm that the funds are a true gift and not a loan. Additional paperwork is usually required to source all gift funds and to satisfy seasoning requirements.
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How will child support affect mortgage qualification?
Where child support and alimony are paid by you to another person, generally the amount paid out is deducted from your total income before determining the size of mortgage you will qualify for.
Where child support and alimony are received by you from another person, generally the amount paid may be added to your total income before determining the size of mortgage you will qualify for, provided proof of regular receipt is available for a period of time determined by the lender.
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How does bankruptcy affect qualification for a mortgage?
Depending on the circumstances surrounding your bankruptcy, generally some lenders would consider providing mortgage financing.
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What is mortgage loan insurance?
Mortgage loan insurance is insurance usually provided by companies like GE Capital Mortgage Insurance Company, MGIC Mortgage Guranty Insurance Companyan and RMIC Residential Mortgage Insurance Company to name a few. This insurance is required by law to insure lenders against default on mortgages with a loan to value ratio greater than 80.00%. The insurance premiums are paid by the borrower. This is not the same as mortgage life insurance.
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