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A mortgage requires you to
pledge your home as the lender's security for repayment of your loan.
The lender agrees to hold the title or deed to your property (or in
some states, to hold a lien on your title or deed) until you have paid
back your loan plus interest.
Mortgage Amount and Term
The mortgage amount is the
amount of money you borrow from a lender to pay for your house. The
term is the number of years over which you can pay back the amount you
borrow.
The length of your mortgage
repayment period will directly affect your monthly mortgage payments.
For the same mortgage principal amount, you will find that the shorter
your repayment period is, the higher your monthly payments will be,
but the total interest you pay over the life of the loan will be
less. On the other hand, the longer your repayment period
is, the lower your monthly payments will be, but the total interest
you pay over the life of the loan will be more.
The most popular mortgage term
is 30 years. By extending payment over 30 years, you keep your monthly
housing costs low. If you can afford higher monthly payments,
you can select a mortgage term that is shorter: there are 20-year,
15-year, and even 10-year fixed-rate mortgages available from most
mortgage lenders.
Amortization
Over time, you will repay your
mortgage through regular monthly payments of principal and interest.
During the first few years, most of your payments will be applied
toward the interest you owe. During the final years of your loan, your
payment amounts will be applied primarily to the remaining principal.
This type of repayment method is called amortization.
Fixed Interest Rate
You can choose a mortgage with
an interest rate that is fixed for the entire term of the loan. A
fixed-rate loan gives you the security of knowing that your interest
rate will never change during the entire term of the loan.
Adjustable
Interest Rate
An adjustable-rate mortgage
(called an ARM) has an interest rate that will vary during the life of
the loan, with the possibility of both increases and decreases to the
interest rate and consequently to your mortgage payments.
Down Payment
The down payment is the part of
the purchase price that the buyer pays in cash and does not finance
with a mortgage. Your down payment will reduce the amount you’ll
need to borrow. So, the more cash you put down, the smaller the size
of your loan, and the smaller the amount of your mortgage payments.
Lenders often view mortgages
with larger down payments as more secure because you have more of your
own money invested in the property. However, you may have
as little as 3 percent to 5 percent of the purchase price for a down
payment. Lower down payments help many people afford homes of
their own sooner.
Closing Costs
The closing (or, in some parts
of the country, settlement) is the final step, during which ownership
of the home is transferred to you. The purpose of the closing is to
make sure the property is ready and able to be transferred to you from
the seller. Items to be paid at closing vary from state to state
and may include transfer taxes and recordation taxes. Other
closing costs are title insurance, the site survey fee, attorney fees,
loan discount points, and document preparation fees. Usually,
closing costs are expressed as a percentage of the sales price or loan
amount. Typically, costs range from 3 percent to 6 percent of the
sales price of your home. Sometimes, you can negotiate to have
the seller of a property pay some of your closing costs.
Discount
Points
In the special vocabulary of
mortgage lending, “points” are often used to describe a type of
fee that lenders charge. (The full term to describe this fee is
“discount points.”) Simply put, a point is a unit of measure that
means 1 percent of the loan amount. So, if you take out a $100,000
loan, one point equals $1,000. If you take out a $50,000 loan,
one point equals $500. Discount points represent
additional money you can pay to the lender at closing. In
return, the lender will provide you with a lower interest rate on your
loan. Usually, for each point you pay for a 30-year loan,
your interest rate is reduced by about 1/8th (or .125) of a percentage
point. So, if the current interest rate on a 30-year mortgage is
8.5 percent, paying 1 point means you could get that mortgage for an
interest rate of 8.375 percent.
For example, you are shopping
for a 30-year mortgage loan. A lender quotes you an interest rate for
a 30-year, $50,000 mortgage at 8.5 percent with no discount points.
If you like that rate, you can choose not to pay any discount points
at closing and pay 8.5 percent interest. If you want to pay less
interest, ask the lender to quote you interest rates with your paying
1, 2, or 3 discount points. Usually, the longer you plan to stay
in your home, the more sense it makes to pay discount points.
Conforming and
Nonconforming Loans
The term “conforming”, as
opposed to “nonconforming”, is sometimes used to explain loans
that offer terms and conditions that follow the guidelines set forth
by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac
are two private, secondary mortgage market companies that buy mortgage
loans from lenders, thereby ensuring that mortgage funds are available
at all times in all locations around the country.
The most important difference
between a loan that conforms to Fannie Mae/Freddie Mac guidelines and
one that doesn't is its loan limit. Fannie Mae and Freddie
Mac will purchase loans only up to a certain loan limit (currently
$240,000).
So, if your loan amount will be
for more than the conforming loan limit of $240,000, you may be asked
to pay a higher interest rate on your mortgage. Your mortgage
loan may also follow slightly different underwriting requirements,
particularly in regard to your required down payment amount.
Check with your lender about this if you are taking out a large loan
amount. Nonconforming loans are sometimes called jumbo loans.
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