When you are ready to buy a home or refinance an existing home loan it is very important to learn as much as you can about how mortgages work, what the different types of mortgages are, how home loans are financed and how properties are appraised. The more you know about the home mortgage game the better you can play it. The better you play the home mortgage game the more money you can save or even earn as you build equity in your property.
To help you get started here are a few phrases you are likely to hear from a mortgage broker or loan officer who handles your arrangement.
MORTGAGE
Don't laugh! Everyone thinks they know what a mortgage is, but do you really know?
A mortgage is basically a promise to pay a debt put in writing. That's it. A mortgage is an agreement to pay money that has been loaned to you with the house being collateral.
So, if ever you should decide not to pay your mortgage for three months in a row you can expect the bank that loaned you the money will take their house back. This process is called foreclosure and we will get to that later.
Mortgage's have interest rates and terms. They can either be fixed or adjustable.
TERMS
Each mortgage is designed to be paid in installments over a specific period of time. The amount of time in which a mortgage is expected to be paid back is called the term. Some common terms are 30 years, 15 years and sometimes even 10 years. The length of the term affects how much the monthly mortgage payments will be. A mortgage loan of $700,000 paid over 15 years will have much higher monthly payments than a mortgage loan for the same amount paid back over a term of 30 years.
Another factor to consider though is the ...
INTEREST RATE
The interest rate is the percentage paid on the mortgage loan amount. You didn't think you were getting the money for free, did you? Interest rates range from high to low based on the borrower's credit score. The higher the credit score the lower the interest rate and the lower the monthly mortgage loan payments. The lower the credit score the higher the interest rate and the higher the monthly mortgage loan payments. If you are serious about obtaining an affordable mortgage loan fixing any existing problems with your credit is the first and most important step to take. The better your credit score, the less you pay.
There's all different types of mortgages. There is the:
ARM (ADJUSTABLE RATE MORTGAGE)
An adjustable rate home mortgage loan is a home mortgage that changes from time to time. This type of mortgage may have an interest rate of 7% one month and a payment amount of $1,000, then change to an interest rate of 6% and a payment of only$700 a month. (This is a hypothetical mortgage of course.) The degree to which the mortgage rate can change is directly related to the index it is tied to. Each index is different (some indexes are tied to foreign bank interest rates for instance) so make sure to ask your loan officer or mortgage broker which index the adjustable rate he is offering is tied to. Also ask what the likelihood of change is.
Adjustable Rate Mortgages are usually fixed for a period of time (1 to 5 years). Then they become adjustable. This can be a good thing or a bad thing depending on your perspective. Having an adjustable rate mortgage could mean having a very low mortgage for a while, then having a leap in payment amounts due all of a sudden. Be careful and investigate what you are offered thoroughly.
FIXED RATE MORTGAGES
A fixed rate mortgage is just what it sounds like. The interest rate stays the same for the duration of the mortgage. If your mortgage loan interest rate started at 5% regardless of the market and how high the interest rates get you will never have to pay more than 5% on that loan.
The only way a fixed rate mortgage can change is through ...
REFINANCING
Refinancing is the process of changing the terms of an existing mortgage agreement. You can refinance because the interest rates are now lower and you could save money by qualifying for a lower rate. You can refinance to change the length of your mortgage loan making it either longer or shorter.
Some people refinance to take cash out of the equity they have built up in their house.
In each case refinancing your mortgage entails new closing costs, so be careful how often you refinance your mortgage. Just make sure that after the closing costs and fees are accounted for it is still worth the lowered interest rate or cash out. Sometimes it isn't.
FORECLOSURE
If you are having some trouble paying the mortgage one month the bank will charge you late fees for that month. If you are still late the second month maybe its time to start looking for a second job. If you are late three months in a row you will quickly learn the meaning of foreclosure, the process by which the bank kicks you out of your home (which is really their home since you obviously can no longer afford to pay for it).
EQUITY
Simply put equity is the difference between your mortgage loan balance and the value of the house.
If you owe the bank $100,000 on your mortgage and your house is worth $200,000 you have $100,000 in equity available. Equity is built up value in a house. If the house prices in your neighborhood are going up while your loan amount is going down you are building equity.
APPRAISAL
Another very important aspect of your mortgage is the appraisal. The value of your home must be determined before the bank can loan you money for it. An appraiser determines how much the house is actually worth by comparing it to houses in the neighborhood and inspecting all of its features.
If you add to your house or embellish it in anyway you may actually raise the property value. In this case you would need an appraisal to document the new value.
Mortgage loans don't have to be scary. As long as you stay informed you should be able to handle your home mortgage loan effectively. The more you know the farther you go. Until next time.
