A mortgage is a comprehensive process that includes a loan that is used to purchase real estate. That’s the short definition of what a mortgage is. A mortgage consists of principal, interest, term, amortization and the lien on the mortgaged property. The loan which arises from a mortgage is used to buy a home and must be paid back over agreed upon number of years. At the end of the term when the loan is fully amortized it becomes the sole property of the mortgage borrower. However in the event that the loan is not repaid a foreclosure process begins in which the lender can legally take claim of the property. It is essential for any borrower to become well acquainted with the terms used in the mortgage process. They will be repeated often, and they will also be written down in the mortgage contract, understanding these words will keep you on top of things, as well as prevent you from being misled.
5 Parts To A Mortgage
Principal is the money loaned to the borrower. Initially the principal will begin at 100% but with each mortgage payment and subsequent payments the principal will be reduced. The amount that gets paid becomes amortized which is good thing because it means you are getting closer to achieving your goal of paying off your mortgage.
Interest is the percentage charged for your loan. The interest is added by multiplying the percentage with the principal. Having a lot of unpaid principal left on your mortgage will reflect a larger interest as well. Interest is always greater towards the initial years of the mortgage. It is important to understand this part of the process and to look for the best mortgage interest rates unless you don’t mind drowning in debt.
Amortization is the friendliest term in the mortgage. It is the amount of the loan that has been repaid. Amortization leads to eventual full payment of the loan.
Termis the length of the mortgage and can be 15 years and often 30 years. Some terms have fixed interest rates, such as 15 year fixed mortgages. There are variable years of course and a 20 year fixed mortgage while uncommon also exists.
Lien is straightforward and it’s the claim that the lender has on your property. If you neglect to pay the monthly mortgage payments the lender can begin a process called foreclosure to take claim of the property. This process begins when the security instrument (part of the lien) goes into effect because the borrower failed to fulfill the promissory note, a contractual promise to repay the loan under the agreed upon conditions.
A mortgage is probably the biggest commitment of your life after marriage and parenthood. It’s a serious endeavor and warrants the necessity for so many stringent requirements. In a utopia world all mortgages would be repaid back in full. This way the borrower is happy and so is the lender but life isn’t perfect and if your mortgage application isn’t perfect then you have even more reason to scrutinize and understand each and every term in your mortgage.
Prequalification and being pre-approved can be likened to the former being casual and the later formal. Being prequalified means you have met with a loan officer and based on the answers you gave him, you are deemed qualified to take out a mortgage loan. As confident as the loan officer might sound it is not binding. Typically you will be asked several questions to assess if you can afford the loan as well as to determine if you have the right credit score. Questions asked might include how much you earn per year or even per month. The loan officer may even get into specifics such as the type of job you have, how long you have worked at your job, and details of prior employment.
Other question will include what if any debts you may have. You may be asked if you have a car loan, student loan and how many credit cards you have. The loan officer follows a procedure set out by company policy and usually they make correct assessments. There are however instances when a loan officer determines you are prequalified but you end up getting disapproved for a loan. The majority of the errors are on behalf the potential buyer. This is often due to incorrect information, such as lying about actual salary or even not disclosing all their debts. It is best to be honest and forefront with the loan officer. It will be a goodwill gesture to answer truthfully to all questions.
The reality is you will be doing yourself a disservice by withholding information because after prequalification the procedure turns to verification. And this is the part where you can be preapproved or not. The information you have provided will be meticulously verified by automated systems and of course an human underwriter. Credit agencies will be notified and your credit standing whether it is good or bad will be known. The same is true for your income as this can easily be verified by tax returns. Some lenders even verify the actual premises of occupation and also the time you have stated you worked at your job. Claiming you have certain assets can also be verified by bank statements and don’t even think of doctoring anything because that is fraudulent and will get you in a world of trouble. Lenders have resources to verify the amount of capital you have in the bank.
You should use prequalification to your benefit as it’s the easiest and simplest way to gauge if you indeed would qualify for a mortgage. Use the meeting with the loan officer to your advantage and provide the most accurate information. Any shortcomings within reason can be worked out and you should take the time to understand why the loan officer thinks you don’t qualify, if that is the case. It might be because you don’t have enough down payment money. You can solve that by saving more money or even looking for lenders who are willing to ask for less. Prequalification and preapproval are a big part when delving into buying a home, understanding them the correct way will make matters clearer whenever meeting with loan officers.
A fixed rate mortgage or simply FRM is a loan has a set non-variable interest rate or a monthly payment that remains the same throughout the term of your mortgage. The interest rate at the signing of the contract is binding whether you mortgage is for 15 or 30 years. Home owners who did not pay at least 20% down payment will however have two additional expenses affixed to their mortgage. These are monthly prorated balances of quarterly/yearly real estate tax and yearly home insurance fees. One of the important factors of fixed rate loans is that timing is everything. You might be shopping for a home when interest rates at are an all time low. That would be a prime example of when to go head in first with a fixed mortgage rate. It isn’t always this simple though. Evaluating your present financial situation with foresight to the future will help determine if a fixed rate mortgage is right for you.
Interest rates in early 2010 are hovering around 4.9% for a 30 year fixed rate loans and 4.2% for a 15 year fixed rate mortgages. Those rates certainly favor FRM but with a blink of an eye, more like a year’s time, adjustable rate mortgages might be more enticing. FRMs almost always have higher interest rates that ARMs because lenders consider them to be a bigger risk (for them). This is quite normal, and when pondering between FRM and ARM take into account whether or not you will reside in the home for many years or just several. A FRM is usually the safer bet for people who intend to live their lives in one home or at least 7 or more years.
Positive Points Of Fixed Mortgages
1- FRMs offer stability that ARM can not guarantee. You can expect to pay the same monthly payment, but with an adjustable interest loan the monthly balance will fluctuate and sometimes very volatile.
2- The predictability of fixed rate mortgages can have a positive affect on the well being of home owners. It is beneficial knowing what to expect, the drama of fluctuating mortgage payments might have dire repercussions. Owners who have steady, stable incomes are better able to manage their expenses and thus their lives when their budget is fixed. Who needs a curve ball in life, especially one that can wreck havoc on your living standards. The element of surprise is essentially eliminated and you are more able to plan ahead with a FRM.
Negative Points Of Fixed Mortgages
1- You are essentially tied down to the fixed interest rate for the entire term of the loan. This can be a good thing but at times can backfire on you. Let us take Josh as an example. Josh opted for a 30-year fixed rate mortgage when interests rates were 9%. A few years later after signing his mortgage contract the interest rate plummeted to 5%. The loss is tremendous and can even keep homeowners up at night just thinking about how much more money in interest they are paying.
2- FRM incur higher interest rates than adjustable rate loans. A 15 year ARM might have 5% interest while a 30 year fixed mortgage loan might have interest that is a little over 7%. That is a considerable difference but many variables must be considered to decide which is best in the long term.
Home buyers looking for a home while interest rates are at record lows would be making a smart choice. Interest rates over the past 30 years have fluctuated from a high of around 17% to record lows hovering in the 4% range as witnessed in 2010. The median interest rate over that time has been approximately 7-9%. Taking advantage of low rates can save you a lot of money as well as give you the stability you want when it comes to making monthly mortgage payments.