Understanding Mortgage

A mortgage is a loan for the amount of the price of the house remaining after the down payment.  The promissory note is the agreement signed at closing in which the buyer agrees to pay the lender the funds for the house.  The mortgage is the legal document securing the note that creates a lien on the property.  Mortgages are paid through monthly payments composed of interest (the charge for the use of the money) and the principal (amount towards repayment of the money borrowed). 

It is important that homeowners select a mortgage to best suit their needs.  To ensure that the homeowner is satisfied with the terms of their mortgage, is is recommended that the buyer shops around for mortgage loans to compare interest rates.  A good deal on the mortgage can save a substantial amount in the long run.

At IMAX Premier we can consult with you to help you pick the mortgage best fit for you.  Contact one of our representatives today to help you ascertain whether a fixed-rate or adjustable-rate loan best suits your family’s circumstances.

Down Payments

The down payment is the difference between the cost of the home and the amount of the loan.  The standard down payment is 20% but depending on the situation you can put down as little as 3-10%.  If your down payment exceeds 20% you will save money long term and pay less interest overall and avoid the monthly cost of private mortgage insurance (PMI).  If the down payment is 10% or below you will have higher interest rates and possibly incur PMI charges.  Take into consideration this information when determining what amount to put as a down payment.

Interest Rates

Mortgage lenders will charge you through either interest rates paid monthly over the duration of the loan of through points, a one time sum of money that you pay up front.  One point is equivalent to 1% of the total loan amount.  When comparing interest rates ask for the annual percentage rate (APR).  The APR includes the cost of points and other fees including mortgage insurance which makes it useful when determining the best loan.  Lenders are obligated by law to provide you with accurate information regarding the APR in a lending statement.

Points

Points are prepaid interest that raises the effective yield to the lender without raising the interest rate on a note.  Points discount the value of the loan. 

EXAMPLE:  If you pay two points equivalent to $1,800 on a $90,000 loan you have really borrowed $88,900.  Yet you will be required to pay back the $90,000 plus interest. 

Points are a standard aspect of the mortgage business.  One point is roughly equal to an additional 1/8th of one percentage point of the interest rate in a 30 year interest so the APR of a 7% 30-year fixed-interest rate with no points is equivalent to 6.75% with two points.

Lenders may also charge an orientation fee which is typically 1% of the loan principal.  Application fees are an additional cost to cover the price of paperwork and loan approval.  Application fees are not tax-deductible but the orientation fee is.

Types of Loans

Fixed-rate:  In a fixed-rate mortgage loan the interest rate and monthly mortgage payment stay the same.  This saves the borrower the stress of worrying about increases in the interest rate or monthly payment; these values are locked for the duration of the loan.  You will know exactly how much interest you will pay over the loan duration.  The principal amount and interest is fixed and the initial years the payments will mostly consist of tax-deductible interest.  Mortgages without prepayment penalties allow you to shorten the loan term which results in lower interest costs by making periodic payments toward the principal.  However, there is a downside because interest rates on fixed-rate loans tend to be higher than starting rates on adjustable-rate loans.

Adjustable-rate mortagae loans (ARM):  ARM loans have an interest rate that will adjust, typically every 6-12 months, but potentially as often as once a month.  The interest rate on an ARM is determined by what is happening to interest rates in general.  If interest rates overall are rising, then your ARM will likely rise.  When interest rates are decreasing, then ARM rates tend to fall.

There are a multitude of additional choices you can choose from regarding your interest rates.  Hybrid loans began as a fixed-rate loan and then converts into an ARM and typically adjusts every 6-12 months.  7/23 loans are fixed for the first seven years and then have a one time adjustment before remaining at a fixed-rate for the duration of the loan.

There are pros and cons to each type of loan but which mortgage is best for you is dependent on your personal and financial situation.  You can consult with us, but ultimately you are best-positioned to decide which type of loan best matches your situation and goals.

Should I Choose a Fixed or Adjustable Interest Rate?

The advantage of a fixed-rate loan is that you will always know what your monthly mortgage payment is going to cost which makes budgeting and planning easier.  The downside is that you will pay a higher interest rate in order to get a lender to agree to commit to a fixed-rate.  The longer time that the lender agrees to accept a fixed-rate the more risk they are taking.  Another potential downfall to a fixed-rate mortgage is in the event interest rates fall significantly after you take out your mortgage, you will be stuck with an expensive mortgage.  A decline in your property value or financial situation can result in you being unable to qualify for a refinance.  Even if you do qualify for a refinance, doing so takes time and has the additional costs of a new appraisal, loan fees, and title insurance. 

Some ARMs are more volatile than other but all fluctuate with interest rates in the market.  If the interest rate in the market changes, so does your interest rate and thus, your monthly payment.  This can make financial planning and budgeting very difficult. 

First-time buyers and other buyers who are barely able to afford the property while accept an ARM because since it starts out a lower rate they are qualified to borrow more.  However, just because you are approved to borrow more does not mean that you can afford it. 

Homeowners who qualify for both an ARM and a fixed-rate tend that choose an ARM do it because it will save them money through lower interest rates.  These homeowners decide the risk of fluctuating rates is worth the amount saved from the initial lower rates.  ARM’s interest rates tend to be lower than a comparable fixed-rate for the first year or two of the loan.  Another advantage is if you purchase a home during a period with high interest rates, you will be paying the initial payments with the artificially depressed rates and if rates then decline you will get the benefit of lower rates without refinancing.  If you have a an ARM and rates decline and you do not qualify for a refinance, you are  likely already benefiting from lower rates.  In a fixed-rate you must refinance to get the benefit of a decline in interest rates. 

The downside to an ARM is that if interest rates rise your interest rates and monthly payments will rise as well.  If rates rise by more than 1-2% and stay high, the ARM will likely end up costing more than in a fixed-rate.

Before Deciding Which Interest Rate be Sure to Consider:

Many home buyers, especially first-time homeowners, take an ARM because it enables them to borrow more and buy a more expensive home.  A lot of people in the real estate and mortgage business will encourage over-borrowing because their commission is a result of the cost of the home and size of the mortgage.  If you are considering an ARM it is imperative that you understand the effect that rising interest rates will potentially have on your finances. 

Before taking an ARM, be sure you can affirmatively answer the following:

Is your monthly budget capable of affording higher monthly mortgage payments while still being able to attain other financial goals like saving for retirement or your children’s education?

Do you have an emergency reserve fund that is equivalent to at least 6 months of living expenses to tap in to in the event your monthly mortgage payments rise?

Can you afford the highest possible monthly payment of your ARM?  Your lender will be able to rpive you with the highest possible rate you will pay in the event the ARM enters the lifetime interest-rate cap allotted for the loan.

Are you barely able to afford the loan and or are near the maximum amount allowed by your lender?

If your financial situation can withstand potentially higher rates then do consider in ARM.  The chances are that an ARM will save money.  Your interest rate will start lower and if overall rates don’t change will stay lower.  Even in the event of rising rates they will inevitably come down at some point.  If you can afford the times of high payments, you will still likely save money.  Addtionnally, all ARM loans have a limit or cap in the rise allowed for the interest rate of your loan.  Typical caps are 2% each year and 6% over the duration of the loan. 

Only consider an ARM if you are financially and emotionally stable enough to handle the maximum payments for an extended period of time.  ARMs are best for those who do not take out a loan for the maximum they qualify for and those who are saving more than 10% of their monthly income.  If you choose an ARM, be sure you have a emergency cushion to access if your rates rise.  Do not choose an ARM solely because of the appeal of the initially lower iterest rates that allows you to purchase a more expensive home.  It is best to buy a home you can afford with a fixed-rate interest.  If you want a loan with more stability but without the premium in a long-term, fixed-rate loan, consider a hybrid loan.

If you do not plan on residing in the home for a long period of time consider an ARM.  Saving money is almost guaranteed in teh first 2-3 years due to the initally lower interest rate.  If interest rates rise you will end up paying more.  If you are certain that you will not live in teh home for more than 5 years you will likely save money with an ARM. 

If you plan on having ownership of the home for more than 5-7 years then a fixed-rate may be more financially responsible particularly for those who are not financially secure enough to handle the fluctuating payments. 

Pre-Qualify

A vital first step in homebuying is meeting with a mortgage lender to discuss your financial situation and reach an agreement on mortgage qualifications.  If you are pre-qualified you have an advantage in that your financial papers are readily available and current.  You will also know the general sizes and types of mortgages you will qualify for.  Also, a letter of pre-qualification in required for submitting an offer on a property.

 

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