MORTGAGE

What is a Mortgage?

A mortgage is a form of debt in which one can own property by paying the entire price over time with interest. The borrower maintains all the rights, privileges and responsibilities of a property owner as long as the conditions of the mortgage, such as monthly payments of principal and interest are met.

Two Standards of Loans

The are two types of loans involving mortgages, a conventional or conforming loans, which is the loan that most people have or an insured loan, insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Insured loans are sometimes called government loans.

There are conforming loan limits are based on the number of units in the structure, the number of individual families that can live in the structure.

One-family	$417,000
Two-Family	$533,000
Three-Family	$645,000
Four-Family	$801,000

 

The maximum loan amount is 50% higher in Alaska, Guam, Hawaii and the Virgin Islands.

Jumbo Loans

Loans above the maximum loan about established by the government are known as jumbo loans. These loans are sold by lenders on a much smaller scale, and they usually have a slightly higher interest rate than the conforming loan, how much higher varies with the economic condition and the market.

Fixed Rate Mortgages

(FRM) or Fixed Rate Mortgages provide you with the same monthly payment throughout the term of the loan. No economic condition can change either the interest rate on the loan nor the monthly payment. These are both “fixed” permanently. Fixed-rate mortgages are available for various terms starting with 40 years and 5 other terms of 30,25,20,15 and 10 years. The shorter the term, usually the lower the interest rate. Also the shorter the term the higher the payment. But the payment is less interest and more principal (the money you actually borrowed).

The most popular mortgage terms are 30 year and 15 years. There is a big difference in the interest paid over 30 years vs. 15 years. For example $200,000.00 borrowed for 30 years might cost 6.25%. This would cost $243,316.00 over the term of the loan. A 15 year mortgage which would be a little lower, maybe 5.75% would have interest paid over the 15 years of $98,947.00. But the 15 year loan payment would be $1,660.00 a month vs. the 30 year loan payment of $1,231.00 a month. If you can afford the shorter time period there is significant savings and of course, you no longer are making any payments other than insurance and taxes after 15 years.

Adjustable Rate Mortgages

(ARM) or Adjustable Rate Mortgages is a loan whose interest rate and usually monthly payments fluctuate over the period of the loan. This type of mortgage has adjustments based on changes in a specific “index” and the interest rate of your mortgages changes as the index changes. An index can be many different things for example: T-Bills or Treasury Bill rate, LIBOR or London Inter Bank Offering Rates, PR or Bank Prime Rate, and there are many more. From February of 2003 to August of 2006 the LIBOR rate went from l.4% to 5.6%, 400% higher interest. The T-Bill started in February of 2003 at 2.25% and peaked in August of 2007 at 4.4%. So it started higher but didn’t rise as much as the LIBOR rate. Usually the lender you chose only uses one index. In the past year the MTA or the 12 Month Treasury Average seems to be in the middle of the various indexes used.

The lender adds a “margin” to the index to compute the loan interest. The margin can be anything the lender determines from 1% to 4% with the majority of loans at 2% to 2.5%. So this means in an adjustable rate mortgage interest is computed by calculating the index + the banks margin. For example if the index was 2.3% and the banks margin was 2.5% your interest rate at that time would be 4.8%. The margin always remains at 2.5% but it is added to the index to compute your final interest rate.

Lenders have different adjustment periods. The more frequent the adjustments in a rising market the less advantageous. The more frequent in a declining market the more advantageous. Keep in mind that interest rates are near an all time low. It is highly more likely interest rates will rise over a few years and thereafter than decline.

To “protect” the borrower from enormous increases in monthly payments there are caps set for the increase of the interest rate over the term of the loan. I put the word “protect” in quotes because it is not protecting the borrower if the variable rate rises to more than they can afford. Further the rise, if it comes early in the loan, can cost a fortune over time changing all the costs to the borrower. The advantage to a variable interest loan is the mortgage payment initially is the lowest rate you can have.

CAUTION: The complexities of your loan can be many. When comparing rates you need to compare all the details of the loan too, especially in AMRs. Adjustable Rate Mortgages can have a great deal of variables including Negatively amortizing loans, where the interest you pay initially is not even enough to cover the interest of the loan. Then when the term of the loan is up, you end up owing more than the original loan.

You need a trusted loan resource. As we all know, this has been a problem because many large institutions sold mortgages to people without explaining them fully resulting in many people ending up with payments they could not afford.

I recommend Lee Appleby because I will answer every questions and even tell you the questions you need to ask.

There is more, much more but I do not want to confuse you, if you are not already confused. There are:

Interest-Only Mortgages
Pay Option ARMs
Buydown Mortgages
Graduated Payment Mortgages
Convertible ARMs
A Two-Step Mortgage
Option ARMs
Combined (hybrid) Loans
Fixed Period ARMs
FHA Programs
VA Guaranteed Home Loans
RHS programs

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We will provide you with the an exceptional rate, the best service and all the information you need to know to understand the components of your mortgage.