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Understanding Mortgage Terms
Points, fees, lock period, jumbo, conforming, ARM…and we haven’t even mentioned rate and APR!
Mortgages may seem simple enough, but there is more to them than interest rates. Considering all aspects of a mortgage might mean the difference between the right mortgage and regret.
Mortgages are broken into two tiers, Conforming and Jumbo. A loan greater than $417,000 is considered a jumbo loan as it exceeds the levels Fannie May and Freddie Mac are willing to purchase. Conforming loans are up to $417,000 for a single family home and will likely be offered at a lower interest rate.
Jumbo loans pose a greater risk of foreclosure, so the lender charges a higher interest rate to offset the added liability.
Lenders offer Fixed and Adjustable Rate Mortgages (ARM). The most popular fixed loans are 15 and 30 years. A 30 year loan will come with a higher interest rate than the 15 year. Lower monthly payments make the 30 year loan program a more desirable option for many borrowers despite the additional interest.
An ARM will come with a handful of choices for fixed periods. A 3 year ARM, for instance, will offer a fixed rate the first 3 years of the loan, and then will convert to a variable rate throughout remaining term of the loan.
ARM rates typically are lower than fixed rates. Once the fixed period of an ARM expires, however, you have no control where your interest rate will head, be it up or down. If you plan on living in your home a short period, this may be a good option. If you purchase a 5 year ARM and sell your home in 4 years, the variable aspect of your loan won’t matter.
A fixed mortgage offers the security of knowing your interest rate won’t leap to new heights. If you bought your dream home, this may be the best choice.
Sometimes two seemingly identical loans offer different interest rates. The tie breaker is the Lock Period.
Once you agree to a loan, the lender will guarantee the rate for a period of time, such as 30, 45 or 60 days. If you do not close your loan within that lock period, you will pay the prevailing rate that is offered when the loan finally closes. Consider the length of escrow before settling on a lock period. Lenders charge slightly higher rates for longer periods.
A Point may or may not be a good idea, depending on your situation.
One point equals one percent of the mortgage loan. Paying a point on a $100,000 mortgage would be $1,000. This is due at the closing of escrow along with your down payment and other closing costs. Paying points will reduce the interest rate you pay and considered by the IRS to be prepaid interest, which will help on your taxes
How to decide points (or how many) vs. no points? Calculate the upfront cost of paying the point(s) and how many payments you will need to make with the reduced interest rate before drawing even. Knowing this will make the decision easy! Hint: the longer you plan on living in your new home, the more attractive points become.
There is no such thing as a free lunch, or a free mortgage loan. On the day you close on your home purchase be prepared to sign a telephone book size pile of papers and bring a cashiers check to cover your down payment and Loan Fees.
We offer the best web templates for your business. web templates Our website templates availble for immediate download. Closing costs can range from several hundred to thousands of dollars. Some of these costs will be obvious (your prorated portion of property tax for the year) and others will be…less than obvious. The fees may include notary fees, courier fees, administrative fees, broker fees, escrow fees, etc. The total fees will partly depends on the exact closing day of the loan. Closing costs are not tax deductible.
PMI – Private Mortgage Insurance – allows a borrower to qualify for a loan that otherwise would be out of reach. With less than a 20% down payment, borrowers are required to purchase an insurance policy to protect the lender. If the borrower defaults on the loan, the insurance policy kicks in.
Now that you know everything about mortgages, you are ready for rate and APR.
When selecting a loan you will want to consider both numbers. The Rate is simply what is used to calculate interest payments on the loan. The APR or annual percentage rate, factors all one time fees into the loan and is considered to be the loan’s true cost. It is possible for a lender to offer a lower rate but a higher APR than a competitor.
When choosing a mortgage factor all variables into your decision. Then shop and compare different offers from various lenders in your local area.
©2006 Informa Research Services, Inc.
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