Mortgage 101
summary on how mortgages work
Mortgages are often referred to as a loan made by lenders for purpose of buying a home. The term "mortgage" actually refers to a contractual agreement that gives the lender the right to possess your home if you fail to pay back your loan obligations.
Below are six (6) quick summary guides about mortgage and how they work.
Page Topics:
mortgage 101
Three Parts to a Mortgage
principal: the original amount that you borrow with an obligation to repay the amount over a set term.
interest: a percentage amount that you agree to pay the lender for use of the principal amount until the full amount is repaid.
term: the length of time (generally in months) to repay the loan amount .
Example:
the lender gives the applicant $100,000 (principal) to buy a home. The buyer agrees to pay 10% annually (interest) on the loan balance until the entire amount has been repaid.
If the buyer pays interest-only payments, s/he will pay the lender $10,000 each year for use of the loan:
(calculated as: $100,000 X 10% = $10,000)
View more detail information and illustrations
(note: links to our companion site
www.SayLending.com)
mortgage 101
Mortgage Loan Components
The Purchase Price:
This is the the agreed upon purchase price of the home between the seller and buyer.
The Down Payment:
The down payment is an amount that you pay out of your own pocket on the purchase price of the home. The remaining portion is the amount borrowed from the lender.
Most lending institutions require that the down payment be at least 20% percent of the home purchase price. Any down payment that is less than 20% of the purchase price will still qualify you for a mortgage but you will have to carry Private Mortgage Insurance (PMI).
The Home Loan:
If your qualify, your lending institution will give you a loan that pays the seller for the purchase price of the home minus your down payment.
The type of loan the lender gives you depends on the your qualifications and how you want to repay the loan.
When you sign a mortgage agreement, you agree to repay monthly the amount you borrowed (the principal) plus the interest that the lender charges for the borrowed amount.
View more detail information and illustrations
(note: links to our companion site
www.SayLending.com)
mortgage 101
Mortgage Loan Types
Conventional Loans:
Conventional loans are mortgage loans provided by lenders that are not government sponsored loans (FHA, VA or RHS). There are many loan types to select from. View mortgage loan types.
Conforming Loans:
Conforming loans are conventional loans that meet terms and conditions set forth by Fannie Mae and Freddie Mac.
These two stock-holding companies purchase mortgage loans from lending institutions and secure them for resale to the investment community. Buying back mortgage loans allow these agencies to provide a continuous flow of affordable funding to banks who reinvest their money back into more mortgage loans.
Fannie Mae and Freddie Mac establish maximum loan amounts, income requirements, down payment requirements, and type of suitable properties.
Loans that do not conform to these guidelines are referred to as non-conforming loans.
Jumbo Mortgage Loans:
These are loans that are above the maximum loan amounts established by Fannie Mae and Freddie Mac.
Rates on jumbo loans are generally higher than conforming loans. Jumbo loans are used to purchase expensive and high-end custom construction homes.
B/C Loans:
Loans that do not meet the credit requirements of Fannie Mae and Freddie Mac are referred to as B, C and D paper loans.
Loans of this type are made to applicants that have filed for bankruptcy, foreclosure and who have bad credit.
Government Loans:
Different governmental agencies will secure loans for low- to moderate-income and other qualified home buyers.
Lenders are required to follow certain guidelines when making government loans. The most common government loans are FHA Loans.
VA Loans:
These loans are sponsored by the U.S. Department of Veteran Affairs. They guarantee loans for eligible veterans, active-duty personnel, and surviving spouses. These loans offer competitive rates, lower or no down payments, and minimum income requirement.
RHS Loan Programs:
Affordable housing for low- to moderate-income level rural residents to purchase, construct, repair, or relocate to rural-related facilities. Lower or no down payment is required in most cases.
These loans are guaranteed by the U.S. Department of Agriculture.
View more detail information and illustrations
(note: links to our companion site
www.SayLending.com)
mortgage 101
Do Some Calculations
Two types of calculations that you can make below:
- Monthly Payment Calculation
estimate the monthly loan payment on a loan based on the amount your borrow, the prevailing interest rate, and term of the loan.
This is just an estimate. The true cost will be subject to the APR and escrow costs. - Monthly Affordability Calculation
works in reverse. Input the amount you can afford to pay per month to calculate how much loan you can borrow.
mortgage 101
Who Are The Players
There are four major players that participate in the mortgage lending business:
1: Lenders of Money:
This would include Commercial Banks, Savings & Loans, Credit Unions, Mortgage Bankers, and others that lend money to prospective borrowers.
Commercial banks, S&Ls, and Credit Unions generally use collected deposits as sources of loans. Mortgage Bankers get loan money from investors or public issued debt.
2: Investors:
There are stock-holding companies that buy mortgages for investment reasons. This allows for a continuous source of money into the system so that new loans can be made.
For example, a bank may securitize a percentage of their mortgage loans — this means that they take a certain portion of their mortgage loans and sell them to an outside investor. The money the bank gets from the sale usually goes back into issuing more loans.
The investor now collects a return on their portfolio of mortgage loans, which could be quite attractive considering the interest rates on mortgage loans.
3: Government Agencies:
Agencies include the Federal Government, State Agencies, the Veterans Administration, and others.
These agencies do not lend money — rather they guarantee loans allowing the lenders to extend credit to low-to-moderate income borrowers, home buyers who have little down payment, and others.
4: Loan Brokers:
This includes mortgage brokers, real estate agents, lending web sites, etc.
These players act as middlemen who help prospective borrowers find the right mortgage product among multiple lenders.
Loan brokers can be considered as a distribution network (retailer) of mortgage loans from the banks (manufacturers) to the borrower (consumer).
View more detail information and illustrations
(note: links to our companion site
www.SayLending.com)
mortgage 101
More Loan Components
Amortization Payment:
Lenders use an amortization schedule to figure your monthly mortgage payments.
Most amortization schedules use a 30-year repayment period; however, you can get a 15-, 20-, or 25-year repayment schedule.
The amortization schedule first calculates the interest charges for the month on the amount you borrowed and then adds an amount to repay the loan based on a 30- or 15-year repayment schedule.
Interest Rate:
See interest rate notes
The Escrow:
The escrow is a depository account that the bank manages.
Part of your total monthly payment includes bank collections for property taxes, hazardous insurance, PMI, and other expenses related to your home. These collections are held in escrow until payments are due: see information on estimating escrow costs.
Points:
Points are prepaid interest that lenders charge for the cost of borrowing money. A point equals 1% of the amount you borrow. Charging points is a standard practice among mortgage lenders.
Points can raise your APR. One point is roughly equivalent to one-eighth raise in your initial rate on a 30-year mortgage.
Sometimes you can pay additional points to reduce your interest rate. A lender may quote an initial rate of 9.25% and another rate at 9.0% if you pay 2 points. Points in most cases are tax deductible.
Closing Costs:
Closing costs are fees for professional appraisals, surveys, title searches, loan documentation, inspections, points, and other services required by law and your lender that are related to the purchase of your home.
You will be obligated to pay these costs before taking ownership of your home.
Upon completion of your application, you will receive a "Good Faith" estimate that itemizes your projected closing costs. This is an estimate only and does not signify the true amount of your closing costs. Costs may vary by area.
View more detail information and illustrations
(note: links to our companion site
www.SayLending.com)
Helpful Tools
Some helpful tools for making decisions:
 |
|