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Mortgage 101

Real Estate Agent with Kenna Real Estate Company

How much do you know about mortgages and mortgage terms?  Most people who have actually purchased a home can understand most of the mortgage language.  If you have never purchased a home, however, you may not understand many of the terms that are used.  You are the ones I want to help with this posting.  The rest of you might want to read on just to test yourself. 

First of all, do you know what components make up your mortgage payment?  There is the Principal, which the actual amount you borrowed to buy your home.  Your payment also includes Interest which is what the lender is charging you to use their money.  These two are often referred to as P & I.  They are a huge percentage of the amount you pay each month on your mortgage.  The interest makes up most of the payment when you first begin making payments, but gets lower as the mortgage term progresses.  The amount you will be paying towards the principal will be very small in the beginning of the mortgage term, but will get larger as it progresses. 

 Another component of your payment is an amount that goes to an escrow account for paying your annual Property Taxes.  The amount of these taxes is based upon an appraisal made by the entity that collects those taxes and is a small percentage, usually .5% to 2%, of that appraised value. 

 If you do not obtain your own Homeowners Insurance and show proof of that insurance to your lender, an escrow account is set up and additional monies for that account are included in your monthly payment.

 Mortgage Term:  The number of years over which you will be paying back your loan.  This is usually 30 years, but there are 10 year, 15 year and 20 year mortgages available.  The shorter the term, the smaller the interest rate and the larger the payment. 

 Amortization:  Repayment of the mortgage where the principal is divided over the term of the loan.

 Balloon Loans:  A balloon loan usually offers a lower interest rate.  This is because it requires an early lump sum pay-off at a date certain 5, 7 10 or 15 years after the beginning of the loan in exchange for the lower rate.  Buyers should be very careful about obtaining this type of mortgage because the inability to pay the lump sum, or refinance at that time can lead to foreclosure. 

 Closing Costs:  These included transfer fees for title, utilities and HOAs, recording fees, title insurance costs, survey or appraisal fees, discount points, document preparation, courier fees and others.  They can range from $1000 to several thousand dollars.  When choosing a lender, closing costs are something that should be asked about because they do vary considerably.  Always ask for a "Good Faith Estimate" which should include a close estimate of all costs associated with your mortgage. 

 Conforming Loans:  This represents the amount of loan that could be loaned at the normal interest rates with normal requirements for documentation and qualifying.  Anything over this conforming (Non-conforming) amount would have a little higher interest rate and might require a different percentage for the down payment and have different qualifying requirements.  These amounts were set by Freddie Mac and Fannie Mae two quasi-government organizations that deal in loans.  Recently the conforming amount has been greatly increased in areas where the houses  are almost always higher priced than the conforming amount.  FHA has also raised this limit for conforming loans in those areas.  So, although this conforming amount used to be the same across the country, it now varies by city.

 Discount Points:  Simply put, points are additional money that you pay at closing to get the lender to lower your interest rate.  They are expressed as a percentage with 1% being one point.  Each point usually lowers your interest by .125 of a percentage point. 

 Down Payment:  This is the amount in cash that you will pay at closing to reduce your total mortgage amount.  Generally most lenders want 20 % down which would equal $60,000 on a $300,000 loan.  In this case the loan amount would be reduced to $240,000 and would bring your monthly payments much lower than if you had borrowed the full $300,000. The more that can be paid down, the less monthly payment there will be. 

 Fixed Rate Mortgage:  If you take out a mortgage with a fixed rate, your interest rate will never change over the entire term of the mortgage.

 Foreclosure:  When a person gets months behind on their mortgage payments, the lender will usually file for foreclosure.  If that individual cannot get caught up with their payments within a certain period of time after that filing, usually 3-6 months, the lender will foreclose on (take back) the home, evict the individual and sell the house to recoup their loss.  The amount of time that subsides between the date of filing and date of foreclosure varies by state. 

 Jumbo Mortgage Loan:  Another name for a non-conforming mortgage loan.

 Adjustable Rate Mortgage (ARM):  With an adjustable rate mortgage, your interest will adjust in accordance with the current interest rates at any given time.  You will usually get a fairly reasonable starting rate, but the rates can go up quite dramatically depending on what index is used to set them.  There are 1 year, 2 year, 3 year, 5 year, 7 year and 10 year ARMS.  This determines when the rate can adjust, at 1, 2, 3, 5, 7 or 10 years after the date the mortgage starts.  The rate can then adjust at certain intervals, from every 6 months to every year.   These dates and intervals of adjustment are stated in the mortgage.  There are also two caps on these rates.  The first cap is the total percentage points that the rate can increase when it does.  The second cap is the total percentage points that it can increase over the term of the mortgage.  Once it gets to that cap, it can never increase again, but it can go down if interest rates go down.  It can then go back up again after the stated interval.