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Mortgage Options for Home Buyers
To first-time or even repeat buyers it can be daunting to figure out what all your martgage options are. Especially when you’re time pressed to make a commitment to one after you have drafted a contract to purchase a home. Here is an overview of available mortgage products. I’ve added common loan terms from mortgage lenders.
-Affordable housing loan: umbrella term used to cover various loan products targeted to first-time homebuyers.
-Assumable loan: existing mortgage loan that can be assumed by another person; most conventional loans are not assumable; government loans are assumable with qualification of the new person.
-Bi-weekly mortgage: one-half of the mortgage payment is paid every two weeks, resulting in one extra full payment toward principal each year.
-Blanket mortgage: mortgage secured by more than one piece of property.
-Blended rate (or wraparound) mortgage: refinancing plan that combines the interest rate on an existing mortgage loan with current interest rate for an additional amount of loan.
-Bridge (or swing): loan used to bridge the gap when someone is purchasing a new home before they have gone to settlement on their previous home.
-Budget mortgage: another name for a loan that included taxes and insurance along with the principal and interest payment (PITI).
-Installment sale (also called a land contract): usually a private agreement between a seller and buyer where title is not conveyed until all payments have been made.
-Carry-back financing: whenever a seller agrees to finance either the first or a second mortgage on the property.
-Chattel mortgage: a pledge of personal property to secure a note.
-Construction loan: short-term loan made during the construction of a house.
-Home equity loan: either a lump sum or a line of credit made against the equity in a home.
-Interest-only: Your monthly payments only cover the interest on your mortgage loan. Your payment does not include any principal payments to create equity. In a market transitioning from a sellers to a buyers market, you might loose money on the sale of your home.
-125% loan: A loan product in which you are actually borrowing 25% more than the present value of the property you are purchasing. If you should have to sell the property in the first few years, you will find yourself “upside-down” in the mortgage, owing more on the mortgage than you can sell the house for.
-Open-end mortgage: one where additional funds may be borrowed without changing other terms of the mortgage, typical for construction loans.
-Package mortgage: mortgage secured by a combination of real and personal property; often used for vacation property such as a cabin, beach condo, or ski chalet.
-Portable mortgage: new concept; mortgage loan can be carried with you from one property to another.
-Purchase money mortgage: any loan used to purchase the real property that serves as collateral but usually refers to seller-held financing.
-Reverse mortgage: special program for senior citizens (62 or older), which utilizes the equity in the seniors’ home to provide additional income without having to sell their home.
-Sub-prime loan: loan with risk-based pricing for persons unable to qualify for prime conventional loans; typically has higher rate of interest; credit scoring and appraisal are critical.
-Mortgagee: the party receiving the mortgage, the lender.
-Mortgagor: the party giving the mortgage, the borrower.
-Mortgage: document establishing property as security for the repayment of the mortgage loan debt.
-Note: a written promise to repay a debt.
-Deed of trust: document conveying legal title to a neutral third party to provide security for the mortgage loan debt. The choice of whether to provide collateral for the loan through a mortgage or a deed of trust depends on individual state law.
-Default: failure to carry out the terms of the contract; the most important term being the agreement to make regular payments.
– Loan-to-value (LTV): percentage of what the lender will lend divided by the market value (e.g., property worth $200,000 with a LTV of 90% means that the lender will loan 90% of the value, or $180,000, and a down payment of 10%, or $20,000, will be required from the borrower.
-Qualifying ratios: the percentage of gross monthly income allowed by different loan programs.
o Front-end ratio is the amount allowed for total housing expense.
o Back-end ratio is the amount allowed for total debt. Example: Fannie Mae/Freddie Mac ratios are 28/36 or 33/38 for affordable loans. FHA ratios are 29/41.
-Points: each point is 1% of the loan amount. Lenders often charge a l% loan origination fee. Additional points may be charged to discount (lower) the rate of interest.
-Buy-down: a cash payment to the lender that lowers the rate of interest; often used a marketing technique by new homebuilders. Example: Property selling for $200,000 with a 2-1 buy down. Interest rate for first year is 4%, second year 5%, and life of the loan 6%.
-PITI: usual components of a mortgage loan: principal, interest, taxes, and insurance. Payment is attributed first to principal, next to interest. Taxes and insurance are paid from an escrow account. Interest and taxes are tax deductible.
-Principal: the balance due on the amount originally borrowed.
-Interest: the amount charged by the lender for the use of the amount borrowed.
-Conventional loan: any mortgage loan that is now government insured or guaranteed.
-Government loan: FHA-insured or VA-guaranteed loans.
-Conforming loan: conforms to Fannie Mae/Freddie Mac guidelines.
-Nonconforming loan: does not conform to Fannie Mae/Freddie Mac guidelines.
-Jumbo loan: one that exceeds current Fannie Mae/Freddie Mac loan limits.
-First mortgage (or Trust): the primary loan placed on the property.
-Junior, or second mortgage (or Trust): secondary loan sometimes used in conjunction with first mortgage or one placed sometime after closing on first; such as a home equity loan.
-Portfolio lender: one who retains and continues to service the mortgage loans in-house.
-Prepayment penalty: a fee charged by the lender if you wish to pay off part or all of the balance due prior to the scheduled end of the term; penalty not allowed on any conforming or government loans; most often seen in jumbo loans and ARMs.
-Negative amortization: occurs whenever the monthly payment is not enough to cover the interest charges for that month with the additional amount being added to the principal balance; results in an increasing principal balance rather than a decreasing principal balance as occurs with a fully amortized loan.
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