Understanding Mortgages Better

The various terms, rules, fees and options that are associated with a mortgage application are enough to scare a first-time mortgage applicant. Even to a person who has had a mortgage before, all these things could become somewhat intimidating and scary. Hence, it is necessary to understand mortgages thoroughly in order to use them to the hilt.

Some tips and illuminating facts on mortgages are given below:-

(1) Types of Mortgages – There are three main types of mortgages being used today: the fixed rate mortgages, convertible mortgages and the special mortgages.

With fixed rate mortgages, there are options to make the repayments in 30 years or 15 years. In the latter the interest will be half the former, but the monthly payments would be higher since the loan is to be covered in shorter time. There is also an option of biweekly payments on the 30 year mortgage, which can reduce the repayment time by about seven years. Apart from these, there is an adjustable rate mortgage where the rate fluctuates according to prevailing market conditions.

Convertible mortgages have five types. The first are the hybrid and convertible ARM, where the borrower is allowed to switch between a fixed rate and an adjustable rate if the market rate goes down. The second are the balloon loans in which the person makes low payments throughout the tenure of the loan, but needs to make a lump sum payment at closure. Similar to this is the third type – the interest only loans – but in this periodic lump sum payments are to be made, which normally are scheduled when the borrower gets his/her bonuses. There is a fourth type known as reverse mortgages for people who have good equity on their houses. With these loans no repayments are to be made until and unless the house is to be sold. Buy down loans, the fifth type, are dependent on the points to lower interest rates.

Special mortgages include the FHA loans and the Veteran Affairs loans. These are available for people with bad credit ratings and for people in the armed forces respectively.

(2) Fees – All mortgages have fees to be paid other than the principal itself and the interest. The different heads under which fees are to be paid are:-
a) Appraisal – These are the charges for calculating the present market worth of the house intended to be purchased.
b) Organization – These are the charges for processing the application and other related duties.
c) Down payment – This is the portion of the total house cost that needs to be paid upfront, before the loan could be processed.
d) Closing costs – These are the charges to be paid when the loan is ended. The charges go towards transferring the title of the home ownership from the lending bank to the borrower’s name.

(3) Terms – The common terms used with regards to loans could turn out to be quite complex in nature. The following are some of the terms commonly used:-
a) Points – Points are charges that are paid in order to lower the interest rate. Points are generally paid in a lump sum amount at closing time.
b) Good faith estimate – This is the total in amount of fees that is to be paid at closing time.
c) Loan locks – In fixed rate mortgages, the borrower may want to lock the interest rate when it is at ebb. There are charges for locking this rate of interest. But if the borrower does not want to lock the loan, then both the borrower and the lender could arrive at a mutually agreeable rate of interest.
d) A truth in lending disclosure – This is a form that gives the complete cost of the loan in both percentage and dollar form.
e) Pre-qualifying – This is the term used if the borrower qualifies for a loan before he/she makes an application for the same. This gives a clear idea to the borrower in advance how much credit would be available to make the final purchase, thus enabling negotiations with the seller.
f) PITI – PITI stands for principal, interest, taxes and insurance. These are all taken into account when calculating the amount of payment to make per month.
g) Escrow – Escrow is a third party account which holds money and important documents when the loan is going on. It is held as a kind of security for both the borrower and the lender.

This is only the tip of the iceberg when it comes to getting mortgage information, but it does try to cover the aspects of a normal loan application procedure. If you encounter something that you don’t understand, then do not hesitate to approach a financial consultant before signing on the dotted line.

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