Mortgage Options for Home Buyers
For first-time buyers or even repeat buyers, it can be daunting to figure out what all your mortgage options are. Especially when you have little time to commit to one after you have drawn up a contract to buy a house. Here is an overview of the mortgage products available. I have added common loan terms from mortgage lenders.
-Affordable Home Loan: An umbrella term used to cover various loan products aimed at first-time home buyers.
-Assumable loan: existing mortgage loan that can be assumed by another person; most conventional loans are not assumable; Government loans are assumable with the qualification of the new person.
-Bi-Weekly Mortgage: Half of the mortgage payment is paid every two weeks, resulting in an additional full principal payment each year.
– General mortgage: mortgage guaranteed by more than one property.
-Combined Rate (or Wraparound) Mortgage: A refinancing plan that combines the interest rate of an existing home loan with the current interest rate for an additional loan amount.
-Bridge (or swing): loan used to bridge the gap when someone is buying a new home before agreeing on their old home.
-Inexpensive Mortgage: Another name for a loan that included taxes and insurance along with the payment of principal and interest (PITI).
-Installment sale (also called a land contract): Usually a private agreement between a seller and a buyer where title does not pass until all payments have been made.
-Financing with transfer: whenever a seller agrees to finance the first or second mortgage on the property.
-Movable mortgage: Pledge of personal property to guarantee a promissory 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 against a home’s equity.
-Interest only: Your monthly payments only cover the interest on your mortgage loan. Your payment does not include any principal payments to build capital. In a market transitioning from a seller’s market to a buyer’s market, you may lose money on the sale of your home.
-125% Loan: A loan product where you are actually borrowing 25% more than the current value of the property you are buying. If you have to sell the property in the early years, you will find yourself “upside down” on the mortgage, owing more on the mortgage than you can sell the house on.
-Open mortgage: one in which additional funds can be borrowed without changing other terms of the mortgage, typical of construction loans.
-Combined mortgage: mortgage secured by a combination of real and personal property; it is often used for vacation properties, 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 real property that serves as collateral, but generally refers to seller financing.
-Reverse Mortgage: A special program for seniors (62 and older), which uses the senior’s home equity to provide additional income without having to sell their home.
-Subprime Loan: Risk-based pricing loan for people who cannot qualify for conventional prime loans; usually has a higher interest rate; scoring and credit evaluation are essential.
Mortgage Terms.
– Mortgage: the one who receives the mortgage, the lender.
-Mortgagor: the party that gives the mortgage, the borrower.
-Mortgage: document that establishes the property as collateral for the repayment of the mortgage loan debt.
-Note: a written promise to pay a debt.
-Trust deed: document that transfers the legal title to a neutral third party to give security to the mortgage loan debt. The choice to provide collateral for the loan through a mortgage or deed of trust depends on individual state law.
-Breach: breach of 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 (for example, a property worth $200,000 with an LTV of 90% means the lender will lend 90% of the value, or $180,000, and a down payment of 10%, or $20,000, will be required from the borrower.
-Qualification ratios: the percentage of monthly gross income allowed by different loan programs.
o The starting ratio is the amount allowed for the total housing expense.
o The 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 loan origination fee. Additional points may be charged to discount (lower) the interest rate.
-Buy-down: a cash payment to the lender that reduces the interest rate; It is often a marketing technique used by new home builders. Example: Sale of property for $200,000 with an initial purchase of 2-1. The interest rate for the first year is 4%, the second year is 5%, and the life of the loan is 6%.
-PITI: usual components of a mortgage loan: principal, interest, taxes and insurance. The payment is attributed first to principal, then to interest. Taxes and insurance are paid from an escrow account. Interest and taxes are tax deductible.
-Principal: the balance owed on the amount originally borrowed.
-Interest: the amount charged by the lender for the use of the borrowed amount.
-Conventional loan: any mortgage loan that is now insured or guaranteed by the government.
-Government loan: Loans insured by the FHA or guaranteed by the VA.
-Conforming Loan: Meets Fannie Mae/Freddie Mac guidelines.
-Non-Conforming 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 main loan placed on the property.
-Smaller or Second Mortgage (or Escrow): Secondary loan that is sometimes used in conjunction with the first mortgage or placed sometime after the closing of the first; like a home equity loan.
– Portfolio lender: the one that retains and continues to manage the mortgage loans internally.
– Prepayment penalty: a fee charged by the lender if you want to pay some or all of the balance due before the scheduled end of the term; penalty not allowed on any conforming or government loan; most often seen in jumbo loans and ARMs.
– Negative Amortization: occurs when the monthly payment is not enough to cover the interest charges for that month and the additional amount is added to the principal balance; results in a rising principal balance rather than a declining principal balance as with a fully amortized loan.
