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Mortgage: What’s the Deal? An Introduction to Loans Part-3

The Advantages and Disadvantages of Fixed-Rate Mortgages vs. Adjustable-Rate Mortgages

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Loans may be set up in an infinite number of ways, but the two main types are fixed-rate and adjustable-rate.

Modified-Rate Mortgage

A mortgage with a fixed interest rate will have the same monthly payment for the whole of the loan. Until the loan is paid off or refinanced, the interest rate on a 30-year, 4% fixed-rate loan will remain constant. An advantage of fixed-rate loans is that monthly payments are set in advance.

Revolving Credit Mortgage (ARM)

Adjustable interest rates fluctuate with market conditions. Many ARMs include an introductory fixed-interest “teaser rate” period of 5, 7, or 10 years. Your interest rate will stay the same during this period. Your interest rate will change every six months to a year after your fixed-rate period finishes. The interest you pay each month might thus affect the amount you pay each month. Interest-rate adjusting mortgages commonly have 30-year periods.

Variable-rate mortgages (ARMs) can be beneficial for some borrowers. You can get a better interest rate on an adjustable-rate mortgage if you plan to move or refinance before the end of your fixed-rate period.

Consider Your Income, Assets, and Credit Rating

We’ve shown that you have no say over the going market rate, but you can influence the lender’s perception of you. Pay close attention to your credit score and DTI and remember that fewer negative marks on your record make you appear like a reliable borrower.

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There are a few criteria that must be met before you can apply for the loan. Mortgages are often granted to those who have established credit, a regular source of income, and a debt-to-income ratio of 50% or less (at least 580 for FHA or VA loans or 620 for conventional loans).

What Does It Take To Pay A Mortgage?

Monthly payments for your mortgage are referred to as your “mortgage payment.” There are four primary components that make up your monthly payment: principle, interest, taxes, and insurance.

Principal

Principal represents the remaining balance of your loan. After making a $10,000 payment on a $200,000 mortgage loan, the borrower will owe $190,000. Your mortgage principle will be reduced by a portion of your monthly payment. The principle amount of your loan can be reduced and the interest you pay can be kept to a minimum by making extra payments on it.

Interest

Your monthly interest payment will be calculated using the interest rate multiplied by the loan principal. Mortgage companies collect interest payments and distribute them to the loan’s investors. Your interest payments will decrease along with the principle when the loan expires.

Finances, Insurance, and Taxes

Payments for taxes and insurance on your house may be rolled into your monthly mortgage payment through an escrow account. Your lender will hold onto the funds in your escrow account until those expenses are paid. Then, when the time comes, the lender will cover expenses like tax obligations and insurance payments.

The Role of Mortgage Insurance

Unless you can put down at least 20% on a property, mortgage insurance will likely be required for your loan. Traditional mortgages often involve PMI (PMI).

The down payment size has no bearing on the mortgage insurance premium (MIP) required for FHA loans. The financing cost for a VA loan might be included in the mortgage itself. There is an origination cost and a monthly guarantee fee for USDA loans.

PMI

If you want your traditional conforming loan lender to rest easy, you’ll need to pay for private mortgage insurance (PMI). If your down payment is less than 20%, private mortgage insurance (PMI) will likely be required. When your loan-to-value ratio (LTV) is 80% or lower, you may be able to have your PMI premiums cancelled at your request. That’s what lenders mean when they claim you have 20% equity in your property.

PMI premiums are typically half a percent to one percent of the home’s purchasing price. PMI premiums might be rolled into the monthly mortgage payment, paid in full at closing, or a hybrid of the two. A lender-paid PMI is available in which the monthly charge is covered by the lender instead of the borrower.

MIP

No matter how much of a down payment you make or how much equity you already have in your house, if your mortgage is an FHA loan, you will be required to pay a mortgage insurance premium (MIP) for at least the first 11 years of your loan’s term. Please be aware that MIP is required throughout the life of the loan unless a 10% down payment is made.

The Jargon of Home Loans

It’s possible you’ll encounter some housing market jargon you’re unfamiliar with during your search. We’ve assembled a simple glossary of mortgage industry words for your convenience.

Amortization

A portion of your monthly mortgage payment will be used to pay interest to your lender or mortgage investor, and the remaining portion will be used to reducing the principle balance of your loan. How such payments are spread out throughout the loan’s term is known as its “amortisation.” There is a greater percentage of your payment that goes toward interest towards the beginning of the loan. Over the life of a loan, more of each payment will eventually be used toward the principal.

First Expenditure

The first sum of money put down on a house is called the down payment. When applying for a mortgage, a down payment is often required.

A greater down payment often equals better loan conditions and a lower monthly payment, although this can vary depending on the sort of loan you’re obtaining. As an example, traditional loans may only demand a 3% down payment; nevertheless, you will be required to pay a monthly PMI cost to make up for the low down payment. You may avoid PMI and obtain a better interest rate if you put down 20%.

Use a mortgage calculator to explore how different down payment amounts may effect your monthly payments.

Escrow

Having a house means having to pay for things like property taxes and insurance. Lenders typically establish an escrow account to handle these costs for you. Your lender will handle your escrow account, which is similar to a bank account. The purpose of the account is to gather cash so that your lender may pay your taxes and insurance on your behalf; however, no interest will be earned on the money stored there. Your monthly mortgage payment will include an escrow payment.

Escrow accounts aren’t standard with all mortgages. Unless otherwise specified in the loan documents, you will be responsible for making your annual tax and insurance payments out of your own pocket. Lenders typically provide this choice because it protects them against unpaid tax and insurance claims. An escrow account is needed if your down payment is less than 20%. If your down payment is at least 20%, you’ll have the choice of paying these costs up front and rolling them into your monthly mortgage payment.

Remember that the sum you must have in your escrow account is calculated based on your annual insurance and property tax bills. If any of these factors shift from year to year, so too will your escrow payment. This implies that your mortgage payment each month might go up or down.

Loan-to-Value Ratio

To illustrate the recurrent cost of borrowing money, lenders use interest rates to express this cost as a percentage that borrowers must pay back every month. The interest rate you’ll have to pay depends on both broad economic trends (such as the current Fed funds rate) and specifics about your own financial situation (such as your credit history, income, and assets).

Notice of Mortgage Loan Payments

A promissory note is a legal document that spells out the loan’s repayment terms and conditions in writing. Mortgage notes are common in the real estate industry. It’s like an IOU, only it lays out the terms for paying it back. The following provisions apply:

Forms of Interest Rates (adjustable or fixed)
Ratio of Interest Rate
Timeframe for paying back the loan (loan term)
Money borrowed that must be repaid in full
The promissory note will be returned to the borrower once the debt has been repaid in full. Your lender has the right to take possession of the property if you fail to fulfil your obligations under the promissory note (such as making loan repayments on time).

Creditor Servicing

If you have a mortgage, your monthly statements, payments, escrow account management, and questions should all come from the loan servicer.

In certain cases, the mortgage lender will also act as the mortgage servicer, although this is not always the case. Your loan’s servicing may be out of your control if the lender decides to sell those rights.

Final Thoughts:

If you’re thinking about becoming a homeowner, you should know that there’s a lot to take in.
While buying a house may not be cheap or simple, the benefits far outweigh the costs. You should not go into the mortgage market without first learning as much as possible about the process. Are you prepared to make the initial move toward purchasing a home?

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