Mortgage

Mortgages - buying a house

To buy a house involves a lot of money and not everyone has enough of it on his bank account. If you are an average American, chances are you need a mortgage loan.

The purchase of real estate can usually be regarded as a joint undertaking between an equity investor and a lending institution. Very few occurrences of cash bought properties occur. In most real estate dealings a lender provides a part of the financing, and the property is held as security for the debt.

For the repayment of a debt a mortgage is a pledge of security. This pledge is made by formal written agreement in which the person who signs a promissory note pledges the property being financed as security (or collateral) for the debt. A mortgage in this context is a lien - not evidence of a debt.

The basic components of a mortgage

The principal. The total amount one borrows or has currently outstanding on the mortgage. It represents the amount that you owe to the lender.
The home equity: This is the value of the house above (or below) the outstanding principal of the mortgage. It represents the portion of the house that is yours. The equity is equal to the book value of the house minus the principal balance.
The mortgage rate. This is the interest rate that you are being charged on the principal. Obviously, the greater the principal and the higher the interest rate, the larger your monthly mortgage payments will be.
The mortgage payment: This is the regular installment of cash, paid monthly and sometimes even bi-monthly, with which you repay the mortgage.
The amortization period: the number of years it will take to completely repay the mortgage if you make the above-mentioned mortgage payments until the outstanding loan has been paid in full.
The mortgage term: the period of time covered by a specific mortgage agreement. When the term matures, the mortgage is renegotiated at prevailing interest rates. Hence, while the amortization period is typically on the order of 10 to 25 years, the mortgage term tends to be much shorter. It usually ranges from six months to five, or ten years at most. We say that a mortgage is ‘long’ if the term is closer to five years, and short when the term is closer to one year. However, the most important thing to note about mortgages is that mortgage interest rates will depend on the term of the mortgage. In other words, if you pick a 5-year term, you might be charged for example 8% interest on the principal you are borrowing. While if you pick a one year term, you might be charged for example only 7% on the principal. The reason for the difference in rate, depending on term, is that the interest rate yield curve is not necessarily flat, but can be upward sloping or downward sloping depending on the period in question.
The prepayment options. Depending on the institution, the term and the type of mortgage, you might be granted the right to prepay a certain portion of the loan at fixed points in time — without incurring any penalties. This feature is related to the concept of open mortgage, versus a closed mortgage. One can always convert an open mortgage to a closed mortgage, but not vice versa.

There are many types of mortgages and these can be classified into 2 groups: conventional and governmental loans. Mortgages from both categories can be further categorized as fixed rate loans, adjustable rate loans and different hybrids or combinations from these mortgage loans.

The US government provides mortgages which can be found from three government departments. These are the US Department of Veterans Affairs (VA), US Department of Housing and Urban Development (HUD) and The Rural Housing Service (RHS) of the U.S. Dept. of Agriculture. Aside from these, other mortgage plans for low cost to moderate housing plans are also available in different cities, states and counties. Most of these provide fixed rate mortgages and low interest rates.

Mortgage plans that are not included among these are under conventional mortgages. There are 2 kinds of mortgage under this category. These are conforming mortgage loans and non-conforming mortgage loans. Conforming mortgage loans follow the guidelines and conditions that were set up by 2 stock-holder owned corporations: Freddie Mac and Fannie Mae. These two companies purchase mortgage loans from lending institutions and package these into securities that are then sold to investors.

Both organizations set guidelines on down payments, suitable properties, loan amounts, borrower credit and income requirements on mortgages. And every year, loan limits for persons applying for their first mortgage are made known. To see their tables for loan limits, interest rates, and other information, visit the Fannie Mae (www.fanniemae.com) and Freddie Mac(www.freddiemac.com) websites.

There are also other mortgage loans available in the market. These non-conforming loans include: Jumbo loans and B/C loans. Jumbo mortgage loans are those that are above the maximum loan established by Freddie Mac and Fannie Mae. It is a kind of mortgage that has a higher interest than conforming loans because loans are acquired and bought in lower degree.

B/C mortgage loans, on the other hand, refer to plans that are offered to persons who have borrowed mortgage loans earlier but have filed for foreclosure and bankruptcy. This is also for borrowers who have had a record of late payments.

As mentioned earlier, conventional and governmental mortgages can be classified into fixed rate mortgage and adjustable mortgage. From the term “fixed rate”, fixed rate mortgage loans are those whose monthly payments remain fixed over the period of the loan. There are so many kinds of these ranging from 10 - 30 years but the more popular terms for mortgage are 15 and 30. You should note that a shorter mortgage period assures you a smaller interest to pay.

If you want to avail of mortgage loans where monthly payments can change periodically, then you could choose a plan under adjustable rate mortgages. The interest in this type of mortgage loan changes depending on the type of index made to the interest rate. Some of these indexes include Constant Maturity Treasury (CMT), Prime Rate, Certificate of Deposit Index (CODI) , 12-Month Treasury Average (MTA), Cost of Savings Index (COSI), Certificates of Deposit (CD) Indexes, Treasury Bill (T-Bill), 11th District Cost of Funds Index (COFI), London Inter Bank Offering Rates (LIBOR) and Fannie Mae’s Required Net Yield (RNY)

Online mortgage information reveals that many companies offer online resources and services for those who want to avail of these loans. But before choosing the right type of mortgage there are some considerations you have to think about such that your mortgage plans will work out with your financial objectives. These are:

The amount you can pay monthly for the mortgage
How much you can pay for down payment
How long you plan staying on the house
Consider if you plan to make extra principal payments
And since mortgages take over long periods of time to cover, it is also important that you consider the stability of your income.

More mortgage information