Mortgages

If you are financing the purchase of your real property, you may be overwhelmed with information about mortgages and how to decide which product is best for you. You should meet with a mortgage broker or banker that you trust, verify their licenses, and ask for referrals. Here are some basics so you can approach the process armed with some information and knowledge.

A mortgage is a financial instrument that gives the lender a security interest in real property to secure a loan. When you borrow money to buy (or refinance) your property, you will sign a Note to evidence that debt, with repayment terms. The Note sets out the time for repayment and the interest rate charged by the lender. You will also sign a mortgage at the closing, which transfers an interest in the house to the lender to the extent of the funds borrowed. Mortgages vary quite a bit depending on the term of the loan and the interest rate, which may be fixed at one rate or change throughout the term of the loan.

The mortgage process has changed over time…years ago a customer would walk into the local bank, sit down at the loan officer’s desk, and get a loan. Problems arose because banks could only lend the money that it held in its depositors’ accounts. Because mortgages tend to be large loans, small banks ran out of money to lend quickly. In order to help smaller banks lend more money, and to improve the liquidity of the real estate market, Congress encouraged the formation of FNMA (Fannie Mae) and FHMLC (Freddie Mac). These companies purchase mortgages from banks, providing the necessary funds to enable banks to lend to more people. FNMA and FHMLC in turn, sell mortgage backed securities based on these loans that are sold on Wall Street to investors at a predetermined rate of return.

TYPES OF MORTGAGE PROGRAMS

Fixed Rate Mortgage – This is the most common mortgage type. As the name implies, the interest rate on a fixed rate mortgage does not change throughout the term of the loan. The number of years making up the term is commonly 30 or 15. A fixed rate mortgage offers the security of having a mortgage payment that remains constant over the life of the loan and is a good idea when interest rates are low and when you plan on staying in the home for a long period of time. A 30 year term usually will have a lower interest rate, and therefore a lower monthly payment, than a mortgage with a 15 year term. Often you can qualify for a larger loan amount if you apply for a longer payment term.

Adjustable rate mortgage (ARM) – As the name suggests, this type of mortgage differs from a fixed rate mortgage in that the interest rate changes during the term of the loan (sometimes also called Variable Rage Mortgages). The most common adjustable rate mortgage is a 1 year ARM, which adjusts annually to a new interest rate dependent on market conditions. When the interest rate changes, the new rate is calculated by using an index, such as the Libor or the Prime rate, and adding a margin (i.e. 2.0% to 3.0%). Most programs have limits to how much they can change per adjustment and also over the life of the loan. Adjustable Rate Mortgages offer the advantage of a lower initial interest rate in exchange for the security of a fixed rate. If you are planning to stay in your home for a short time, the ARM might be a good choice. Some ARMs are convertible to a fixed mortgage, although there are usually fees to do so, and other limitations such as the timing of the conversion. It is often only offered in certain years of the loan, and the rates after conversion are not the best fixed rates available.

There are several other mortgage options; you might hear about a two-step mortgage, a balloon mortgage, or a Jumbo mortgage. There are also programs available through the Federal Housing Authority (FHA) and the Veterans Administration (VA) which may help you qualify for a mortgage even if you don’t qualify for traditional bank loans.

Before you decide on any type of mortgage, make sure you get all of the costs, fees and other pertinent details from your loan officer so you can make an informed decision.