Mortgage / Home Loan
Home mortgages are available from several types of lenders: commercial banks, mortgage companies, and credit unions. Different mortgage lenders may quote you different prices, so you should contact several lenders to make sure you're getting the best price.
Qualifying for a mortgage is based on your income-debt ratio
>> What is a Mortgage?
Whether you are buying your first home, trading up to a larger home, building your dream home, or even down-sizing once the kids are out on their own, a house is probably the single biggest investment you will ever make. When purchasing a real estate property, unless paying cash, consumers typically finance all or a portion of the purchase price. A mortgage in essence is the conditional pledge of the property to a creditor as security for performance of an obligation or repayment of a debt.
The document the buyers' sign promising to pay the money owed is the note. Both documents are filed for public record to protect all parties involved. The amount of the money borrowed, called the principal, plus interest, which is the cost of using the money, are paid back to the creditor in monthly installments. Some mortgages are available where the buyer pays interest only, monthly or quarterly. (Check with your lender for availability).
Home mortgages are available from several types of lendersincluding a mortgage broker. Brokers arrange financial transactions rather than lending money directly; in other words, they find a lender for you. A broker's access to several lenders can mean a wider selection of loan products and terms from which you can choose. Brokers will generally contact several lenders regarding your application, but they are not obligated to find the best deal for you unless they are bound by contract to act as your agent. Consequently, you should consider contacting more than one broker, just as you should with any financial institutions.
>> Qualifying for a Mortgage
Generally speaking, qualifying for a mortgage is based on the ratio of income and debt. It is determined by multiplying your gross monthly income (before any taxes are withheld) by a mortgage factor of 28 - 36%, and then subtracting all long-term monthly debts, i.e. car payment, credit cards, etc. The remaining amount is the mortgage payment you qualify for. (Please confirm your specific situation with an actual mortgage lender).
>> Types of Mortgages
1. Fixed Rate Mortgage
With a fixed rate mortgage, payments remain the same for the life of the loan, which can be 15, 20, or 30 years, depending on your lender. Usually, the shorter the term, the lower the interest rate and the quicker equity is built in the property. During the beginning years of a 30-Year loan, more interest is paid than principal, meaning larger tax deductions. As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.
With most fixed rate mortgages, your monthly principal and interest payment will not change for the term of the loan, regardless of whether interest rates rise or fall. In exchange for that stability, you may have a higher interest rate than you would with an adjustable rate mortgage.
2. Adjustable Rate Mortgage
With an adjustable rate mortgage, your payments will vary over time. This mortgage typically has an initial fixed rate lower than the rate of a comparable fixed rate mortgage. The initial fixed rate period is followed by adjustment intervals. For example, a "3/1 ARM" is fixed at an initial low rate for the first 3 years, and then adjusts every year based on an index. The adjustable rate mortgage is a good choice for buyers who will have a substantial increase in salary over the adjustment period and therefore, can absorb the additional payment if the payments increase during the adjustment.
This mortgage type allows the borrower to qualify for a larger loan amount. Many adjustable rate mortgages also give the buyer the benefit of adjusting downward. The adjustment rate is determined by several indexes, so please consult with your lender to determine if this type of mortgage is right for you.
3. Balloon Mortgage
A balloon mortgage offers very low rates for an initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is due or refinanced (though not automatically).
4. Two-Step Mortgage
A two-step mortgage has an interest rate that adjusts only once and remains the same for the life of the loan.
5. Reverse Mortgage
The reverse mortgage is aptly named because the payment stream is reversed. Instead of the borrower making monthly payments to a lender, as with a regular mortgage, a lender makes payments to the borrower. This special mortgage is used to convert equity in a home into cash to provide seniors financial security in their retirement years. There are age restrictions with the reverse mortgage.
>> Become Mortgage-Free Faster
1. Monthly, Bi-Weekly, or Weekly Payments
Once your mortgage amount, rate and amortization period have been established, your monthly payment can be calculated. Now is the time to decide how often you want to make your payments, because by selecting the right payment frequency could literally mean thousands of dollars in savings.
For example, on a $100,000 mortgage at 8% interest, amortized over 25 years, the monthly payments would be $763.21. However, by simply switching to bi-weekly payments (every two weeks) with payments of $381.61 (half of the monthly payment), there would be a saving of $30,484 in interest! Weekly payments of $190.80 will save $30,839 in interest, and you will be mortgage free in 19 years vs. the full 25 year period.
2. Prepayments - Extra Payments Against Principal
This is one of the most important features to look for when you are getting a mortgage. Having the prepayment privilege that works to your specific needs could mean a difference of thousands of dollars over the life of your mortgage. Although all financial institutions offer some form of prepayment privilege, the amount and how it can be applied varies from one to another.
Some offer only up to 10%, once per year, and on the anniversary date. Then there are others that offer as high as 20% per year, and prepayments can be done throughout the whole year as long as the total does not exceed 20%. Ideally, you should work your prepayment privilege as often as possible throughout the year. Saving aside to make that big prepayment is not the best strategy. We have found that the small, regular prepayments will reduce your mortgage faster.
3. Increase Your Regular Payment
The secret to borrowing is borrow early in your life. The reason is that the future value of the dollar decreases. When you borrow early, your payments are set. As time elapses, our incomes tend to increase, but our mortgage payments stay the same, provided you locked-in to a long term, fixed mortgage.
Therefore, in the future you may be in a position to increase your payment on the mortgage, regardless if you are paying weekly, bi-weekly, or monthly. Any increase in payment is directly going to pay down the mortgage, thus saving you thousands of dollars due to the effect of interest not compounding on that amount for the life of the mortgage.
4. Double-Up on Payments
A few lenders will allow you to double-up on your payments, and the extra payment goes directly in the principal. If you double-up once in the year, you have just achieved the benefits of the weekly or bi-weekly mortgage. This is a neat little feature for someone who prefers the monthly payments but wants the results of the weekly and bi-weekly payments.
5. Early Renewal Option
This is a great feature to have when interest rates are on the rise. If you are locked-in to a term and the mortgage will be maturing in months or years down the road, and the mortgage rates are on a rise, you can renew your mortgage before the maturity and lock-in the low rates for a new term. You may not even have to pay anything out of pocket and still save over the term, especially if rates move up considerably.
6. Portable Mortgage
If you want to take your mortgage with you when you move, you can if your mortgage has a clause that allows you to do that. This option allows you to continue your savings on your lower rate if the going rates are higher, as well as avoid any penalties if you were to break that mortgage. If you need a larger mortgage for the new property, your existing mortgage amount can be increased. As for the associated costs, since a new mortgage document must be registered on title, legal fees and normal appraisal fees would be applicable.
7. Assumable Mortgage
If you are moving and don't want to take your mortgage with you, or you are selling and not buying, an assumable feature will allow the buyer(s) of your property to take over the mortgage, provided they meet the lender's qualifying criteria. By doing so, you will not pay any penalties as you are not breaking the mortgage contract. In fact, if your interest rate is lower than those available at the time, your assumable mortgage suddenly became a great selling feature for your property.
Remember: You must get a release from the Mortgage Company to ensure that you are no longer liable for the mortgage. Some mortgage companies automatically offer a release, but with others, you must make the request, and do it through your lawyer.
8. Mortgage Life Insurance (optional)
Since your home is likely your single largest investment, you may want to protect that investment. Many financial institutions offer mortgage life insurance at an affordable and competitive price, and the requirements for eligibility are usually quite simple to meet. If you or your co-borrower (if you choose joint coverage) becomes deceased, the insurance company will pay off your mortgage.
Also, some institutions now offer job-loss and/or disability insurance to borrowers. The best thing to do in making a decision about how to insure your mortgage is to have an insurance agent work out the figures for a private term insurance and mortgage life insurance.