When you are looking for a home loan, it is important for you to understand all the terms for the mortgage. A loan may look like a better deal if the rate is lower, but you should consider all aspects of the loan. Find out what the total cost of the mortgage will be over the life of the loan. These are some of the terms you will want to consider when looking at loans.
Interest rates change daily. The same lender will quote different rates for each specific type of loan they offer. The interest rate you qualify for depends on the size of mortgage, the size of your monthly payments, your down payment, term of the loan and credit worthiness.
Lenders typically charge a loan origination fee in the form of points. Each point is equal to 1 percent of the loan amount. Points are usually paid as a one-time expense at closing. The more points a homebuyer is able to pay at closing, the lower the interest rate should be.
Annual Percentage Rate
This is the total interest rate taking into account points and other costs of financing.
Most home loans are repaid over 10 to 30 years. With a shorter repayment term, monthly payments will be higher, but less interest will be paid over the term of the loan. First-time homebuyers normally take the longest mortgage term offered in order to get the lowest monthly payment.
A loan-to-value ratio is the loan balance you owe compared to the appraised value of the house. This usually is described as a percentage. Loans have a limit for the money that can be borrowed. For example, 95% LTV means you can borrow 95 percent of the value of the home and must make a down payment of 5 percent.
The down payment is the amount of cash the homebuyer pays toward the purchase price. If the loan has a 95% LTV ratio, then the buyer must come up with 5 percent of the loan’s value for the down payment.
Mortgage insurance protects the lender in case the homebuyer does not repay the loan. A lender typically requires mortgage insurance if the down payment is less than 20 percent of the price of the house. Private mortgage insurance (PMI) pays the lender a percentage of their loss in case of foreclosure and will be included in your monthly mortgage payment.
FHA and VA provide government insurance on certain loans. They will pay the lender up to 100 percent of the original loan if the bank is forced to foreclose. All THDA loans must be backed by FHA, VA, USDA/RD or an approved private mortgage company.
Homebuyers will sometimes pay a mortgage insurance fee at closing and then a small monthly premium as part of the mortgage payment.
When the homeowner has paid more than 20 percent of the fair market value of the house, he or she may request the monthly premium to be removed by federal law. Once the LTV ratio reaches 78%, mortgage insurance premiums must be removed. Discuss this with your lender.
When a lender quotes an interest rate, that is the rate that is in effect for that particular day. That rate may not be available when you close the loan. Rates change daily and sometimes multiple times during a day. Homebuyers should ask whether the lender will lock-in the rate, for how long, whether there is a charge for the lock-in, when the lock-in will take effect and whether the rate can be changed at a later time. Also ask if there is a fee to lock-in the rate and if the lock-in fee is refundable if your application is rejected. It is important to get this information in writing.
At the beginning of the loan and again at the beginning of every year, the lender estimates how much the taxes and insurance will cost for the year and divides the cost by 12. The lender collects that money each month and saves it in an escrow impound account. When the bills are due, the lender pays them. A homebuyer should find out how much the monthly payment will be and whether he or she will earn interest on the money in the account. (Lenders typically require approximately two months’ worth of payments for insurances and taxes at closing.)
Many closing costs vary by the lender. Fees included in closing costs typically include: the application, origination/points, credit report, appraisal, survey, lender’s attorney, title search and title insurance, tax service, flood certificate, prepaid interest, home insurance, notary fee, wire fee, transfer taxes, recording fees and document preparation. The homebuyer should get a good faith estimate, which is a listing of all the expenses the homebuyer will be asked to pay. The homebuyer should ask if any of these fees are refundable if he or she does not qualify for the loan.
If a homeowner has extra money, he or she can make partial prepayments on the loan. This allows the individual to reduce the total amount he or she owes on the loan, thus saving money on interest. Some lenders charge a prepayment penalty. In addition, some loans may require a prepayment penalty if refinanced before a specified period of time. Be sure to ask the lender if the loan includes a prepayment penalty.
Transfer of Loan
While you may start the loan process with a lender or mortgage broker, you could find that after settlement another company may be collecting the payments on your loan. Collecting loan payments is often known as “servicing” the loan. Your lender or broker will disclose whether it expects to service your loan or to transfer the servicing to someone else.