 Learn
about Loans
Our web site contains many valuable learning resources including:
The most important thing to know is the
loan process, how it works and what choices you have. If
you understand this you will begin to see how an educated
and knowledgeable Loan Specialist can guide you through this
process and assist you in finding the right loan program
for your needs.
What is a Mortgage?
According to Webster's ,
a mortgage is "the pledging of property to a creditor as security
for the payment of a debt." In plain terms, it is the legal contract that says
if you don't pay the loan back (along with all of the fees and interest that
are included with it), then the lender can have your house.
Your mortgage can be a very valuable wealth increasing tool allowing you the ability to earn equity appreciation in an appreciating market while gaining the mortgage interest deduction on your federal tax returns. Consult with your tax advisor for how much of your interest you can deduct. In comparison to credit cards and personal loans, your mortgage secured by your property, can provide you financing and cheap money to continue with your dreams. It’s extremely important to work with an experienced loan officer to provide you the best available terms and options to keep you in track with your short term, mid-term, and long-term goals.
Your down payment is the lump sum you pay up front that reduces the amount of money you have to finance. Depending on your qualifying, you may be eligible for 100% financing or as little as 3 to 5 percent of the purchase price. The more money you put down, though, the less you have to finance and the lower your monthly payment will be. Generally any one loan that is over 80% loan to value, will also carry mortgage insurance. The larger your down payment and lower your loan to value, the lower your mortgage insurance premium. Example: 10% down with 90% loan to value will carry a higher mortgage insurance premium than 15% down with 85% loan to value.
Insurance - There are several types of insurance that can come into play when you get a mortgage. You'll have hazard insurance to protect against losses from fire , storms, theft, etc., and if your home is in a flood risk zone you may be required to carry flood insurance. In Hawaii, most lenders require hurricane (windstorm) insurance. The amount of coverage you will be required to carry will be to cover your full replacement cost as determined in the appraisal based on current costs of construction to rebuild the same house should a disaster occur. Any single loan that is above 80% (a few rare Alt-A Programs may waive this requirement), will require mortgage insurance also known as MI (mortgage insurance) or PMI (private mortgage insurance). Mortgage insurance does not cover your mortgage in the case of death, it protects the lender with an insurance policy on the loan granted to you. Mortgage Insurance companies have their own guidelines and requirements of a borrower in order to issue such policy. Mortgage Insurance can sometimes be pretty expensive, so it makes sense to put as much into your down payment as you can.
The mortgage payment is made up of:
- Principal - This is the total amount
of money you are borrowing from the lender (after you've
made your down payment). It is the amount of money
you are financing.
- Interest - This is the money the
lender charges you for the loan. It is a percentage
of the total amount of money you are borrowing.
- Taxes - Money to pay your property
taxes is often put into an escrow account, meaning
that the money is placed in the hands of a third party
until it is time to pay or certain conditions are met.
A portion of your property tax is added to your monthly
mortgage payment and held in escrow until it is due.
- Insurance - There are several types
of insurance that can come into play when you get a
mortgage. You'll have hazard insurance to protect against
losses from fire ,
storms, theft, etc., and if your home is in a flood risk
zone and you're getting a federally insured loan, you'll
have to get flood insurance. Unless you have at least
20 percent equity in your home, you'll also have to
pay private mortgage insurance (PMI). This can sometimes
be pretty expensive, so it makes sense to put as much
into your down payment as you can. (Equity is the portion
of your home's value that you have already paid for.)
These pieces of your mortgage payment are referred to as PITI .
There are also closing costs that you will have to pay.
We talk about them in detail later in this article.
Mortgages are typically paid off in incremental payments
that gradually chip away at the principal of the loan.
This is called amortization . The portion
of your payment that goes to pay the interest is much
higher than the portion that goes to the principal --
at least for the first several years. These payments
are precisely calculated and scheduled to pay off the
loan in a specified period of time.
Well now that you know what a mortgage is, lets break
down what you need to know about Mortgage Loans. Learn
the Loan Process and then try submitting your loan
scenario. |
