Question: What Is A Mortgage?

Answer: Generally speaking, a mortgage is a loan obtained to purchase real estate. The "mortgage" itself is a lien (a legal claim) on the home or property that secures the promise to pay the debt. All mortgages have two features in common: principal and interest.

Question: What Is A Loan To Value (LTV) And How Does It Determine The Size Of The Loan?

Answer: The loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing. Each loan has a specific LTV limit. For example: With a 95% LTV loan on a home priced at $50,000, you could borrow up to $47,500 (95% of $50,000), and would have to pay $2,500 as a down payment.

The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to payout of their own funds. So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require mortgage insurance policy.

Question: What Types Of Loans Are Available And What Are The Advantages Of Each?

Answer: Fixed Rate Mortgages: Payments remain the same for the life of the loan

Types: 15-year, 30-year
Advantages: Predictable
Housing cost remains unaffected by interest rate changes and inflation

Adjustable Rate Mortgages (ARMS): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits

Types:
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)
Two-Step Mortgage: Interest rate adjusts only once and remains the same for the life of the loan
ARMS linked to a specific index or margin

Advantages:
Generally offer lower initial interest rates
Monthly payments can be lower
May allow borrower to qualify for a larger loan amount

Question: When Do ARMs Make Sense?

Answer: An ARM may make sense if you are confident that your income will increase steadily over the years, or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.

Question: What Are The Advantages Of 15- And 30-Year Loan Terms?

Answer: 30-Year: In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions. As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.

15-year: Loan is usually made at a lower interest rate. Equity is built faster because early payments pay more principal.

Question: Can I Pay Off My Loan Ahead Of Schedule?

Answer: Yes. By sending in extra money each month, or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal.

Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.

Question: Are There Special Mortgages For First-Time Homebuyers?

Answer: Yes. Lenders now offer several affordable mortgage options which can help first-time homebuyers overcome obstacles that made purchasing a home difficult in the past.

Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.

Question: How Large Of A Down Payment Do I Need?

Answer: There are mortgage options now available that only require a down payment of 5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you'll have.

Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and --possibly-- repairs and decorating.

Question: What Is Included In A Monthly Mortgage Payment?

Answer: The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable).

Question: What Factors Affect Mortgage Payments?

Answer: The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.