Mortgage - loan for the purchase of real estate.
Those interested in buying a hose and taking out a mortgage should definitely read the information below (including all the links from the Federal Reserve and elsewhere). While it may not be the most enjoyable way to spend your time making the wrong decision can have a huge impact on your financial well being. Along with planning for retirement taking out a mortgage represent long term financial risks to your future well being. Failing to take the time to examine your options can be very costly in the long run.
Adjustable rate mortgages have the risk of increasing interest rates increasing the required payment.
- 30 year mortgage - mortgage to be paid off in 30 years.
- fixed rate mortgage - mortgage with a fixed interest rate that does not change over the course of the loan.
- adjustable rate mortgage (ARM) (variable rate mortgage) - mortgage where the interest rate adjusts during the course of the loan. Often the rate is reduced at the beginning of the loan in which case it will adjust higher during the loan period (unless rates were to drop dramatically).
- points - 1 point = 1% of the loan value. So 1 point on a $400,000 mortgage is $4,000. Points are paid at closing and serve to reduce the interest rate. For example, the mortgage company may offer a 30 year loan at 7% with 2 point or 7 1/8% with 1 point or 7 1/4 with 0 points (this is just an example).
- interest deduction - in the USA the interest paid on mortgages is deductible (depending on the current IRS rules for limits...). The deduction is granted for the interest paid not the principle paid. In the first few years (of a 30 year mortgage) the payment will be nearly all interest (for example $1,950 out of $2,000 a month as interest). Over the years the proportion of interest and principle will slowly move toward more and more principle being paid off (which will reduce the deduction that can be taken each year).
- jumbo mortgage - a mortgage above the conventional conforming loan limits which is set by Fannie Mae and Freddie Mac. Jumbo mortgages rates are higher than conventional mortgage rates. As of 2009 the limit was $417,000 or 125% of the median house price (but no more than 175% of the standard conforming limit - which puts the maximum at $729,750).
- mortgage broker - professional that provides mortgages to consumers. They can work for one company or can show options from a variety of companies.
- interest only mortgage - as you might guess a mortgage where the payment only covers the interest, principle is not paid back initially.
- pre-qualify - based on underwriting criteria a prospective home buyer will qualify for a certain loan amount (based on earning, earnings history, job, credit history, assets...). Being pre-qualified for a mortgage is an advantage for at least 2 reasons. First you know what amount you can afford to pay for a house. Second when you make an offer if you are pre-qualified the home owner knows you can get a mortgage for the required amount and therefore is more willing to accept your offer.
- reverse mortgage - essentially a home owner signs over the ownership of the real estate to the lender in return for a stream of payments
- Private Mortgage Insurance (PMI) - an additional monthly charge will be made each month if the mortgage is for more than 80% of the home's value. This can be waived after the % of loan to home value decreases below 80%, but often the home owner must bring the matter to the attention of the lender to have this charge removed. Cancellation of Private Mortgage Insurance: Federal Law May Save You Hundreds of Dollars Each Year
- fees - many fees are included with a mortgage. IN the USA the HUD-1 form must spell these fees out to the borrower.
When I have taken out mortgages and examined the various options I find IndyMac and CountryWide have presented reasonable options. Each time I have been looking different lenders would be offering the best options (rates, service...). So take a look around and get quotes from several sources, in addition to those two.
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