Monthly Archives: October 2015

Buying a Home, Mortgages, Resources

What Is Equity?

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Equity is the value YOU own in property such as a house. It’s the difference between what’s OWED and what the property is WORTH in the current market.

The example this video shows – you have a house worth $300,000 today and you owe the bank $200,000.  Your equity would be $100,000.

If the house is valued at $500,000 in five years, and you still owe $150,000 your equity will be $350,000.

Equity grows if the property value goes up or if the amount owed goes down.  The key thing to remember, simple as it sounds, is that you “own” increases in value. The bank’s loan doesn’t go up if the home’s value goes up.

Equity in a home can be used as collateral for loans but a house is not a piggy bank. Home equity can become a key financial asset over time; treat it wisely.

Buying a Home, Mortgages, Resources

What Is “Prime”?

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The Prime Lending Rate – sometimes just called “Prime”  – is the interest rate that banks charge each other for overnight loans. Some consumer rates – like ARMs – are set in relation to Prime.

In the US, Prime is affected by the Federal Reserve lending rate to banks; historically, Prime is about 3 percent above the Fed rate.

The video shows  an example.

  • The Federal Reserve loans to Bank A at 1%
  • Bank A loans to Bank B at 4%
  • Both banks – A & B – will recalculate variable-rate loans like ARMs on that 4% Prime figure.

ARM rates are frequently defined as “% above Prime” – that gap is usually called the “margin” or “spread.” Just remember those 3 layers in Prime: Federal Reserve Bank A Bank B And finally, YOUR rate.

Buying a Home, Mortgages, Resources

What Is PMI?

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This video tells you about it all. PMI stands for Private Mortgage Insurance or Insurer. These are privately-owned companies that provide mortgage insurance. They offer both standard and special affordable programs for borrowers.

These companies provide guidelines to lenders that detail the types of loans they will insure. Lenders use these guidelines to determine borrower eligibility.

PMI’s usually have stricter qualifying ratios and larger down payment requirements than the FHA but their premiums are often lower and they insure loans that exceed the FHA limit.

Buying a Home, Mortgages, Resources

What Is Mortgage Insurance?

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Like the video shows, mortgage insurance is a policy that protects lenders against some or most of the losses that result from defaults on home mortgages. Like home or auto insurance, mortgage insurance requires payment of a premium, is for protection against loss, and is used in the event of an emergency.

If a borrower can’t repay an insured mortgage loan as agreed, the lender may foreclose on the property and file a claim with the mortgage insurer for some or most of the total losses.

You generally need mortgage insurance only if you plan to make a down payment of less than 20% of the purchase price of the home. The FHA offers several loan programs that may meet your needs.

Buying a Home, Mortgages

What Are Discount Points?

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Discount points allow you to lower your interest rate. While this video simplifies things to help you remember, “points” are essentially prepaid interest with each point equaling 1% of the total loan amount.

Generally, for each point paid on a 30-year mortgage the interest rate is reduced by 1/8 (or.125) of a percentage point.

When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid.

Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment.

Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.

Mortgages

What Is Included In A Monthly Mortgage Payment?

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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.
If you are refinancing compare what is and isn’t included in your financing options. Watch this video and it’ll make sense.

Buying a Home, Mortgages

What Factors Affect Mortgage Payments?

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Well, as this story shows, 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.
In bullets:

  • Down payment
  • Loan size
  • Interest rate – fixed or adjustable
  • Repayment term – how long
  • Payment schedule – how often

All affect the size of your payment.

Buying a Home, Mortgages

What Are The Advantages Of 15- And 30-Year Fixed-Rate Mortgages?

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For both, as we show you in this video, compared with other options,  with fixed rates, housing costs won’t be affected by interest rate changes and inflation.

With A 30-Year Term: 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.

With A 15-year Term: Loan is usually made at a lower interest rate. Equity is built faster because early payments pay more principal. And the loan is paid off earlier.

Compare payments, principal and interest totals to make a decision.

Buying a Home, Mortgages

How Does The Interest Rate Factor In Securing A Mortgage Loan?

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As you’ll see in the video, a lower interest rate allows you to borrow more money than a high rate with the some monthly payment.
Interest rates can fluctuate as you shop for a loan so ask lenders if they offer a rate “lock-in” which guarantees a specific interest rate for a certain period of time.

Remember that a lender must disclose the Annual Percentage Rate (APR) of a loan to you. The APR shows the cost of a mortgage loan by expressing it in terms of a yearly interest rate. It is generally higher than the mortgage interest rate because it also includes the cost of points, mortgage insurance and other fees included in the loan.

Buying a Home, Mortgages

What Types Of Mortgage Loans Are Available?

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This video tells you about the most common types: Fixed Rate, ARM, Balloon and 2-Step.

First, Fixed Rate Mortgages: Payments remain the same for the life of the loan generally 15 years or 30 years. Interest rates remain the same, so payments are predictable.

A second common type is an Adjustable Rate Mortgage, or ARM. ARM Payments increase or decrease on a regular schedule with changes in interest rates increases are typically subject to limits.

Third, Balloon Mortgage: These 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.

Finally, a Two-Step Mortgage- Interest rates adjusts only once and remains the same for the life of the loan.

Many other types are available, including government-insured mortgages and VA loans for veterans. Talk to lenders and real estate professionals to assess your situation.