Bill Gatton asked:




Your home is most probably the largest investment you will make during the entire course of your life. Home mortgage loans are most often the largest financial decision a person ever makes. It is important to fully understand how mortgages work and their component terms. Failure to do so can prove quite costly.

The first component is the duration of the loan. Mortgages most often have thirty year pay back periods. However, some newer exotic mortgages allowed for extension of this timeframe to up to fifty years. The long the loan term means the slower you are paying towards principal balance. This can prove risky. It is advised you stick with a 30 year term, and if you can afford the payment then seek a 25 year term.

The next important facet of a mortgage is its associated interest rate. Interest rates for mortgages are generally tied to a prevailing market rate. If you have good credit this rate tends to be lower. Also, a higher down payment can translate to a lower rate. It is important to seek the lowest rate possible. Even a tiny bit lower rate can translate to significant savings over the long course of the loan.

Some interest rates are fixed. This means the initial rate you have stays the same and never changes. This allows for effective family budgeting knowing exactly how much your housing expense will be on a continuing basis. The fact that is fixed doesn’t mean that you are stuck with it forever. At some point in the future if rates decrease it could be possible to refinance and thus lower your rate.

Other mortgages have what is called “adjustable rates”. These mortgages have interest rates which fluctuate with the benchmark rate. Most often, they go significantly up from the initial rate you are given. Many borrowers are confused and think their adjustable rate loan is actually fixed. It is imperative you know for sure which yours is. If you unknowingly have an adjustable rate you could be in for a rude surprise which is best avoided.

Some loans have what are called “teaser” rates. You are well served not to be teased in by these. The initial monthly payment amount on these mortgages are very low. That is the bait. Once they hook you, then the payment amount can radically increase. Many times so much so the borrower can no longer afford it. This is obviously a predicament you do not desire to find yourself in.

Some mortgages have various fees and other charges termed “points”. Many borrowers focus solely on the interest rate and fail to take into consideration these fees and points. Make sure you read all the fine print. See exactly what charges are levied at closing. High points or fees can wipe out an otherwise attractive interest rate.

Home mortgage loans can be confusing. If you don’t understand a clause then ask. If you still don’t understand, then ask again. Pay attention to the duration, the interest rate and ensure you understand if your rate is fixed or adjustable. Avoid high fees or points owed at closing. These simple steps can save you thousands over the time you own your home.

Louis

Jayson asked:


The term ‘reverse mortgage loan’ is not particularly descriptive of the kind of financing involved. It implies that the homeowner is lending money to the mortgage company.

With a regular mortgage, the usual pattern works like this: the total price of a property is $100,000. Of this amount, let’s say $10,000 (10%) is put down by the prospective homeowner – the other $90,000 is supplied by a bank or other financial institution. Then, over a period of 15 to 40 years (depending on the loan term), the homeowner pays back the $90,000 in regular monthly payments including interest.

With a reverse mortgage loan, a homeowner with equity in their home or who has paid off their existing mortgage, requests a cash sum from a lending institution. The big difference from a regular mortgage is that there are no monthly payments involved. In fact, there are no payments during the homeowner’s lifetime; the total loan amount is paid back only upon the death of the homeowner. This amount will also include interest accrued over the lifetime of the loan.

There are several ways in which the homeowner can enjoy the benefits of a reverse home loan. He or she can take out a single lump sum in cash, or alternatively, a regular monthly cash advance. Another option is to use the available loan as a line of credit and use it as needed; a homeowner could also choose to combine some of the options above.

Reverse mortgage loans can be of particular help to many older Americans who may be poor in terms of available savings or monthly income, but who are wealthy in terms of the equity that has built up over the years on their real estate property. For example, if a person is retired and purchased their house 30 years ago for $10,000, they have paid off their mortgage and the house is now valued at $100,000. They could take out a reverse home loan and have access to much of that equity, with no monthly payments.

Therefore, unlike a regular mortgage, with a reverse mortgage, such things as credit score and income are not particularly relevant as there are no monthly payments involved. Obviously, these loans are generally made to senior citizens who can use the equity in their home to help finance them on a monthly basis, or perhaps to pay off their medical bills, or maybe even to travel the world.

These reverse mortgage loans are usually tax-free and are officially known as ‘Home Equity Conversion Mortgages’ or HECMs. They are backed by HUD (The Department of Housing and Urban Development). This kind of loan can also be obtained from private institutions such as banks and many other mortgage lenders, who are not backed by HUD.



HARRIS

Kristin Abouelata – Home Loans asked:


Many people automatically obtain mortgage financing that amortizes over thirty years.  Amortize, according to Wikipedia, “is the process of decreasing, or accounting for, an amount over a period of time. The word comes from Middle English amortisen to kill.”  Basically, applying it to a mortgage, it means the terms for killing off that huge debt to which you just obligated yourself. That’s a nice thought – killing your mortgage, right?  Now, consider the basic question – how long are you going to be hacking away at this debt?

Typically, as aforementioned, the most common loan term is for 30 years.  But also quite common is the 15 year mortgage.  What’s the most obvious difference?  In basic terms, it’s the payment itself.  The loan that amortizes over 15 years costs you approximately 20% to 25% more out of pocket per month.  That difference oftentimes is where the buck stops.  It’s a matter of affordability.

However, if the numbers work for you, a 15 year mortgage has its added attractions.  In a nutshell, you pay less interest over the period of the loan, so it’s less out of pocket at the end of the day (or mortgage, in this case).  Over fifteen years, this time reduction can result in considerable savings.

There’s another solution to this dilemma. However, it requires personal discipline.  You can obtain a 30 year mortgage, figure out what extra principal payments to make each month, and pay it off in 15 years.  This situation works for a lot of people.  For instance, if your monthly income is inconsistent, it’s a great plan.  Say you consistently make $60,000 annually, but you get the majority of your income only two times a year.  Obtaining a fifteen year loan, although affordable on paper for you, doesn’t pan out realistically.   Yet, if you’re disciplined, you can plop down a big principal payment when the money is flowing those couple of times a year.  That way, you’re not backed into a corner to always have to cough up the higher payment.  This scenario works for some people quite well.

There are other loan terms besides 15 or 30 year mortgages.  There are 10, 20 and 40 year mortgages, too.  However, they are not as common.  The reason they aren’t is because of the very fact that they are uncommon.  You see, the secondary market wants to sell loans into pools of other loans similar in interest rate, type and amortization.  Since there aren’t a lot of these “diffent’ type amortizing loans, the appetite to buy them isn’t as evident.  And if no one is hungry for the item on the menu, you either don’t carry a lot of it, or you price it a bit higher for the rare, discriminating palate.

But again, you can always choose a 30 year mortgage, and pay it off on a shorter schedule to suit your own personal needs.  What you choose to do need only make sense to you.  You may qualify for a 15 year loan, but only be comfortable with a 30 year loan.  Only you can say.  However, if it is easily affordable, then the chance to build your equity more quickly may be a deciding factor.



TRENT