Basics of Mortgage and Finance
For most people, purchasing a home can be a highly unnerving experience. As buyers we are presented with a multitude of options to finance the purchase. However, most of us feel as if a high-level degree along with unlimited time is a necessity in order to understand the options and make an intelligent decision. We hope that by reading on we can provide you with some basics of Mortgage and Finance and help you make the best decision based on your needs.
RULE NUMBER 1
The first thing to remember when making this important choice is that lending is a business. Lenders are in the business of making money by loaning money and generating an income based on the interest of that loan. Most of us begin to wonder where the lender gets the money initially. The money a lender has to loan comes from multiple sources.
For example: Tom has a large sum of money in a savings account within a bank or another financial institution. Tom receives 4% interest per year on the money store in his personal account. The lender then uses Tom’s money temporarily, loans it to you, and charges you 9% interest.
THE SECONDARY MARKET
Lenders generally sell their loans on a secondary market, such as Fannie Mae, who then buy the loans and therefore leave the lender with a nearly inexhaustible supply of money. Today billions of dollars in mortgages are arranged yearly and sold on to the secondary market. In fact, the vast majority of loans are sold on this basis. The loan can be sold repeatedly, so do not be surprised if this happens with your loan as well.
BEWARE OF SCAMS
Always check with your lender if you receive letters notifying you that your loan has been sold on to another lender. Unfortunately, there are a lot of scams and dishonest people preying on honest consumers. The most common scam involves people receiving official looking letters from “so-called” lenders advising them that their loan has been sold on to another company on the secondary market and they will need to send all future mortgage payments to the new company. For this reason, it is critical to always check with your lender if you receive this type of a letter. Remember, if your loan is sold on the secondary market, all lenders are required by law to provide you with the full company name and a toll free number of the new lender.
TYPES OF LOANS
There are several types of loans, to name a few there are conforming, non-conforming, and jumbo loans. The type of loan is based on the dollar amount. The cut-off point, in dollars, from a conforming to a non-conforming loan changes every few years. Currently, it is at approximately $333,700. With a jumbo loan, the interest rate is generally higher. There are also loans that meet specific guidelines of government-backed companies, such as Freddie Mac and Fannie Mae, that are termed conventional loans.
WHAT IS A MORTGAGE
A mortgage is simply a very large loan that a home buyer uses to purchase a house. Mortgages are made up of different elements including: Mortgage Notes, sometimes called a promissory note. This is the document that contains a promise to repay the loan. It indicates the specific terms and conditions of your loan, and how it will be repaid.
The actual mortgage is a separate document that you will sign at the closing of your home. It pledges your home as security for the loan. In some states, buyers sign a deed of trust rather than a mortgage. Both documents serve the same function.
WHAT EXACTLY IS PRINCIPAL & INTEREST (P&I)?
All mortgage payments are divided into two distinct categories:
- Principal: The amount you return to the lender for the actual dollars borrowed. Because the principal is based on the amount of money actually borrowed, it remains fixed for the entire life of the loan, but is reduced proportionally with each payment. You will never pay back more principal than you originally borrowed.
- Interest: As we mentioned earlier, with every loan interest is applied that you as the borrower must repay. The interest that you will be charged on your loan can vary. It will depend on interest rate market conditions, and the type of mortgage that you receive.
TYPES OF MORTGAGES
There are two primary types of interest rates:
- Fixed Rates: A fixed rate is one that is set at the time of purchase. With a fixed interest rate you lock in the interest rate for the entire term of the loan.
- Adjustable Rates: With an adjustable rate, the interest rate you pay changes as national interest rates move up or down. Although adjustable rates present some risk, they usually offer a lower initial interest rate than a fixed rate.
All interest rates are subject to historical changes. For example, available interest rates change with the overall economic changes within the United States. Interest rates have fluctuated since the end of World War II to a record high of 16% in the early 1980’s and a near record low of 6% just 15 years later in the mid 1990’s. Interest rates continue to move up and down in response to various national and international economic factors and uncontrollable events.
TO PROCESS YOUR HOME LOAN
- A full month of pay stubs for each loan applicant
- W2’s for 2 previous years for each loan applicant
- Copy of Homeowners Insurance Declaration Page
- Copy of 2 months of bank statement
- *Copy of quarterly statement(s) for any investment(s)
*Programs are available when this documentation is not always required
We hope this information will provide some insight into the mortgage process. At SI we work with excellent and qualified brokers. Please feel free to contact us for more information or a recommended mortgage broker.
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