MORTGAGES
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.
WHAT IS A LOAN-TO-VALUE (LTV) RATIO? HOW DOES IT DETERMINE THE SIZE
OF THE LOAN?
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 ratio, the less cash homebuyers are required to pay out of their own funds. So, to protect lenders against
potential loss in case of default, higher LTV loans (80% or more) usually require a mortgage insurance policy.
WHAT TYPES OF LOANS ARE AVAILABLE AND WHAT ARE THE ADVANTAGES OF EACH?
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
WHEN DO ARMS MAKE SENSE?
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.
WHAT ARE THE ADVANTAGES OF 15 - AND 30-YEAR LOAN TERMS?
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.
