Mortgage Loan (2)

Applying For A Mortgage

In the United States it is most common for borrowers to apply for mortgages online. There are several industry leaders including lendingtree.com who specializes in mortgage loans and match you with lenders while bankrate.com provides a similar service but also offers several other loans. Other sites such as onereversemortgage.com cater to a generation approaching retirement while sites like lendasaurus.com provide a service to anonymously monitor loan pre-approvals. Additional sites by direct lenders from individual loan officers to companies such as Quicken allow borrowers to apply online. Most mortgage lenders are not local to their customers and possess, licenses in many states which has made the internet and technology invaluable for lenders while allowing borrowers to compare rates. Many times, even when a borrower applies for a mortgage in person the application in submitted online and the borrower can follow their loan application status online.

Loan to value and downpayments

Upon making a mortgage loan for the purchase of a property, lenders usually require that the borrower make a downpayment; that is, contribute a portion of the cost of the property. This downpayment may be expressed as a portion of the value of the property (see below for a definition of this term). The loan to value ratio (or LTV) is the size of the loan against the value of the property. Therefore, a mortgage loan in which the purchaser has made a downpayment of 20% has a loan to value ratio of 80%. For loans made against properties that the borrower already owns, the loan to value ratio will be imputed against the estimated value of the property.

The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan: the higher the LTV, the higher the risk that the value of the property (in case of foreclosure) will be insufficient to cover the remaining principal of the loan.

Value: appraised, estimated, and actual

Since the value of the property is an important factor in understanding the risk of the loan, determining the value is a key factor in mortgage lending. The value may be determined in various ways, but the most common are:

1. Actual or transaction value: this is usually taken to be the purchase price of the property. If the property is not being purchased at the time of borrowing, this information may not be available.
2. Appraised or surveyed value: in most jurisdictions, some form of appraisal of the value by a licensed professional is common. There is often a requirement for the lender to obtain an official appraisal.
3. Estimated value: lenders or other parties may use their own internal estimates, particularly in jurisdictions where no official appraisal procedure exists, but also in some other circumstances.

Payment and debt ratios

In most countries, a number of more or less standard measures of creditworthiness may be used. Common measures include payment to income (mortgage payments as a percentage of gross or net income); debt to income (all debt payments, including mortgage payments, as a percentage of income); and various net worth measures. In many countries, credit scores are used in lieu of or to supplement these measures. There will also be requirements for documentation of the creditworthiness, such as income tax returns, pay stubs, etc. the specifics will vary from location to location.

Some lenders may also require a potential borrower have one or more months of "reserve assets" available. In other words, the borrower may be required to show the availability of enough assets to pay for the housing costs (including mortgage, taxes, etc.) for a period of time in the event of the job loss or other loss of income.

Many countries have lower requirements for certain borrowers, or "no-doc" / "low-doc" lending standards that may be acceptable in certain circumstances.

Standard or conforming mortgages

Many countries have a notion of standard or conforming mortgages that define a perceived acceptable level of risk, which may be formal or informal, and may be reinforced by laws, government intervention, or market practice. For example, a standard mortgage may be considered to be one with no more than 70-80% LTV and no more than one-third of gross income going to mortgage debt.

A standard or conforming mortgage is a key concept as it often defines whether or not the mortgage can be easily sold or securitized, or, if non-standard, may affect the price at which it may be sold. In the United States, a conforming mortgage is one which meets the established rules and procedures of the two major government-sponsored entities in the housing finance market (including some legal requirements). In contrast, lenders who decide to make nonconforming loans are exercising a higher risk tolerance and do so knowing that they face more challenge in reselling the loan. Many countries have similar concepts or agencies that define what are "standard" mortgages. Regulated lenders (such as banks) may be subject to limits or higher risk weightings for non-standard mortgages. For example, banks and mortgage brokerages in Canada face restrictions on lending more than 80% of the property value; beyond this level, mortgage insurance is generally required.

Foreign currency mortgage

In some countries with currencies that tend to depreciate, foreign currency mortgages are common, enabling lenders to lend in a stable foreign currency, whilst the borrower takes on the currency risk that the currency will depreciate and they will therefore need to convert higher amounts of the domestic currency to repay the loan.

Repaying the mortgage

In addition to the two standard means of setting the cost of a mortgage loan (fixed at a set interest rate for the term, or variable relative to market interest rates), there are variations in how that cost is paid, and how the loan itself is repaid. Repayment depends on locality, tax laws and prevailing culture. There are also various mortgage repayment structures to suit different types of borrower.

Capital and interest

The most common way to repay a secured mortgage loan is to make regular payments of the capital (also called the principal) and interest over a set term. This is commonly referred to as (self) amortization in the U.S. and as a repayment mortgage in the UK. A mortgage is a form of annuity (from the perspective of the lender), and the calculation of the periodic payments is based on the time value of money formulas. Certain details may be specific to different locations: interest may be calculated on the basis of a 360-day year, for example; interest may be compounded daily, yearly, or semi-annually; prepayment penalties may apply; and other factors. There may be legal restrictions on certain matters, and consumer protection laws may specify or prohibit certain practices.

Depending on the size of the loan and the prevailing practice in the country the term may be short (10 years) or long (50 years plus). In the UK and U.S., 25 to 30 years is the usual maximum term (although shorter periods, such as 15-year mortgage loans, are common). Mortgage payments, which are typically made monthly, contain a capital (repayment of the principal) and an interest element. The amount of capital included in each payment varies throughout the term of the mortgage. In the early years the repayments are largely interest and a small part capital. Towards the end of the mortgage the payments are mostly capital and a smaller portion interest. In this way the payment amount determined at outset is calculated to ensure the loan is repaid at a specified date in the future. This gives borrowers assurance that by maintaining repayment the loan will be cleared at a specified date, if the interest rate does not change. Some lenders and 3rd parties offer a bi-weekly mortgage payment program designed to accelerate the payoff of the loan.

An amortization schedule is typically worked out taking the principal left at the end of each month, multiplying by the monthly rate and then subtracting the monthly payment. This is typically generated by an amortization calculator using the following formula:

where:

is the initial principal

is the percentage rate used each payment; for a monthly payment, take the Annual Percentage Rate (APR)/12 months

is the number of payments; for monthly payments over 30 years, 12 months x 30 years = 360 payments.

Interest only

The main alternative to a capital and interest mortgage is an interest-only mortgage, where the capital is not repaid throughout the term. This type of mortgage is common in the UK, especially when associated with a regular investment plan. With this arrangement regular contributions are made to a separate investment plan designed to build up a lump sum to repay the mortgage at maturity. This type of arrangement is called an investment-backed mortgage or is often related to the type of plan used: endowment mortgage if an endowment policy is used, similarly a Personal Equity Plan (PEP) mortgage, Individual Savings Account (ISA) mortgage or pension mortgage. Historically, investment-backed mortgages offered various tax advantages over repayment mortgages, although this is no longer the case in the UK. Investment-backed mortgages are seen as higher risk as they are dependent on the investment making sufficient return to clear the debt.

Until recently it was not uncommon for interest only mortgages to be arranged without a repayment vehicle, with the borrower gambling that the property market will rise sufficiently for the loan to be repaid by trading down at retirement (or when rent on the property and inflation combine to surpass the interest rate).

Interest Only Lifetime Mortgage

Recent Financial Services Authority guidelines to UK lenders regarding interest only mortgages has tightened the criteria on new lending on an interest only basis. The problem for many people has been the fact that no repayment vehicle had been implemented, or the vehicle itself (e.g. endowment/ISA policy) performed poorly and therefore insufficient funds were available to repay the capital balance at the end of the term.

Moving forward, the FSA under the Mortgage Market Review (MMR) have stated there must be strict criteria on the repayment vehicle being used. As such the likes of Nationwide and other lenders have pulled out of the interest only market.

A resurgence in the equity release market has been the introduction of interest only lifetime mortgages. Where an interest only mortgage has a fixed term, an interest only lifetime mortgage will continue for the rest of the mortgagors life. These schemes have proved of interest to people who do like the roll-up effect (compounding) of interest on traditional equity release schemes. They have also proved beneficial to people who had an interest only mortgage with no repayment vehicle and now need to settle the loan. These people can now effectively remortgage onto an interest only lifetime mortgage to maintain continuity.

Interest only lifetime mortgage schemes are offered by two lenders currently - Stonehaven & more2life. They work by having the options of paying the interest on a monthly basis. By paying off the interest means the balance will remain level for the rest of their life. This market is set to increase as more retirees require finance in retirement.

No capital or interest

For older borrowers (typically in retirement), it may be possible to arrange a mortgage where neither the capital nor interest is repaid. The interest is rolled up with the capital, increasing the debt each year.

These arrangements are variously called reverse mortgages, lifetime mortgages or equity release mortgages (referring to home equity), depending on the country. The loans are typically not repaid until the borrowers are deceased, hence the age restriction.

Interest and partial capital

In the U.S. a partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding capital balance is due at some point short of that term. In the UK, a partial repayment mortgage is quite common, especially where the original mortgage was investment-backed and on moving house further borrowing is arranged on a capital and interest (repayment) basis.

Variations

Graduated payment mortgage loan have increasing costs over time and are geared to young borrowers who expect wage increases over time. Balloon payment mortgages have only partial amortization, meaning that amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term, and at the end of the term a balloon payment is due. When interest rates are high relative to the rate on an existing seller's loan, the buyer can consider assuming the seller's mortgage. A wraparound mortgage is a form of seller financing that can make it easier for a seller to sell a property. A biweekly mortgage has payments made every two weeks instead of monthly.

Budget loans include taxes and insurance in the mortgage payment;package loans add the costs of furnishings and other personal property to the mortgage. Buydown mortgages allow the seller or lender to pay something similar to mortgage points to reduce interest rate and encourage buyers. Homeowners can also take out equity loans in which they receive cash for a mortgage debt on their house. Shared appreciation mortgages are a form of equity release. In the US, foreign nationals due to their unique situation face Foreign National mortgage conditions.

Flexible mortgages allow for more freedom by the borrower to skip payments or prepay. Offset mortgages allow deposits to be counted against the mortgage loan. In the UK there is also the endowment mortgage where the borrowers pay interest while the principal is paid with a life insurance policy.

Commercial mortgages typically have different interest rates, risks, and contracts than personal loans. Participation mortgages allow multiple investors to share in a loan. Builders may take out blanket loans which cover several properties at once. Bridge loans may be used as temporary financing pending a longer-term loan. Hard money loans provide financing in exchange for the mortgaging of real estate collateral.

Foreclosure and non-recourse lending

In most jurisdictions, a lender may foreclose the mortgaged property if certain conditions - principally, non-payment of the mortgage loan - occur. Subject to local legal requirements, the property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt. In some jurisdictions, mortgage loans are non-recourse loans: if the funds recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining debt.

In virtually all jurisdictions, specific procedures for foreclosure and sale of the mortgaged property apply, and may be tightly regulated by the relevant government. There are strict or judicial foreclosures and non-judicial foreclosures, also known as power of sale foreclosures. In some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of lenders to foreclose is extremely limited, and mortgage market development has been notably slower.

Mortgage loan (1)

A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.

The word mortgage is a French Law term meaning "death contract", meaning that the pledge ends (dies) when either the obligation is fulfilled or the property is taken through foreclosure^.

A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank or credit union, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.

In many jurisdictions, though not all (Bali, Indonesia being one exception, it is normal for home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets for mortgages have developed.

Basic concepts and legal regulation

The mortgage loan involves two separate documents the mortgage note (a promissory note) and the security interest evidenced by the "mortgage" document; generally, the two are assigned together, but if they are split traditionally the holder of the note and not the mortgage has the right to foreclose. According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his or her interest (right to the property) as security or collateral for a loan. Therefore, a mortgage is an encumbrance (limitation) on the right to the property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property. As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time, typically 30 years. All types of real property can be, and usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk.

Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential and commercial property. Although the terminology and precise forms will differ from country to country, the basic components tend to be similar:

• Property: the physical residence being financed. The exact form of ownership will vary from country to country, and may restrict the types of lending that are possible.
• Mortgage: the security interest of the lender in the property, which may entail restrictions on the use or disposal of the property. Restrictions may include requirements to purchase home insurance and mortgage insurance, or pay off outstanding debt before selling the property.
• Borrower: the person borrowing who either has or is creating an ownership interest in the property.
• Lender: any lender, but usually a bank or other financial institution. Lenders may also be investors who own an interest in the mortgage through a mortgage-backed security. In such a situation, the initial lender is known as the mortgage originator, which then packages and sells the loan to investors. The payments from the borrower are thereafter collected by a loan servicer.
• Principal: the original size of the loan, which may or may not include certain other costs; as any principal is repaid, the principal will go down in size.
• Interest: a financial charge for use of the lender's money.
• Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan; without this aspect, the loan is arguably no different from any other type of loan.
• Completion: legal completion of the mortgage deed, and hence the start of the mortgage.
• Redemption: final repayment of the amount outstanding, which may be a "natural redemption" at the end of the scheduled term or a lump sum redemption, typically when the borrower decides to sell the property. a closed mortgage account is said to be "redeemed".

Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system.

Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country.

Lenders provide funds against property to earn interest income, and generally borrow these funds themselves (for example, by taking deposits or issuing bonds). The price at which the lenders borrow money therefore affects the cost of borrowing. Lenders may also, in many countries, sell the mortgage loan to other parties who are interested in receiving the stream of cash payments from the borrower, often in the form of a security (by means of a securitization).

Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually considered a function of the creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its original capital; and the financial, interest rate risk and time delays that may be involved in certain circumstances.

Mortgage loan types

There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements.

• interest: Interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower.
• term: Mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization.
• payment amount and frequency: The amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid.
• prepayment: Some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.

The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable-rate mortgage (ARM) (also known as a floating rate or variable rate mortgage). In some countries, such as the United States, fixed rate mortgages are the norm, but floating rate mortgages are relatively common. Combinations of fixed and floating rate mortgages are also common, whereby a mortgage loan will have a fixed rate for some period, for example the first five years, and vary after the end of that period.

• In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. Therefore the payment is fixed, although ancillary costs (such as property taxes and insurance) can and do change. For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan,
• In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be, for example, 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve.

The charge to the borrower depends upon the credit risk in addition to the interest rate risk. The mortgage origination and underwriting process involves checking credit scores, debt-to-income, down payments, and assets. Jumbo mortgages and sub-prime lending are not supported by government guarantees and face higher interest rates. Other innovations described below can affect the rates as well.

Mortgage Law: An Overview

A mortgage involves the transfer of an interest in land as security for a loan or other obligation. It is the most common method of financing real estate transactions. The mortgagor is the party transferring the interest in land. The mortgagee, usually a financial institution, is the provider of the loan or other interest given in exchange for the security interest. Normally, a mortgage is paid in installments that include both interest and a payment on the principle amount that was borrowed. Failure to make payments results in the foreclosure of the mortgage. Foreclosure allows the mortgagee to declare that the entire mortgage debt is due and must be paid immediately. This is accomplished through an acceleration clause in the mortgage. Failure to pay the mortgage debt once foreclosure of the land occurs leads to seizure of the security interest and its sale to pay for any remaining mortgage debt. The foreclosure process depends on state law and the terms of the mortgage. The most common processes are court proceedings (judicial foreclosure) or grants of power to the mortgagee to sell the property (power of sale foreclosure). Many states regulate acceleration clauses and allow late payments to avoid foreclosure. Some states use instruments called deeds of trust instead of traditional mortgages.

Three theories exist regarding who has legal title to a mortgaged property. Under the title theory title to the security interest rests with the mortgagee. Most states, however, follow the lien theory under which the legal title remains with the mortgagor unless there is foreclosure. Finally, the intermediate theory applies the lien theory until there is a default on the mortgage whereupon the title theory applies.

The mortgagor and the mortgagee generally have the right to transfer their interest in the mortgage. Some states hold that even when the purchaser of a property subject to a mortgage does not explicitly take over the mortgage the transfer is assumed. Mortgages employ due-on-sale and due-on-encumbrance clauses to prevent the transfer of mortgages. These clauses allow acceleration (having the principal and interest become due immediately) of the mortgage. In 1982, Congress made these clauses enforceable nationwide by passage of the Garn-St Germain Depository Institutions Act of 1982. The law of contracts and property govern the transfer of the mortgage's interest.

If the mortgage being foreclosed is not the only lien on the property then state law determines the priority of the property interests. For example, Article 9 of the Uniform Commercial Code governs conflicts between mortgages on real property and liens on fixtures (personal property attached to a piece of real estate).

When a mortgage is a negotiable instrument it is governed by Article 3 of the Uniform Commercial Code.

 A mortgage may be used as a security interest by the mortgage.

The law of mortgages is mainly governed by state statutory and common law. Mortgages are regulated by federal or state law or agencies depending on under whose law they were chartered or established. The Office of Thrift Supervision, an office in the Department of the Treasury, regulates federally chartered savings associations. The Comptroller of the Currency charters and regulates national banks. Federal credit unions are chartered and regulated by the National Credit Union Administration.

Federal agencies that purchase loans and mortgages are the Federal National Mortgage Association or Fannie Mae, the Federal Home Loan Mortgage Corporation or Freddie Mac, and the Government National Mortgage Association or Ginnie Mae. The federal government also insures mortgages through the Federal Housing Administration and the Department of Veterans Affairs.

How to Compare Mortgage Programs

To compare mortgage programs you need to look at the APR. What is an Annual Percentage Rate (APR)? The annual percentage rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate.

Steps

1. Look at your Truth in Lending (TIL) statement from your bank/broker. Typically the APR is found next to the rate.
   • Example:
     • Year fixed | 8 percent | 1 point | 8.107% APR
     • The APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan.
     • The APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the "true cost of a loan." It creates a level playing field for lenders. It prevents lenders from advertising a low rate and hiding fees.
   • Ideally, one should be able to compare APRs from various lenders, then select the loan with the lowest APR.
   • Unfortunately it's not that simple. Various lenders calculate APRs differently! A loan with a lower APR may not be the best choice. A good way to compare different lenders is to ask them to provide a Good Faith Estimate of closing costs. Be sure you compare the same loan program (e.g., 30-year fixed), interest rate and rate lock period. You may ignore fees that are independent of the loan, such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Pay particular attention to loan fees. The lender with the lowest loan fees will likely have the best deal.
2. Compute the APR:
   • The reason why APRs are confusing is because the rules to compute APR are not clearly defined.
   • What fees are included in the APR?
   • The following fees ARE generally included in the APR:
     • Points - both discount points and origination points
     • Pre-paid interest. The interest paid from the date the loan closes to the end of the month. Most mortgage companies assume 15 days of interest in their calculations. However, companies may use any number between 1 and 30!
     • Loan-processing fee
     • Underwriting fee
     • Document-preparation fee
     • Private mortgage-insurance
   • The following fees are SOMETIMES included in the APR:
     • Loan-application fee
     • Credit life insurance (insurance that pays off the mortgage in the event of a borrowers death)
   • The following fees are normally NOT included in the APR:
     • Title or abstract fee
     • Escrow fee
     • Attorney fee
     • Notary fee
     • Document preparation (charged by the closing agent)
     • Home-inspection fees
     • Recording fee
     • Transfer taxes
     • Credit report
     • Appraisal fee
   • Calculating APRs on adjustable and balloon loans is even more complex because future rates are unknown. The result is even more confusion about how lenders calculate APRs.
3. Do not attempt to compare a 30-year loan with a 15-year loan using their respective APRs. A 15-year loan may have a lower interest rate, but could have a higher APR, since the loan fees are amortized over a shorter period of time.
4. Realize that many lenders do not even know what they include in their APR because they use software programs to compute their APRs. It is quite possible that the same lender with the same fees using two different software programs may arrive at two different APRs!
5. Understand the following:
   • Use the APR as a starting point to compare loans. The APR is a result of a complex calculation and not clearly defined. There is no substitute to getting a good-faith estimate from each lender to compare costs. Remember to exclude those costs that are independent of the loan.

   Tips

• Compare mortgage rates from many banks at once.
• Obtain your credit scores and fix any discrepancies before you apply for a loan.
• Always have the bank/broker give you a Good Faith Estimate (GFE)
• Demand in writing, a guarantee from the lender/broker that the fees in the GFE will not be more than quoted and if they are the lender/broker pays for them.
• Be certain that you are comparing exactly the same program and that the GFE's are dated the same day.

How to Refinance Your Mortgage

The benefits of mortgage refinancing for several borrowers is that it lowers payments on a monthly basis and makes cash available for spending or investment. However, it is not advisable to jump on the refinancing bandwagon.

Steps

1. Know what will influence the rate that you will receive. Here are the elements that will determine the rate you will receive:
   • Loan size
   • Your credit score
   • Paid points
   • When is the closure of the loan?
   • Locked or floating rate
   • Debt to income ratio
2. Understand that advertised rates are not reliable. Experts say that when mortgage refinancing companies publish their rates, it is most likely that only about 10% of applicants get to avail them. The displayed low rates are used to lure people. It's not wise to fall for them.
3. Know what type of loan you want. Disclosing details to the loan officer will facilitate the process towards being given the best possible rate. State how long you would be able to pay off your loan and how much you would really need. Are you into paying points to lower the interest rate? Contemplate well before deciding to nod on any offer. If you inform your loan officer immediately regarding information that will reveal whether you meet all the requirements or not, the sooner you will know if you will be exempted from paying the other additional fees.
4. Shop around. This is one of the best ways to go with any kind of transaction. Know the credibility of your choice lenders.
5. Allow ample time for you to get the hang of all the mortgage terms if you're a newbie on this industry. Doing your homework will save you not just some money but also from future headaches.

Tips

• Consider using a Mortgage Broker, they usually have hundreds of lenders to shop from so they can get you better rates than you can get on your own. You'll pay a brokerage fee (usually a percent of the loan) but they do the work for you.
• Reducing the mortgage term - Larger monthly payments will enable you to pay your loan quicker. Since shorter term programs have lower interest rates, surely, you'll be able to save more with this kind of refinancing.
• You may want to avoid "no cost" refinancing. This is because when one says no cost, it does not translate to free. What happens is you are charged a higher interest rate for the life of the loan. In essence, the lender is paying you points which offset the closing costs. If you only plan to keep the loan a short while, this could work to your advantage since the increased amount of interest you pay during the time you keep the loan may be lower than the closing costs you would have otherwise paid. Typically, the no closing cost option is advantageous up until about the third year, however, this can vary by state and your specific situation.
• Dropping of rates - Usually, when rates drop by 1% to 2% mortgage refinancing can be one good option.
• The need for extra money - One choice is to resort to home equity line of credit when you are faced with the need for additional cash. With a checking account, credit account, or direct payment, this allows you to borrow against your home's equity.
• Consolidation of debts - Through mortgage refinancing, consolidating your debts into one payment is viable if you have equity in your home. But you must still consider the rates' dropping before using refinancing in consolidating your debts.
• Staying in your home for an extended period of time - The lower interest rate for refinancing can be best enjoyed if you are to stay in your home at least 5 years.

How to Prepay Your Mortgage

 

Over the course of a 30-year mortgage, you may end up paying more than twice the amount of your principal. The rest goes towards paying interest. That interest is money in the bank's pocket, not in your bank account. Prepaying your mortgage is paying extra principal, especially during the early years of your loan, meaning that your house will be paid off that much sooner, and you will pay less total interest over the life of the loan. It could put you that much closer to retirement.

Steps

1. Evaluate whether prepaying is right for you. In the short term think of prepaying your loan as investing, but investing in a large, illiquid asset. That is, you must sell the house to get the money out again. If you have a low interest rate and you are making good returns on investments, it may not be worthwhile. If other debts are costing you more or if you have little or no savings, focus on those priorities first. The long term prepayment is by far the best thing to do. When the mortgage is paid off 100% of the money you would have paid can now go for investments.
2. Find out the interest rate on your mortgage and the remaining balance. If it isn't on your statement, call your bank or whoever is carrying your mortgage to find out.
3. Use a mortgage calculator (there are many available online or make your own) to find out how much you are paying in interest over the life of the loan.
   • Look for a calculator that gives you an amortization schedule, preferably with a graph of interest and principal paid over time.
   • Look for a calculator that will let you run scenarios and see what happens if you prepay at various rates.
4. Decide how much you will prepay. There is no one right answer to this question. Here are some possibilities:
   • Prepay a certain percentage of your income. One or even half a percent might be small enough to be painless and still make a big dent.
   • Prepay a certain amount each month. Choose a nice, round number that seems right to you.
   • Pay a monthly amount that you were paying before on a different loan. If you just paid off a car loan or credit card, put that amount towards prepaying your mortgage instead.
   • Continue to pay the monthly amount that your mortgage cost before refinancing, even though the new monthly payment is less.
   • Pay the amount of a raise you have just received. The advantage of choices like these is that they keep the rest of your finances the same as they were before. You will not notice that new, "extra" money is going elsewhere.
   • Make one extra payment per year. Divide your monthly payment by 12 and pay that much extra each month. Don't wait until the end of the year or rely on your memory.
5. Phone your bank or mortgage company and verify that any extra payment will get applied immediately toward paying down the principal. They may ask that you enclose a form letter or add a memo to each check to this effect. Prepaying a mortgage is still uncommon enough that some companies don't seem to know what to do about it.
   • Check that your first couple of payments went to the right place. Read your statement after the first extra payment and verify that the payments are being correctly applied against your principal.
6. Automate your payment. The mortgage company may be able to do this for you, or if you have online bill pay with your bank, you can make either a separate payment or an increased payment automatically that way. While you could theoretically make the extra payment manually each month, it is probably easiest to automate it once and let the bank remember the new schedule for you.
• Make sure to include your account information and prepayment instructions with your payment.
• It may help things get processed correctly if you send a separate check or payment for the part you are prepaying. If you are using an online bill pay service, simply set up two payments at the same time each month.
7. Look into a biweekly payment plan. Many people prefer this option because it is simple and lines up with their biweekly paycheck schedule. With a biweekly payment plan, you simply pay half the monthly amount every two weeks. This has the effect of paying one extra payment per year. Set up a biweekly payment plan through your mortgage company or through an independent service. A phone call or two should be enough to set up the payments.
   • With this choice, you must generally set up a plan specifically.
   • Make sure, if you are paying biweekly, that the mortgage company knows what to do with the extra payments.
   • Ask whatever institution sets up your biweekly plan whether the payments get applied immediately, and don't sign up if the answer is no. Some companies, especially third party services, withdraw the funds biweekly and only make the additional payment at the end of the month or year, earning interest on your money in the meantime.
   • Expect a setup fee of a few hundred dollars, and ask what the fees will be before you sign up. Although this sounds like a lot of money, the money you save over the life of the loan will be much more. If you still don't like the fee, set up an automatic transfer yourself.
   • You do not necessarily need to pay someone else to set up your payments for you once you have calculated what they need to be. It's free to do it yourself, and you will save more money (the fee associated with this plan).

   Tips

   • Check the terms of your private mortgage insurance (PMI) if you have it. PMI is insurance for the lender, not for you. It is often required if you have less than 20% equity in your home. If you reach the required percentage, through prepayment or otherwise, ask about canceling it, so you can stop paying extra for it. It won't necessarily get canceled if you don't ask.
   • Start early. Your first mortgage payments will be mostly interest and hardly any principal. The sooner you start paying a bit of extra principal, the less interest you'll pay over the life of the loan, and the more money the extra payments will save you.
   • Always see a certified professional to review your situation and objectives. They are worth the expense.
   • Inflation favors the borrower. Prepaying effectively means paying with more costly money. If you're concerned about this factor, figure it in to your calculations.
   • Pay down costlier debt first. If you have credit card debt, a car loan, or any other loan with a higher interest rate, get it out of the way.
   • If you are interested in going further, read up on how to set up a mortgage cycle or mortgage accelerator program. These programs often use home equity lines of credit (basically a type of second mortgage) to alter the payment schedule, so they're not as straightforward as simple prepayment plans. Make sure you understand how these arrangements work and have a plan for incorporating them into your own finances before you undertake such a scheme.
   • If you set up your own payment plan, you shouldn't have to pay fees, but you are on your own to follow through.
   • Even if you are prepaying, it's worth evaluating periodically whether you have the lowest mortgage rate you can have. Refinancing could also save you a lot of money on your loan. Remember, though, that it may reset the length of your loan and that it often includes fees. For refinancing to be worthwhile, the savings has to outweigh these factors.
     • If you do refinance, one way to prepay your mortgage is to continue paying your previous monthly amount, even though your new amount has gone down.
   • If the mortgage interest paid each year is reducing your tax obligation, then you may benefit more from investing your extra dollars in a vehicle that compounds interest to you until your compounded interest investment's value reaches the balance due on your mortgage.
   • Another option is to grow a liquid,tax-free or tax-deferred side account with compounded returns while continuing to take advantage of the governments copay (tax credit for mortgage interest on principal residence). Then at retirement or before when you have enough cash, pay off the entire principal balance. You will have paid more interest, but potentially earned more in compounded interested and tax savings.

How to Choose a Mortgage Broker

Buying a house can be a daunting task, and for a first time borrower you might not know all the ins and outs that are involved in taking out a home loan. A mortgage broker can help - they are the professionals that match your needs with a home loan from a selection of lenders. But it's important to choose the right broker - one who is knowledgeable, accredited, and covers a wide range of lenders.

Steps

1. Ask friends or colleagues for recommendations. You’ve heard it before; it’s not what you know, but who. Find friends who’ve made property purchases recently and get the details of their mortgage broker.
2. Do your own research via the Internet and telephone. Ask what deals mortgage brokers have on offer and if there are any conditions attached. Remember, this home loan is likely to be part of your life for the next 25 to 30 years so don’t be afraid to ask questions and compare offers.
3. If a mortgage broker offers you a special deal, ask about the special conditions. You know the old saying ‘if it sounds too good to be true, it probably is’. Keep that in mind when assessing deals and weigh up what’s right for you.
4. Internet mortgage brokers should make their offers in writing. Nothing is solid until it’s in black and white. Print out the pages with the offer and keep them filed for reference.
5. Make written notes of all dates, times, names and offers. Keep it all in one folder in case there is a dispute later and you need evidence to back up your claim. Remember, it’s their word against yours, until someone has a record of it!
6. Make sure the mortgage broker belongs to an independent complaints scheme in case anything goes wrong. This ensures you have an avenue to follow for any unforeseen disputes.
7. Check if the mortgage broker has an office. If so, go there to see how busy it is and how professional it appears. Anyone can start a business, but it takes a professional to make it work.
8. Remember, some lenders don’t have branches and only deal through mortgage brokers. Don’t miss out on some good opportunities by ruling out using a mortgage broker.
9. Ask your mortgage broker on what basis they make their recommendations. Mortgage brokers are paid commissions to sell loans, so make sure you ask plenty of questions about the commissions they are paid.
10. Make sure you feel confident about the person who is organizing your mortgage. Go with your gut on this one – if something doesn’t feel right, chances are it isn’t.

Tips

• A good mortgage broker has all the necessary market information at hand to provide you with relevant options detailing the various loan products available. They should also have the capacity to compare all the loans suitable to your particular situation. This is vitally important because it allows you to compare the features, fees, repayment schedules and interest rates of many different loan products at the same time, saving you countless hours of research.
• The mortgage broker will conduct an interview with you to get all the relevant information, both in terms of the financial details of the proposed loan and your lifestyle and risk preferences. They will then use a combination of their own product knowledge and dedicated software to find the home loan that is the best match for you.
• Once the home loan has been settled (that is, when you have your money) the mortgage broker is paid a commission by the home loan lender in question. The commission fee is entirely separate from the fees associated with the home loan, and generally you will pay the same loan fees regardless of whether you use a mortgage broker or get the same loan product direct from a lending institution. After settlement, your mortgage broker will normally remain available to you to assist with any changes to the home loan you may require in the future, and answer any follow-up questions you may have.

Warnings

• There's a number of things to watch out for when considering a home loan. The best thing to do is start reading everything you can so you're familiar with standard terms and what to expect from your mortgage. There's a wealth of information online and many websites now have online mortgage calculators to help you choose the right loan.