Home Loan Chit Chat And Must Know Facts

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Home Loan Chit Chat And Must Know Facts

Home Loan Application

Home loan knowledge is very useful when applying for a home loan to buy a house.

It goes without saying that a home loan is probably the biggest investment most people will ever make in their entire lifetime, and it is something that requires careful planning and informed decisions, not only for those who can afford to buy a house for cash, but also for others who can only purchase a house by getting a mortgage loan.

home loanWhen compared to buy property for cash, getting a mortgage, or a home loan, is a somewhat more complicated, because there are so many things to take onboard and a lot of different aspects you have to consider.

One of the most important elements you need to consider when applying for a home loan is the mortgage rates.

But before we get to that, lets find out what a mortgage really is and how it works.


What is a mortgage?

A mortgage is the type of home loan that you can take to buy property or land.

Commonly a home loan will run for either 15 or 30 years, and throughout the loan period until it’s paid off, your loan is ‘secured’ against the property value.

If, for whatever reason, you fail to pay your home loan monthly installments, the lender has the right to repossess your property and sell it to cover their loss.

That’s why before getting a home loan you have to be completely sure that it’s something you can afford.

You can get a mortgage directly from a bank or any financial institution that has mortgage products. Alternatively you can get your loan through a mortgage broker, especially if you don’t have time and enough knowledge to go through all the available options.

A mortgage broker can help you compare various mortgages available in the market and provide you with valuable information that can help you find the best deal.

When you apply for a mortgage, the lender will review your financial information, including your credit history, monthly income and expenses.

The lender needs to be sure that you are able to pay your monthly installments and keep up repayments if at some point the interest rates rise. If they see any indicator that you won’t be able to make the payments, you will not get a mortgage from them.


How a mortgage works

When your financial information is considered acceptable for the total amount of money you borrow, the lender will approve your mortgage application.

Basically they will pay for the house that you want to buy and you pay the lender in installments with interest until it is repaid.

There are several different kinds of mortgage that you can apply, but basically you have three options available depends on the way you prefer to pay back the loan, whether you want to repay interest and capital or interest only.


Repayment mortgage

This type of mortgage lets you pay the interest along with part of the capital every month. When you reach the end of the loan term, you are expected to have paid it all off and the house is yours to call your very own.


Interest only mortgage

With this type of mortgage, you are only required to pay the interest of the amount you borrow every month, then at the end of the term you should pay off the loan capital.

However, this type of mortgage is getting quite hard to come by as most lenders and regulators are usually worried about borrowers not being able to repay their huge debt all at once at the end of the term.


Combination of repayment and interest only mortgage

Some lenders can actually give you an option to split your mortgage payment. So for half of the term you pay the mortgage interest and capital, while for the second term you only pay the interest.

This way the amount of loan capital you have to pay off at the end of the loan term will not be too big.

Mortgage rates

When you apply for mortgage with a particular lender, it may seem that they set a certain amount of mortgage rate that adds to your loan, but actually it’s a bit more complicated than that.

Mortgage interest rates are set by market forces, which actually not under the lender’s control. These rates are mostly determined on the secondary market, which is the place where mortgages are bought and sold.

In the United States, these mortgages are bought by financial institutions like Fannie Mae and Freddie Mac that bundle them into securities.

These mortgage-backed securities are then sold to investors. When your mortgage is approved, the lender will sell the loan on this secondary market.

This will give the lender their money back with profit quickly without having to wait for you to pay off the mortgage.

The money is then used by the lender to give another borrower a loan, and that’s basically how the money flows in the mortgage finance system.

Investors buy these securities because they want investment products that can give them stable payments continually for a long time.

Collectively, these investors determine the interest rates of mortgage loans  they’re willing to buy. The lender basically just follows this recommendation when they give you a mortgage.

The prices and yields on the secondary market are affected by many factors, including stock prices, foreign markets, unemployment rate and inflation, which eventually will affect your mortgage rate.

Mortgage rates will rise when the economy is on an upswing, because investors will expect higher yields in that condition, on the other hand, mortgage interest rates will fall in a market downturn.

Today, after declining in the first couple of weeks of the year with a fixed 30 year mortgage rates loan at 3.97%, 3.92% and 3.81%, mortgage rates started to tick back up. However, it’s still relatively lower than earlier this month.


Mortgage rates based on the type of mortgage

Your mortgage interest rates are also affected by several other factors within the mortgage package itself, including the type of mortgage and the term of loan you’re willing to take.

Here are three of the most common types of mortgage available today:


  1. Fixed rate mortgage

This is the most common type of mortgage we can find in today’s housing market all over the world.

In fixed rate mortgages, your interest rate will remain the same throughout the entire span of the loan, so the amount of your monthly installments will also remain the same.

The main advantage of this type of loan is that you can make a definitive financial planning, because you know exactly how much you will spend every month to pay for your mortgage.

On the other hand, when compared to adjustable rate mortgages, the interest rates on fixed rate mortgages are generally higher.


  1. Adjustable rate mortgage (ARM)

As the name implies, in an adjustable rate mortgage, the monthly payments can move up and down through the span of the loan following the fluctuation of interest rates in the market.

In most adjustable rate mortgages, there will be an initial fixed rate period, commonly for the first five years. During this introductory period, your interest rate doesn’t change.

After the fixed rate period is over, whether in 3 years, 5 years, 7 years or 10 years depends on the lender, in the next longer period, the rate will change every year following the interest rates’ fluctuation.

The great thing about an adjustable rate mortgage is that during the initial period, the interest rate is generally lower than in fixed rate mortgages.

Furthermore, if after the initial period the interest rate in the market is going down, your monthly payments will be lower as well.

However, interest rates are unpredictable, so there is a chance that after the initial period ends, your monthly payments will be higher.


  1. FHA loan

This is a type of mortgage that’s insured by the FHA (Federal Housing Administration), which is an agency within the US Department of Housing and Urban Development. So besides making monthly installment payments, borrowers with FHA loans also pay for mortgage insurance.

This insurance will protect the lender if the borrower fails to pay for their monthly installments.

Since the loan is insured, usually lenders will offer attractive deals on FHA loans with low interest rates, low down payment also more flexible requirements for borrowers.

Other than the three types of loan mentioned above, there other types of mortgage, including Jumbo mortgage for expensive houses,

Balloon mortgage that’s commonly found in rural areas, Assumable mortgage, Construction-to-Permanent mortgage and Seller financing.


Mortgage rates based on loan term

There are generally two types of loan term that you can choose: a 15-year term and a 30-year term.

If you take the 15-year term loan, your monthly payments will be higher, but the mortgage interest rate will be lower, and the total amount of interest you have to pay over the life of the loan will be relatively low.

On the other hand, if you take the 30-year term loan, your mortgage interest rate will be higher, and the total amount of interest you have to pay over the life of the loan will be significantly higher compared to the 15-year term loan.

However, the good thing is your monthly payments will be much lower. That’s why even though you will end up paying more interest, the 30-year term loan is a lot more popular, because most people can afford the monthly payments.

Mortgage calculator

As mentioned earlier in this article, buying a house with the help of a mortgage is a big financial decision that will affect your financial situation for many years to come, so you have to be smart and well informed before you make any decision.

One thing that you can use to make a smart financial decision relating to your mortgage is a mortgage calculator.

Fortunately there are many of them available online for free.

However, before using the mortgage calculator, you should know exactly how much of a home loan you can afford to borrow and how much you can really afford to pay every month to the lender based on your debt-income ratio.

There are also many online tools you can use for free to do this calculation.

When you have learned about your affordability, you can then use the mortgage calculator to determine what kind of mortgage arrangement that would best suit your financial situation.

A mortgage calculator could help you estimate the total amount of your home loan, determine the most ideal loan term for you and estimate the amount of monthly payment you have to make.

On the mortgage calculator page, usually you can also find mortgage rate tables containing interest rates of different lenders, so you can estimate your loan amount by changing the amount of interest rate based on the rates you find on the table.

If you can’t find a rate from a particular lender on the table, you can always go to their website to get their current rate.


Alternative use of a mortgage calculator

Plan to pay off your mortgage early
– Some mortgage calculators also come with the “extra payments” feature that you can use to find out how you can shorten your loan term and how much savings you can make by paying extra money, whether every month, once every year or just one time during the life of the loan.

Find out if an ARM is a better option
– An adjustable rate mortgage (ARM), might give you a tempting initial rate, but actually this kind of mortgage is not really appropriate for everyone.

In fact with some ARM loans, the lower initial interest don’t really cut the monthly payments as much as people think. It’s easy to see a clear comparison with a mortgage calculator.

Just enter the initial interest rate of an ARM with a 30-year term, and compare that to a conventional 30-year fixed mortgage. This will help you see whether choosing an ARM really worth the risk.

Find out when you can get rid of private mortgage insurance

By using a mortgage calculator, you can easily determine when you will have 20% equity of your house. When you have reached this amount of equity you can request your lender to waive private mortgage insurance.

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