Mortgage guidelines is your prime location for mortgage-related information in the USA. It is updated for 2016, and completely free to use. Scan through these options, and educate yourself with our comprehensive guide.
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Going for a mortgage is a massive decision that will require a lot of financial commitment (Note: Mortgages are secured loans per definition, if you want unsecured business loans go here). Therefore, it is important that you know exactly what you are entering into by understanding how mortgages work. It is also important that you are sure that you will afford repayments.
What is a mortgage?
Simply put, a mortgage refers to a loan that you take out to finance a property or land purchase. The collateral of the loan is the property you have bought with the money. This basically means that should you fail to be up to date with repayments, the lender could repossess the property and sell it off to pay whatever you owe. This is why it is critically important that you choose a repayment schedule that is manageable. Majority of mortgages have a repayment period of 25 years although the term can also be longer or shorter.
Who can legally give you a mortgage?
Institutions that are legally authorized to offer mortgages are building societies, specialist mortgage lenders or banks. Before these institutions agree to lend you money to purchase land or property, they will do thorough investigations to ensure that you are able to meet the monthly mortgage payments.
Nearly all mortgage lenders will want you to pay some money called a deposit for the house. The mortgage making up the difference is always expressed as a percentage of LTV or loan-to-value. This is often expressed as a fraction (percentage) of the property value
For example, if you set aside a deposit of $20,000 on a $200,000 property, the deposit is said to be 10 percent of the purchase price. On the other hand, the mortgage LTV (loan-to-value) would then be 90%.
Generally, if you put down a higher amount of deposit for the house, you will be better placed to get mortgage with lower interest.
Difference between mortgage and other common loans
The main difference between mortgages and other ordinary loans is in terms of the duration of loan repayment. While ordinary loans can be repaid for as low as within one year, mortgages repayment period start at 5 years and can go up to 30 years. Another thing is that with these loans, the collateral is the parcel of land or house that you have purchased using the loan. It is like the bank or your mortgage lender helping you buy a house only to repossess it if you fail to pay for it.
Who should use mortgages VS other loans
Mortgages are designed for people who want to take a long-term loan to finance a property or land purchase. It is much better than to save for the house or land. If you have a steady job or stream of income for say, 15 years, then you would be smart to opt for a mortgage loan.
Who is eligible for a mortgage
Before lenders can give you mortgage loan, they will want to know if you can repay the loan successfully. Therefore, you need to know if you are eligible for a mortgage loan. The following are some of the ways to determine if you are eligible for a mortgage loan or note.
• Check your credit history
The first step towards ascertaining your eligibility status is to take a critical look at your credit report. Most traditional lenders will require you to have a minimum score of 720 but this tends to vary from lender to lender. There is very little chance of you getting approved for conventional mortgage loans if you have a credit score that is less than 650.
• Check your debt ratio
To do this, you need to compare your monthly income to your debt payments. In case you have a debt ratio that is too high, you may miss out on mortgage loan. Most lenders will check to see that your total monthly debt payment does not exceed 36% of your gross income. Many lenders will see you as a high risk for mortgage loan if your debts exceed 36 percent of your monthly income. To qualify for the conventional mortgage loan, lenders want your mortgage principal, property taxes, homeowner insurance and interest not to exceed 28%.
• Use online mortgage calculator to see if you are eligible
You can easily know if you pre-qualify for a mortgage loan by using online mortgage calculators. Before you get pre-qualified by a mortgage broker pr a lender, you may want to perform self-prequalification as this will give you inkling into the amount of money that you may afford for the house. Mortgage affordability calculators often require you to feed in things like sources of income, personal loans, auto loan monthly payments revolving credit card accounts, student loans as well as loan term and loan interest that you want.
What are the different types of mortgage product?
There are different types of mortgages and the kind you choose will have different repayment option. Below are some of the main types of mortgages.
a. Fixed rate mortgage
This is a type of mortgage where the rate of interest is agreed upon by you and your lender and it will stay like that for the mortgage period.
The best thing with this kind of arrangement is that your mortgage monthly payments will not change even if interest rates change. This can allow you to budget better for your repayment.
The biggest drawback with this arrangement however is that you will be tied in for the duration of the mortgage, meaning that even if interest rates were to fall, there is no way you will be able t take advantage of this fall.
b. Variable rate mortgage
This simply means that your payments will fluctuate based on interest rates determined by your lender.
Unlike fixed rate mortgage above, variable mortgage allow you to take advantage of the fall in interest rates.
The problem however is that you cannot budget with your payments because it may fluctuate a little.
c. Tracker Mortgage
This implies that your mortgage payment will vary either going down by or up and this is determined the base lending rate of the central bank. For example, the base lending rate may be 0.5%. Now if your tracker mortgage has an interest of rate 2%, then your new rates will be 2.5% if the base lending rate is raised by 0.50%. If the central bank increases it by 1%, your new rates will be 3%. Now if you had taken a mortgage loan of $1000000, this would mean that you now have to pay $250 per month more.
The advantage with this type of mortgage is that base lending rates are usually much lower than compared to fixed rate deals.
The disadvantage is that tracker mortgage does not offer you the same security which you get from fixed rate mortgage since rates are variable. It means that you must be ready to accept the fact that your monthly payments might go up at times.
d. Capped rate mortgages
These mortgages refer to a kind of variable mortgage that have a ceiling or cap on the amount of money you will need to pay. Since interest rates may increase or decrease, your payments may go down or up under the capped amount but you will not be made to pay more than the amount should interest rates rise further.
e. Collared mortgages
These are usually found along with tracker or capped mortgages. It simply means that there exists a set limit regarding how low the interest rates may go (this is called the collar). It means that your payments cannot get lower than a given level.
f. Cashback mortgage
Cashback mortgages will give you additional lump sum of cash, usually at the start of your mortgage.
g. Offset mortgage
These allow you to reduce the interest you pay on the mortgage by forfeiting interest that your saving will earn you. This must be held by the same lending institution in your savings account.
h. Discount mortgage
This operates in a similar fashion to tracker mortgages but the difference is that unlike tracker mortgage, discount mortgage rates are linked with SVR (standard variable rate that is set by the lender). This can be a significant difference since lenders can change the SVR even if no change of base rate has taken place.
Its advantage is that SVR tend to be lower compared to fixed rate mortgages. Also, given that discounts are variable, rates could fall or even rise. In case there is a fall in the rates, your monthly repayments also fall.
The disadvantage is that you cannot budget with it because of the fluctuation of the interest rate. Also, the manner in which discount mortgages are set is not transparent like is the case with tracker mortgages.
How to choose the best mortgage for you
By the time you are done paying off your mortgage loan, the interest you will have paid will be greater than the actual house purchase price. For instance, if you take out a mortgage of $125,000 at 8% interest rate for a period of 30 years, the interest that you will pay is $205,000 plus the $125,000 that you borrowed. You will have paid $330,000 for a house whose purchase price was $125,000. This is why it is very important that you shop around for the best mortgage because this will be probably the greatest financial decision you will ever make.
• Choose between fixed rate and adjustable-rate mortgage
In case you plan to stay in your house for many years or even indefinitely, then it may be best to lock it in a fixed rate. This is even better when the interest rates are lower.
On the other hand, if you plan to sell the home in 3-5 years, you would be smart to go for a hybrid ARM that has an initial fixed-rate duration matching the length of time that you plan to stay.
• Do you want duration of 15 or 30 years?
The difference in the monthly payments between a15-year and 30-year loan on a $200,000 mortgage loan with a 4.5 interest rate will be %517. However, a 15-year mortgage loan typically has lower rate which reduce the interest you pay on the loan duration.
• How much are you willing to set aside for your down payment?
Many lenders will insist on a 5% minimum down payment. By putting down a deposit of at least 20%, you will not be needed to pay a further monthly premium for PMI (private mortgage insurance). Generally, the more you set aside for the deposit, the better rates you are likely to get from your lender.
How to calculate the expected interest and monthly payment
Calculating the expected monthly payments as well as the interest is very important when picking out the best type of mortgage. There are many online mortgage payment calculators that you can use to an approximate amortization schedule for the mortgage that you are currently servicing. It will show you the amount of interest you can pay as well as estimated principal balances. These mortgage calculators even help you see the impact that any principal prepayment will have on you.
USE OUR MORTGAGE CALCULATOR ON THE TOP OF THIS PAGE TO CALCULATE INTEREST AND MONTHLY RETURNS.
Mortgage regulation & conditions compared to UK, Australia, and Canada
Canada’s housing currently stands at 32% above trend, which is just under the 35% mark on which USA bubble burst.
As for Australia, the median home prices had detached from long-term P/I (Price/Family-Income) ratio of 3.2 in 1997. The ensuing low interest rates enabled consumers to purchase more pricey existing homes while not increasing their monthly mortgage payments. In 2008, the Price/Family Income ratio was pushed to an unsustainable high of 4.8 by irrational exuberance.
The average home price in UK also detached from the 2.0 Price/Income ratio back in 1997. The low interest that were to follow allowed consumers to purchase more pricey existing homes while not increasing their monthly mortgage payments. Inevitable irrational exuberance swept the P/I ratio to 4.9 in 2007. Also the GBP is very volatile especially when paired with the Euro (bear in mind, it is a common practice in the UK to shop for homes elsewhere in Europe). We advise your to use Money Transfer Comparison Services which UK- specialized, in order to reduce the currency volatility when shopping for home abroad.
The average home price in Canada detached from the long-term P/I ratio of 2.7 in the year 2002. This ratio hit a 3.6 bubble high in 2011.
US had lowest interest rates as it emerged from the 2001 recession and this allowed consumers to buy more pricey existing homes while not increasing their monthly mortgage payments. This then caused median price to go over its long term P/I ratio of 1.8. In 2005, irrational exuberance increased the P/I ratio to 2.8 in 2005.
The best place that offers the best value for mortgage is Canada. The country underwent several structural changes and innovation in recent times, mainly in 2006 after the federal government relaxed mortgage insurance.
Current mortgage rates compared to historical over past 20 years in US
At the moment, mortgage lending rates are lower than at any point in the last 40 years. As of June 2010, the average 30-year fixed rate stood at an average of 4.74% (according to Freddie Mac) which is just amazing. The downtrend can be attributed to lackluster demand for the residential real estate.
In 1971, the rate for 30-year fixed mortgage was 7.3%. This then rose to unsustainable high of 18.45% as of October 1981. This did not come down to below 8% until February 1993.
Is Mortgage right for me?
A mortgage is really a big deal and before you apply for one, it is very important that you think critically. And because your lender is taking a big risk in advancing the mortgage to you, they will look into several things before approving your mortgage. Asking yourself the following questions will not only inform you if a mortgage is the best thing for you but it will also ensure that you do not struggle with your mortgage repayments. There is no use getting a house only for your lender to repossess it when you fall behind in your payments. Here are the considerations to take in mind:
• What is your income?
Lenders want to know your annual income. There are some lenders who even consider your overtime and bonuses while some lenders even factor in the expected rental income where you plan to rent spare rooms out.
• What is your age?
This basically has to do with the years remaining before you retire. You can only qualify if your remaining work years can cover the period of the mortgage.
• How much in outstanding loans do you have at the moment?
Remember that if you happen to have other loans, it will have an impact on how much money you can borrow. Also, such outstanding loans may hamper your chances of getting a mortgage.
• What are your outgoings?
Other than your loan repayments, lenders are also interested the financial commitments that you may be having. These include things such as childcare costs. If you have a lot of other financial commitments, a mortgage is probably not the right thing for you.
• Have you been saving?
In order to take out a mortgage, you need to have a deposit which can be up to 10% of the house or property value. It also shows that you can save and you have accumulated enough money to go for your deposit as well as other expenses.
• Do you have a healthy credit history?
If you have been paying your past loans on time, then a mortgage is probably a good thing for you. But if you have struggled in the past, you could just be getting into more trouble. Moreover lenders will examine your credit history and if it is not healthy, they are not likely to advance you any loan.
Ways to repay your mortgage?
Basically, there are three ways of repaying your lender. The method you use will depend on your financial circumstances as well as what your lender offers. They include the following:
Repayment (interest and loan)
This represents the most common way to repay a mortgage. Your regular repayment will be composed of a fraction of the amount you borrowed plus any interest accrued every month. This means that provided that you maintain your repayments fully and on time, your mortgage will have been repaid by full when the loan duration comes to an end.
Under this payment option, you will only pay for the interest on the loan you have borrowed, and it usually translates to lower monthly repayments. But after the agreed ??mortgage period’ elapses, you will still be owing the full amount borrowed. Therefore, you must find ways of paying it back. You will require paying into a different investment so as to build up the money needed for repaying the mortgage when the term elapses. Today, many lenders are restricting the amount of loan that you can qualify for on interest only mortgage. This has been capped at a certain percentage of property value, for instance, the maximum loan could be 50 percent of the value of the property.
Part and part mortgage
Under this option, you will be able to pay back part interest-only as well as part repayment every month.
How to pay your mortgage early
It is a good thing that you are already thinking about how to pay off your mortgage early. Whatever small change you make, it can affect your mortgage balance in a big way. Some of the ways through which you can pay your mortgage early include:
• Repaying expensive debts like credit cards before your mortgage
• Make your savings to work harder for you
• Shorten your mortgage duration
• Pay in excess
• Offset mortgages
Visit http://moneyfacts.co.uk/guides/mortgages/how-to-pay-off-your-mortgage-early/ for more information on how you can pay off your mortgage early.
What are the costs that are associated with a mortgage?
When getting a mortgage, it appears as if everything just revolves around fees. So what are the fees that you need to prepare for? We list them here.
• This is sometimes known as application fee and it is the fee that you will pay at the very beginning after completing the mortgage application.
• Basically, the fee serves to book your mortgage funds even as your application is being processed.
• You pay this fee upfront but some lenders will allow the fee to be included in your mortgage balance.
• It also goes by the name Completion Fee and it requires paying any time prior to the mortgage starting.
• This is the fee that your mortgage lender will charge you to set up the mortgage.
• The manner of paying this fee is optional. You can pay it upfront or even add it to your mortgage balance.
• Your mortgage lender will charge you this fee to commission a mortgage valuation. A mortgage valuation refers to basic inspection of the property that you want to buy.
• The purpose of valuation is to determine whether your home can act as good collateral to lend on.
• This fee is paid upfront when making your mortgage application.
For more details of these fees as well as other fees that you will be required to pay, visit http://moneyfacts.co.uk/guides/mortgages/what-fees-do-i-need-to-pay/.
Big Banks offering Mortgage in the US
Some notable names that offer mortgage lending in the US are Chase Bank, Wells Fargo, CitiMortgage, Bank of America and Ally Bank among others.
How to avoid overpaying for your mortgage
As a first time homeowner, your mortgage payment is likely to be the biggest check you will write monthly. For this reason, it is important that you shop around to cushion you from overpaying for your mortgage.
• Mortgages are not just about interest rates
Most first time homeowners make the mistake of focusing squarely on the interest rate that a particular loan attracts. But the truth is that interest rate is not usually the same thing as APR, or annual percentage rate. Interest rate is simply the cost of borrowing the money while APR is the total loan cost. It is these extra costs, including fees, points and loan costs that you should be comparing when you shop for a loan. For more information on the difference between interest and interest and APR, you can check out this link:http://www.consumerfinance.gov/askcfpb/135/what-is-the-difference-between-an-interest-rate-and-an-apr.html.
• Compare Mortgage Lenders’ Offers
Lenders of mortgages usually give borrowers a form called Good Faith Estimate. This form will have to be filled and returned within three days. This standardized form enables you to easily compare offers from different lenders.
Even if your loan gets accepted before you have made up your mind on the lender to work with, do not worry. You are under no obligation whatsoever to work with a mortgage lender before signing the paperwork.
• Lock Your Rate
Because an offered interest rate is not always binding, locking the mortgage rate guarantees that your mortgage lender will agree to provide you the said interest rate for a given period of time. With standard locks, the duration is 30 days although costs tend to vary based on the duration. Therefore, make sure that your lock rate spells out the interest rate, lock duration as well as number of points.
Mortgage related protection
While it is okay to protect your property, you also need to be insured. It is important that you plan how you will keep up with your mortgage payments even when you are not working as a result of injury or illness as well as how your loved ones will cope were you to die.
Several insurance products exist to help you not only safeguard your home but also your ability pay. They include:
• Critical illness
With this insurance, you can get a lump sum should you suffer a critical illness that is covered by the policy. This is a means of securing financial help when you need it most.
• Life assurance
Under this cover, your family may receive a lump sum should you die. Some policies allow your loved ones to get lump sum payment even when you are diagnosed with a terminal disease.
• Income protection
You get regular monthly income even if you are not working for an extended period of time due to illness or an accident.
Getting a mortgage if you are self-employed
If you are self-employed, you can also qualify to get a mortgage. However, your work is cut out for you because you must show proof of your income to every mortgage lender that you apply to. Most lenders want to see your accounts for the last two years or your tax returns. If you can show more accounts, it is better for your chances.
When lenders make a decision as the amount of money that they should advance to you, they will base their calculations on the average profits that you have been getting in the last couple of years. Lenders will want you to hire an accountant to that then prepares your accounts. And most lenders will insist on a certified or chartered accountant. Therefore, it is important that you have this at the back of your mind when selecting an accountant. You will also need to ensure that your accounts are the latest and that they are in order. Only then can you apply for a mortgage.
Mortgage refinancing refers to replacing the original mortgage with a new one. The purpose of doing refinancing is to enable you, the borrower, to get a different as well as better terms and interest rates. Your first loan gets to be settled, paving way for the second loan being created. This is opposed to just making new mortgage and throwing the old one out through the window. And if you have a healthy credit history, this can be a very good way to change a variable mortgage to a fixed one, hence obtaining lower interest rate. On the other hand, if your credit history is not good or is less than perfect, refinancing might be risky.
Understanding what a reverse mortgage is
This is a type of loan that is designed specifically for individuals above 62 years and the purpose of the loan is to enable them convert a part of equity in their homes into cash.
The reason this product was designed was so as to assist retirees having limited income to use accumulated wealth fond in their homes to meet basic monthly expenses as well as pay for healthcare. But this does not mean that a restriction is put into how the proceeds of reverse mortgage may be used.
The mortgage is so called because it reverses traditional payback stream. As opposed to a traditional mortgage where a borrower makes monthly payment to the lender, here it is the opposite. The lender makes monthly payments to a borrower.
- How First Time Home Buyer Loans Work (http://banking.about.com/od/mortgages/a/firsttimebuyer.htm)
- How Second Mortgages Work (http://banking.about.com/od/mortgages/a/secondmortgage.htm)
- High-Risk Mortgages (http://banking.about.com/od/mortgages/a/hiriskmortgages.htm)
- Get the Wrong Mortgage by Comparing APR
Test yourself with our fun mortgage trivia!
And another one… test your knowledge with our advanced trivia game
Q1. Which of the following is not one of the ways to repay your mortgage? (D)
C. Part and part mortgage
D. Borrowing from the bank
Q2. What are the things that you should consider before taking out a mortgage? (A)
A. Your ability to repay
B. Where you currently stay
C. The number of children you have
D. All of the above
Q3. A mortgage is often associated with various kinds of costs. The following are all the fees charged except one? (D)
A. Booking Fees
B. Valuation fee
C. Arrangement fee
D. VAT Tax
Q4. Below are tips to avoid overpaying for your mortgage. Which one is not? (C)
A. Comparing offers by different lenders
B. Locking your rates
C. Considering only the interest rate charged by a bank
D. All of the above
Q5. As a self-employed/contractor, the lender will ask you to furnish them with bank accounts for how long? (C)
A. 6 Months
B. 1 Year
C. 2 years
D. 3 Years
Q6. The following insurance coverage can protect your property as well as ensure that you keep up with mortgage payments. Which one is not
A. Critical Illness
C. Income protection
D. Life Assurance
Q7. Which of the following is not true regarding mortgages?
A. Only the employed people can qualify for a mortgage
B. A mortgage is meant for people who do not have enough money
C. Your chances of qualifying are hurt by unhealthy credit score
D. Different banks charge different interests on their mortgages
Q8. Mortgage refinancing can help you get better terms. True of False
C. I don’t know
D. None of the above.
Q9. Which one is true with regard to reverse mortgages? (B)
A. The borrower makes monthly payments
B. The lender pays the borrower every month
C. They attract much lower interest
D. Mortgage interest rate is the same as APR
Q10. Which of the following is not a way of paying your mortgage early? (A)
A. Paying off mortgage before credit card
B. Making overpayments
C. Shortening your mortgage durations
D. Offset mortgages
Q11. Which one of the following is true about mortgage refinance
A. You can switch to fixed variable mortgage
B. It is good if you have bad credit score
C. It throws an old loan out
D. None of the above
Q12. When deciding on the amount of money to advance to a self-employed person, the lenders look at their past average——————- (A)
D. Paying frequency
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