Monday, April 24, 2006

Intro to Mortgage

Mortgages exist specifically so borrowers can immediately secure funding from a lender in order to make a real estate and/or land purchase. The debt is paid off gradually, and this financial product allows people to afford housing without first accumulating a large sum of money. These are, of course, the largest loans and financial burden that most people ever undertake.

Pre-qualification is a mortgage option which allows a potential homebuyer to gain approval for a certain amount of mortgage funding before they even begin to shop for a house. This process prevents the frustration of attempting to gain mortgage financing after having shopped for and decided on a house.

Mortgage brokers can serve as an intermediate agent between borrower and lender. They gather the borrower's information, review multiple lenders, and return to the borrower with an assortment of qualified lenders to choose from.

Qualifying Criteria

During the mortgage application process, also known as origination, a lender normally takes precautions to ensure that a potential borrower will be able to consistently make payments and therefore avoid financial loss for either party. This means that there may be certain criteria which must be met by the mortgage applicant. Under normal circumstances, the lender will require certain financial documents in conjunction with the application, such as proof of income/employment, a credit report and score, and tax returns. From these documents, a lender will be able to determine past credit history and history of stable employment and income.

Preferably, a borrower's housing expenses should not exceed 25 to 35 percent of their total income, after combining payments for mortgage, property taxes and homeowner's insurance.

Also, any other outstanding debt is normally taken into consideration as well.

Now available are "No Doc" and "Low Doc" mortgages which require minimal financial documentation on the part of the borrower in exchange for a slightly higher interest rate. This type of mortgage is most likely made possible for those borrowers with good credit standing.

For those with bad credit or questionable credit history, sometimes mortgages considered "subprime" can be extended to the borrower. This simply means that a higher interest rate is required due to the higher risk for mortgage default.

Terms of Mortgage

A down payment has traditionally been required as part of the mortgage process. This is an up-front cost for the borrower and has typically been between 10 and 30 percent of the value of the property. However, nowadays lenders are even more willing to offer "low down payment" or even "no down payment" mortgages to those who qualify. Often, down payments of 5-10 percent are acceptable through today's mortgage lenders.

Mortgages normally last 10, 15, 20 or 30 years in duration. The monthly payment consists of the principal (property value payment) and interest. For longer duration loans, the interest can often compose the majority of the payments. For loans of a shorter duration, the total interest cost is much less, simply because the interest compounds less over the shorter loan duration. For either type of duration, the interest portion of the payment is higher towards the beginning of the mortgage, and as the payoff progresses, the interest cost is reduced as the value of the property is slowly paid off.

An Annual Percentage Rate (APR), or interest rate, will apply to the balance of the mortgage. This rate is typically between 5 and 8 percent, annually. There are two types of APR's: Fixed Rate and Adjustable Rate Mortgages (ARMs). The fixed rate mortgage is established and never changes, the payments will always be fixed. Adjustable rate mortgages have APRs that are fixed for a certain period, then they can be adjusted monthly or annually according to certain federal interest rates. Often, ARMs have a lower initial APR, even one or two percentage points lower than the fixed rate. This advantage comes with the risk of assuming a higher interest rate during later periods of adjustment.

Also more common nowadays are "interest-only" mortgages which permit the borrower to make payments on only the interest portion of the mortgage, rather than pay any principal.

Sometimes extra fees may be imposed on the borrower during the mortgage process, including entry fees, exit fees, administration fees, and lender's mortgage insurance.