Thinking about purchasing a new home in 2015 but feeling stressed and overwhelmed by the ins and outs of a home mortgage? Fear not! We’ve created an easy to read home mortgage cheat sheet that will give you the rundown on things you should know before taking out your first home mortgage.
Types of Mortgage Loans
Fixed-rate mortgage: Fixed rate mortgages are for an initial period, typically anything from a year to 10 years. Basically, it is a means of guaranteeing that your mortgage payment won’t change over a set period of time.
Adjustable rate (ARM): Kind of the opposite of a Fixed-Rate mortgage. As the name suggests, it is a mortgage that is adjusted periodically to reflect market conditions.
Federal Houses Administration Loan: A FHA loan is one that is given by the Federal Housing Finance Agency in order to reduce their risk of loss if a borrower defaults on their mortgage payments. Typically, a FHA loan is one of the easiest types of mortgage loans to qualify for because it requires a low down payment and your credit score doesn’t have to be perfect to get approved.
VA Loan: We salute you! This loan is for past and present US military and their families. The Department of Veterans Affairs (VA) does not lend money specifically for VA loans, but it does back loans made by private lenders (banks, savings and loans, or mortgage companies) to veterans who qualify.
Balloon Mortgage: A balloon mortgage is a type of short-term mortgage that requires borrowers to make regular payments for a specific interval, then pay off the remaining balance within a relatively short time. There are some types of balloon mortgages that require interest-only for 10 years, and the final (balloon) payment would be the balance of the loan. What is nice about balloon mortgages is that like fixed- rate mortgages, the interest is relatively low. However, a big drawback of this type of loan is the the large lump sum payment that comes once the loan has matured. Individuals and families who opt for this loan often face a much higher risk of foreclosure.
Interest-only Mortgage: This one is pretty literal. An interest-only mortgage is a type of mortgage in which the homebuyer is only required to pay off the interest from the principal of the loan. Payments for this kind of loan are fairly low and can be great for first-time home buyers because it allows them to make smaller payments along the way while they build up their savings. Sounds great right? Well keep in mind that the honeymoon can’t last forever and the individual will be responsible for the rest of the loan somewhere down the road. The borrower will have two options. If you’re not ready for the honeymoon to end, you can renew the interest-only mortgage; but if you’re ready to come back to reality and gain some relationship weight, then you can enter a standard mortgage where you begin to pay back the entire loan.
Reverse Mortgage: Do like Missy Elliott and flip it and reverse it for this mortgage, but if you understood that reference, chances are you are too young to qualify for this type of mortgage. A reverse mortgage is available to homeowners who are 62 years or older and enables borrowers to convert the equity of their home into cash that they can use in their retirement. This Baby-Boomer facing type of mortgage only requires payments for property tax and home insurance. The mortgage for the home gets paid back in full to the lender once the individual dies or sells their home.
Important Names to Know
Fannie Mae (Federal National Mortgage Association) | Freddie Mac (Federal Home Loan Mortgage Corporation): Backed by the federal government, Fannie and Freddie were the two biggest home mortgage lenders in the country. Since they had the majority control of the market, they could afford to be extra choosey with whom they would approve. More often than not, it was only those with excellent credit and extra money to throw around that would be granted a home loan, which left a majority of the regular Joe’s out in the wild for private banks to lend to. Private banks would then credit loans much higher than the average Joe could pay back. After a while, Freddie and Fannie decided that they too would join the party and take on some “high risk” lenders which led us to a little thing in 2006 called the Housing Bubble Crisis. And just like a bubble – that baby burst! Today we are all familiar with the hard-to-swallow reality of Government Bail Outs.
Federal Housing Finance Agency: You can think of the Federal Housing Finance Agency as the intervening babysitter of Freddie & Fannie. The Federal Housing Finance Agency is a U.S. government agency created by the Housing and Economic Recovery Act of 2008 that regulates the secondary mortgage market by overseeing the activities of Fannie Mae, Freddie Mac and the 12 federal home loan banks. This new agency was established to act like a bank-regulator in order to strengthen and improve oversight of the U.S. housing finance system.
Government & Laws
Equal credit opportunity act: Courtesy of Uncle Sam, loan applicants can put on their hater blockers with this 1974 US law. The Equal Credit Opportunity Act makes it unlawful for creditors to discriminate any aspect of a credit transaction on the basis of race, color, religions, origin, sex, marital status, age or basis of income.
Truth-In-Lending Act: No secrets here. The purpose of the Truth-in-Lending Act is to protect borrowers by ensuring that they are aware of the terms and cost of credit so that they can be knowledgeable when comparing mortgages. This means that lenders are also required by law to disclose all details of the home mortgage loan such as the APR (annual percentage rate), the precise amount of the loan, finance charges, total sales and downpayment price, and the total amount the borrow will pay over the life of the loan. Another piece of this law states that borrowers are allowed three full days to decline a mortgage loan offer.
Fair Housing Act: Largely regulated and enforced by the Department of Housing and Urban Development, this law provides protection from lenders and mortgage companies that would try to deny an applicant because of their race, age, religion, sex, handicap or familial status. Mortgage lenders also can’t pull any fast ones like changing their mortgage terms, denying appraisals or refusing to give consumers information based on the above criteria.
Real Estate Settlement Procedures Act: R-E-S-P-A find out what it means to me…..or you. The Real Estate Settlement Procedures Act became a law in 1974 and is the doppelganger of the Truth-In-Lenders Act. While the Truth-In-Lenders Act makes mortgages become more transparent, RESPA requires mortgage lenders to provide consumers with certain documents during the application process such as a Special Information Booklet, Good Fair Estimate and Mortgage Servicing Disclosure Statement. These documents are required to be given either at the time of the application or within three days of applying. This law also requires mortgage lenders to provide other important documents such as the statement showing the actual closing cost compared to the Good Faith Estimate (HUD-1), as well as an Affiliated Business Arrangement Disclosure.
Housing and Economic Recovery Act of 2008: The Housing and Economic Recovery Act was one of the many government backed bailouts in 2008 when all heck broke loose in the US economy as a result of the housing mortgage crisis. There’s lots of controversy surrounding government backed bailouts to private sectors, but the long and the short of it is that Freddie and Fannie had to wear a dunce cap in the corner for a minute and were grounded for life by Uncle Sam so that the country could start on the road to financial recovery.
The US Housing Bubble: This term became a “household name” (get it?) between 2006-2008 and affected nearly half of American states. From 2000-2005, there was a huge rise in US house prices and mortgage lenders were giving out higher risk loans. In 2006, there was a figurative pin that burst this economic bubble and thousands of homes fell into foreclosure when families could not longer afford their high mortgage payments.
Mortgage Crisis: See above. The subprime mortgage crisis was a nationwide banking emergency that happened when the Housing Bubble went BOOM and the big “Oops, our bad…” moment for Fannie Mae & Freddie Mac. This crisis had a ripple affect across the US and global economy and led to a little thing called The Great Recession.
assumable mortgage: Don’t be presumptuous about an assumable mortgage! An assumable mortgage is a type of financing arrangement in which the outstanding mortgage and its terms can be transferred from the current owner to the prospective buyer. This can work out greatly to the benefit of the buyer, especially when interest rates rise, because they can assume the seller’s mortgage which was likely created when interest rates were lower.
closing costs: Cue Semisonic…because it’s Closing Time. Closing costs are the fees paid during the closing of a real estate transaction. These fees include the sale of the home, title and settlement services, title insurance and lender fees. Typically closing costs are between 3%-5% of the home’s price.
brokers fees: This is an important, yet sometimes forgotten, expense to budget in when you begin your home-buying journey. A brokerage fee is a fee charged by an agent or company to facilitate things such as the negotiation, sale, purchase, delivery or advice on the transaction itself.
appreciation of home: Your savings plan will appreciate this one. An appreciation of the home is a term to describe an increase in the value of your home over time.
equity: The difference between the amount your home is worth and the balance you owe on your mortgage. For example, if your home was appraised at $150,000 and your mortgage balance was $50,000, you would have $1000,000 in equity.
purchase agreement: A binding document that indicates the amount of your offer. This can include details such as appliances that will stay with house.
counteroffer: Put on your figurative poker face. We say figurative because there likely won’t be any actual face to face time from the time you place in your offer and counteroffer. The counteroffer is the seller’s response to your offer-made in part to continue negotiations towards the purchase agreement. Sellers can counteroffer with their desired amount – typically within 24 to 48 hours.
PITI: A mortgage acronym! PITI makes up the Holy Quartet of your home mortgage. Principal, Interest, Taxes and Insurance.
We hope our cheat sheet helps you to hit the ground running as you begin your home mortgage process. While you’re here, begin to look for your dream home be checking out our available New Jersey listings! Your new home could be just around the corner.