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What is a Mortgage and do you needed?
A mortgage is a long-term loan used to finance the purchase of real estate.
If you have all the money in the bank to buy your home, then you wouldn't need a
mortgage. But most of us don't have hundreds of thousands to pay for a home. So
we need to borrow to get the homes we want. As the borrower, or mortgagor, you repay the lender, or
mortgagee, the loan
principal plus interest, gradually building your equity in the property. While
the mortgage is in force, you have the use of the property, but not the title to
it. When the loan is repaid in full, the property is yours. But if you default,
or fail to repay, the mortgagee can exercise its lien on the property and take
possession of it.
Most people have a lot of questions
when they are thinking about buying their first home. Do I have enough money for
a down payment? Do I qualify for a mortgage? Can I find a home that I like at a
price that I can afford? Buying a home is most likely the single most expensive
and important financial decision of your life. Buying a home, condo, or co-op
for most of us require taking out a mortgage because we don't have hundreds of thousands of dollars in
the bank to pay in cash. So, we pay a percentage of the purchase price in cash
called the down payment. The remainder of the purchase price is
covered by the mortgage, with your title to the house used as security. This
means that if you are unable to repay your mortgage, the lender has the right to
foreclose (to take possession of the property).
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The cost of a mortgage:
How much will a mortgage cost you will depend on three
things: the amount you borrow (loan amount or principal), the
interest you pay and how long you take to repay the loan plus any closing costs
(fees charged by the lender). Since you pay your mortgage monthly, its easy to
forget how expensive a mortgage can be. For example, if you borrow $100,000 for
30 years at 10% interest, your total repayment will be around $316,000 ($878 x
360 months), more than three times the original loan. Just a minor differences
in the interest rate (10% vs. 9.5%) can add up to a lot of money over the 30
years. At 9.5% the total repaid would be $302,700, that's over $13,000 savings
than 10%.
Monthly amount at different interest rate based on $100,000
mortgage
|
Term |
7.0 % |
7.5% |
8.0% |
8.5% |
9.0% |
9.5 % |
10% |
|
15 year |
$899 |
$927 |
$956 |
$985 |
$1,014 |
$1,044 |
$1,075 |
|
30 year |
$655 |
$699 |
$734 |
$769 |
$805 |
$841 |
$878 |
Total Payments
|
Term |
7.0 % |
7.5% |
8.0% |
8.5% |
9.0% |
9.5 % |
10% |
|
15 year |
$161,820 |
$166,860 |
$172,080 |
$177,300 |
$182,520 |
$187,920 |
$193,500 |
|
30 year |
$235,800 |
$251,691 |
$264,240 |
$276,840 |
$289,800 |
$302,760 |
$316,080 |
Points on a Mortgage -
The more points (a point is equal to 1% of the mortgage amount) you are willing
to pay, the lower the interest rate on the mortgage will be. So you are
basically prepaying interest up front to save save on the interest
on the mortgage later, or save the money now and pay the higher interest rate as
you go.
Below is an example of two mortgages. The first mortgage is a no points mortgage
and the second mortgage has points paid up front. Note: in some cases the points
can be "put back into" the mortgage, thus increasing the amount of the mortgage
by the mount of the points paid on the mortgage.
|
Mortgage Amount |
Points |
Interest Rate |
Term |
Monthly Payment |
Total Interest |
|
$100,000.00 (loan A) |
0 |
9.00% |
30 Years |
$805 |
$289,800 |
|
$100,000.00 (loan B) |
2 |
8.75% |
30 Years |
$787 |
$283,320 |
|
Difference |
|
.25% |
|
$18 |
$6,480 |
In the example above, the payment of 2 points, equivalent to $2,000.00 on the
$100,000.00 mortgage lowered the monthly payment by $18 and saved a total of
$6,480 in interest over the life of the mortgage. So, don't just look at the
annual percentage (APR) of a mortgage loan. The example above clearly shows
how important it is to take into account the points on a home mortgage loan.
Depending on your situation, it can be better for you to pay points in order to
get a lower APR. If you plan on staying in the house only a short period of
time, the lower initial cost of less points or even no points would be the way
to go. However, if you are planning to stay in the house for a longer period of
time, and you have the money to pay the points up front, it may be a good idea
to pay the points and
save the interest. This can be a considerable amount of money over the life of
the loan.
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If you plan on staying in the house a long period time and have the money to pay
the points up front, the next question to ask is, Does paying the points to get
a lower interest rate, lower the interest rate enough? This depends on how long
you will stay in the house and how much a point will lower the interest rate.
Generally a point will lower your interest rate by about 1/8 - 1/4 of a percent
on a 30 year fixed rate mortgage and 1/4 - 1/2 a percent on a 15 year fix rate
mortgage.
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What is an amortization?
Amortization is the gradual repayment of a debt
over a period of time, such as monthly payments on a mortgage. To
amortize a loan, your payments must be large enough not only to
pay interest that has accrued but also to reduce the principal
(loan) amount you owe.
When you take out a loan, you pay the lender
monthly installments of principal and interest. In the beginning
of the loan term, you pay almost all interest because the balance
of your loan is still high. Since some part of your monthly
payment goes toward paying down the loan, the interest on the
monthly payment gets smaller and smaller. By the end of the loan,
you're repaying almost all principal. The schedule of payments of
principal and interest is called the amortization schedule.
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You may be able to "put the points into the mortgage". This means that the
dollar amount of the points are added into the mortgage amount. One point on a
$100,000.00 is equal to $1,000.00 So if you were getting a $100,000.00 mortgage
with a 1 point fee put back into the mortgage, the new mortgage amount would be
$101,000.00.
Shopping for the best mortgage rates are easier than ever in this age of
internet.
BestRate.com
for example will give you up to 4 mortgage quotes free when you fill
out their easy online application. Always check the numbers on the various
offers that they come back with. Carefully review these numbers to determine
which combination of points and interest rate best satisfies your needs. You
should
also use E-LOAN to compare rates on hundreds of loans.
Closing costs - These are one-time expenses that
include the cost of a title search, title insurance, surveying fees, attorneys'
fees, mortgage recording tax, and many other smaller fees that can total as much
as 5 percent of the value of the home you're buying. Before purchase, you should
receive from the lender a good-faith estimate of what your closing costs will be
as required by Real Estate Settlement Procedures Act (RESPA).
Next -->>
Different types of mortgages
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