Financing

1. What is a mortgage, and what are the benefits of different kinds of mortgages?
2. What are the different types of lenders, and how do I choose the right one for me?
3. Are there any mortgages especially designed for first-time buyers?
4. Can I get an FHA or VA mortgage?
5. How much of a down payment will I need to buy a home?
6. How does a lender determine the maximum mortgage I can afford?
7. What are the steps involved in the loan process?
8. What are typical closing costs?
9. What are points, and what's the point in paying them?
10. Is the lending process regulated by the government?
11. What is APR and how is it calculated?
12. What is a good-faith estimate?
13. What does my monthly mortgage payment include?
14. Can I pay off my loan early?
15. What are the respective advantages of 15-year and 30-year loans?
16. Do adjustable-rate mortgages offer any protection against rising rates?
17. What can I do if I have a fixed-rate loan and interest rates go down?
18. What is the difference between pre-qualifying and pre-approval?
19. Mortgage Terms Glossary

A mortgage is a loan that a homebuyer obtains directly from a lender to purchase real estate. The mortgage is a lien on the property that secures a promissory note (promise to repay the debt) that states the terms of the loan, including the interest rate and the number of payments.

The most popular mortgages available to home buyers today can be divided into two general categories: those that offer fixed interest rates and monthly payments, and those in which one or both of those factors are adjustable.

Fixed-rate/fixed-payment loans are more traditional and remain the most popular home financing method, currently accounting for about two-thirds of all residential mortgages. Their advantages are well-known: you always know what your monthly principal and interest payment will be, so your basic housing cost will remain unaffected by interest-rate changes until the mortgage is paid off.

Mortgages that entail flexible rates and/or payments have grown in popularity in recent years, primarily during periods of high interest rates and/or rapidly rising home prices. Many, including the popular ARMs (Adjustable Rate Mortgages), offer lower-than-market initial interest rates that allow buyers a measure of affordability unavailable in fixed-rate loans. The tradeoff may be higher interest rates and higher monthly payments later on.

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Before someone lends you the money to purchase your home, they'll want to know a lot about you. And you're entitled to know as much as you can about them too.

It's important because getting a mortgage is not just a one-time signing of documents, a handshake and a check. You will be depending on your lender to fund the loan as promised, on time, and over the life of the loan; to keep good payment records, pay your taxes and insurance (if included in your monthly payment); and to perform many other continuing services.

By working with us, we will introduce you to the best lenders in the city of Boston. Our preferred lenders are detail oriented, result driven and ethical. They will give you the best possible rates and programs - so you're upfront and monthly payment will stay as low as possible.

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Today, first-time buyers enjoy a number of mortgage options that make purchasing a home more affordable by minimizing down payments and keeping monthly payments as low as possible during the early years of the loan.

Most ARMs feature an interest rate that is below market for the first year and may only rise gradually after that.

VA- and FHA-insured loans call for extremely low down payments (zero to five percent of the purchase price) and often offer a below-market interest rate. Similarly favorable terms can be arranged with the help of private mortgage insurance or PMI.

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Just about anyone can apply for an FHA-insured mortgage through banks and other lending institutions. They are particularly well-suited for buyers of moderate income; the low down payment requirements (as low as five percent of the purchase price) are matched by a relatively low maximum mortgage amount.

Similarly, VA-guaranteed loans often require no down payment for up to four times the amount guaranteed by the VA. These loans are reserved for either active military personnel or veterans, or spouses of veterans who died of service-related injuries.

If there is a downside to these loans, it's the qualifying process. Though you apply for government-insured financing through a lending institution, the Federal Housing Administration or the Department of Veterans Affairs must insure or guarantee the loan and may require specific documentation or procedures not necessarily required for conventional financing. That may take more time than is generally required for conventional mortgage approval. Additionally, FHA-required insurance must be added to your payment.

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The amount of money that a buyer must put down at closing depends on the loan-to-value ratio — the percentage of the property's appraised value or sales price (whichever is less) that a lender is willing to loan.

For example, if a property is appraised at $100,000 and the loan-to-value ratio is 90 percent, the lender would be willing to loan $90,000. The buyer's down payment is the remaining $10,000. Because the loan-to-value is a percentage, the higher the sales price of a house, the higher the down payment.

A down payment of 20 percent has been the benchmark for conventional financing, but today, many options are available, some requiring as little as five percent down.

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The three primary areas lenders examine in determining the size of mortgage you can handle include your monthly income; non-housing expenses; and cash available for down payment, moving expenses and closing costs.

The most common way lenders interpret these variables to estimate your mortgage capacity is the Percentage Method. Most lenders feel a family should spend no more than 28 percent of its income on housing costs, including the mortgage, insurance, and real estate taxes. In addition, these housing costs plus your long-term debts (car loans, child support, minimum credit card payments, student loans, etc.) shouldn't exceed 36 percent of your income. Some mortgage companies, have relaxed ratios to help you purchase the home of your dreams.

Although it is not a standardized method, you can also use the Multiplier Method formula as a general rule of thumb to determine how much home you can afford. Most lenders' guidelines allow a family to carry a mortgage that is two to three times its gross annual income (income before taxes and expenses are taken out). The amount of down payment and the type of mortgage (fixed or variable rate) will determine the precise ratio used by the lender.

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When you apply for a mortgage, you will need to furnish information regarding your income, expenses and obligations. It will be very helpful, and save time, if you have the following items available:

• Two most recent pay stubs from your employer
• W-2s for the last two years
• Last two months' bank statements
• Long-term debt information (credit cards, child support, auto loans, installment debt, etc.)

For buyers who qualify for conventional financing, but can't handle the high down payment requirements, most lenders may still offer this financing with PMI, or private mortgage insurance.

Designed to protect the lender against default by the borrower, PMI allows you to obtain traditional financing with a down payment significantly lower than the standard 20 percent. By using PMI, you may be able to get a fixed-rate or adjustable-rate mortgage by putting as little as five percent down.

As with an FHA-insured loan, you must pay premiums for PMI coverage, the amount being determined by the type and amount of your loan. But unlike FHA financing, the maximum loan amount is determined by the lender. Moreover, PMI premiums are often lower than FHA insurance, and may be paid as part of your monthly mortgage payment, in annual installments, or in a lump sum at the time you obtain the loan.

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You can expect to pay the following closing costs at the time of settlement:

• Appraisal fee — covers the cost of a professional written estimate of the property's value.
• Attorney's or escrow fees — your own and the lender's if they have one.
• Credit report fee.
• Points.
• Documentation preparation — covers the cost of preparing the deed and other paperwork.
• First year's premium on fire and hazard insurance.
• Impounds (also known as "escrow account") — sufficient to cover real estate taxes on the purchased property for the current tax period to date. The lender then pays these bills when they come due.
• Interest — paid from the date of closing until 30 days before your first monthly payment.
• Title insurance.
• Mortgage insurance if required.
• Origination fee — covers the lender's administrative costs.
• Recording fees.
• FHA mortgage insurance (FHA loans only).
• VA guarantee fees (VA loans only).

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In real estate, the term "point" refers to one percent of the total mortgage loan amount. Buyers often pay lenders a supplemental fee, calculated in points, to get a better interest rate on a particular mortgage.

For instance, a lender may offer you a choice of two 30-year mortgages: the first at eight percent with no points, and the second at 7.5 percent with an additional three points. If the loan is for $100,000, those three points will cost you an extra $3,000 up front — but you'll get a payback of significantly lower monthly payments for the lifetime of the loan.

Many lenders will advise you to pay the points for the better rate if you can afford it, especially if you plan on keeping the home for more than a few years. Like interest, the money you pay for points may be tax-deductible, and the investment may pay for itself through savings generated by lower monthly payments. We suggest you call your tax preparer.

As your Buyer's Agents, we will work with you to find the break even point, to make sure in make sense to pay the points.

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Most definitely. There are many laws and government regulations that all lenders must follow to ensure that all applicants are given fair and equal treatment. For example, in 1968, Congress passed the Truth in Lending Law, which requires that lenders provide borrowers with information about a loan's true interest rate. By law, lenders must reveal a loan's annual percentage rate (APR).

The law also stipulates that for refinancing and second mortgage loans, the borrower has up to three days after closing to change his or her mind and call the deal off. The lender may not disburse money until after this three-day "recession period" has passed.

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The annual percentage rate (APR) is a calculated rate of interest for a loan over its projected life. This rate includes the interest, all points (which are considered prepaid interest), Mortgage insurance, and other charges associated with making the loan that the lender collects from the borrower.

The APR is calculated by a standard formula that all lenders use. This enables the borrower to comparison-shop between lenders and/or loan products.

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Your lender or loan agent must provide you with a good-faith estimate within three days of your application. This is the information you need to make a fair and accurate judgment when shopping for a loan.

Your estimate is a written document that shows all the costs that can be estimated in advance by the lender. You need this information so there are no surprises on the day you close your sale on the property to be purchased. You will be expected to pay closing costs.

As your Buyer's Agents, we will help you to compare the Good Faith Estimates to ensure you're not missing "hidden costs".

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The bulk of your monthly mortgage payment goes toward paying off the principal and interest of your loan. In addition, most lenders require that you pay a sufficient amount to cover your local real estate tax, plus, is some cases, your homeowner's or hazard insurance. This amount is placed in an escrow account, from which your lender then pays your tax and insurance bills as they come due.

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If you can afford it, and are interested in the considerable advantages of having more equity and/or owning your home free-and-clear at the earliest possible date, the answer in most cases is yes.

The FHA, VA, and even some states do not allow lenders to charge penalties for paying mortgages early or refinancing. In fact, many lenders now include space on monthly statements for borrowers to itemize an additional principal payment they wish to include with their regular payment.

If you're unsure about the rules governing pre-payment, review your loan agreement.

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The 30-year fixed-rate mortgage remains the standard mortgage, with an array of valuable benefits designed especially for buyers who expect to stay in their homes for a long time. Because the borrower pays more interest than principal for the first 23 years, the tax deduction is substantial. And as inflation causes both living expenses and income to increase, your unchanging monthly mortgage payments account for a relatively smaller portion of income as the years go by.

As you'd expect, a 15-year monthly mortgage means higher monthly payments than an equivalent 30-year loan...but not as much higher as you may think. At the same rate of interest, payments on the 15-year mortgage are roughly 20-25 percent higher than a loan that takes twice as long to pay off. And one of the benefits of choosing a 15-year mortgage is that you can generally get a lower interest rate for an otherwise similar loan. Another advantage is faster equity build-up because a larger portion of your early payments is going to pay off principal. This makes the 15-year mortgage an ideal alternative for couples approaching retirement or anyone else interested in owning their home free-and-clear as quickly as possible.

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Yes. ARMs and other variable-rate-of-payment plans offer lower-than-market interest rates initially, but because they are tied to the interest rates of U.S. Treasury Bills or other indexes, interest rates later in the loan term may rise. However, many such loans offer built-in safeguards designed to minimize the effect of any rapid escalation in interest rates.

One such safeguard is the rate cap. Many ARMs include provisions for the maximum amount your rate can rise, both annually and over the life of the loan. For example, if your initial rate is 6.5 percent, the loan may include one-percent annual and five-percent lifetime caps...which means even if rates rise dramatically, you'll pay no more than 7.5 percent next year, 8.5 percent the following year and so on, until a maximum rate of 11.5 percent is reached.

An ARM may also allow your rate to decrease when the index it is tied to goes down. As you might expect, decreases are usually capped as well.

A second protective device included in some ARMs is the payment cap. Under this provision, your monthly payments may rise by only a set dollar amount. The potential disadvantage of this type of cap is that it can slow or even reverse your equity build-up. If rates rise dramatically, you could actually wind up owing more principal at the end of the year than you did at the beginning.

Of course, ARM holders can also consider refinancing to a fixed-rate loan after a few years. Some ARMs even include a provision for converting to a fixed-rate loan after a set period of time.

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When interest rates drop significantly as they have in recent times, the homeowner should investigate the financial advantages of refinancing. Essentially, this means taking out a new loan to pay off your existing loan.

Refinancing may require paying many of the same fees paid at the original closing, plus origination fees. Most mortgage experts agree that if you can get a rate two percent less than your existing loan, and you plan on staying in your home for at least 18 months more, refinancing is a good investment.

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A pre-qualification consists of a discussion between you and a loan officer. The loan officer will collect information regarding your income, monthly debts, credit history and assets, and based on this information calculate an estimated mortgage amount for which you qualify. The pre-qualification is not a mortgage approval, but more an estimate on what you can afford.

A pre-approval, on the other hand, is a more comprehensive approach giving an actual decision on a home loan. With most lenders, a credit report is ordered electronically and is received within 30-60 seconds. This is an actual credit approval and it carries with it some considerable benefits. From this information, a loan approval is given agreeing to finance a home and specifying the total mortgage amount available to you.

What could be more comforting than the peace of mind that goes with knowing that your mortgage is fully approved?

You will have a greatly improved negotiating position when you are pre-approved for a mortgage. Sellers are more apt to negotiate with someone who already has a mortgage approval in hand. The pre-approval letter lets the seller know they are working with a serious buyer. A pre-approved buyer can also close on a property more quickly — another major consideration for a motivated seller. We strongly recommend it.

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Adjustable Rate Mortgage (ARM)--An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

Amortization--A repayment method in which the amount you borrow is repaid gradually though regular monthly payments of principal and interest. During the first few years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal.

Annual Percentage Rate (APR)--The cost of credit on a yearly basis, expressed as a percentage. Required to be disclosed by the lender under the federal Truth in Lending Act, Regulation Z. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Does not include title insurance, appraisal, and credit report.

Application--An initial statement of personal and financial information which is required to approve your loan.

Application Fee--Fees that are paid upon application. An application fee may frequently include charges for property appraisal ($200-$400) and a credit report ($30-50).

Appraisal--A fee charged by an appraiser to render an opinion of market value as of a specific date. Required by most lenders to obtain a loan.

Assumption of Mortgage--The agreement of a purchaser to become primarily liable for the payments on a mortgage loan. Unless otherwise specified by the lender, the seller may remain secondarily liable for payments.

Balloon Payment--A lump sum payment for the unpaid balance of the loan.

Cap--The maximum allowable increase, for either payment or interest rate, for a specified amount of time on an adjustable rate mortgage.

Cash Out--Receiving money back when refinancing your present mortgage.

Ceiling--The maximum allowable interest rate over the life of the loan of an adjustable rate mortgage.

Closing--The final transfer of the ownership of a house from the seller to the buyer, which occurs after both have met all the terms of their contract and the deed has been recorded.

Closing Costs--Any fees paid by the borrowers or sellers during the closing of the mortgage loan. This normally includes an origination fee, discount points, attorney's fees, title insurance, survey, and any items which must be prepaid, such as taxes and insurance escrow payments.

Conforming Loan--Generally, a mortgage loan under $203,150. Qualifying ratios and underwriting methods are standardized to a large degree.

Contract of Sale--The agreement between the buyer and seller on the purchase price, terms, and conditions necessary to both parties to convey the title to the buyer.

Credit Limit--The maximum amount that you can borrow under a home equity plan.

Debt Service--The total amount of credit card, auto, mortgage or other debt upon which you must pay.

Deed of Trust--Used in many western states, the agreement used to pledge your home or other real estate as security for a loan. Similar to a mortgage.

Discount Points (or Points)--The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000).

Down Payment--The difference between the purchase price and that portion of the purchase price being financed. Most lenders require the down payment to be paid from the buyer's own funds. Gifts from related parties are sometimes acceptable, and must be disclosed to the lender.

Due on Sale--A clause in a mortgage agreement providing that, if the mortgagor (the borrower) sells, transfers, or, in some instances, encumbers the property, the mortgagee (the lender) has the right to demand the outstanding balance in full.

Effective Interest Rate--The cost of credit on a yearly basis expressed as a percentage. Includes up-front costs paid to obtain the loan, and is, therefore, usually a higher amount than the interest rate stipulated in the mortgage note. Useful in comparing loan programs with different rates and points.

Encumbrance--A claim against a property by another party which usually affects the ability to transfer ownership of the property.

Equity--The difference between the fair market value (appraised value) of your home and your outstanding mortgage balance.

First Mortgage--A mortgage which is in first lien position, taking priority over all other liens (which are financial encumbrances).

Fixed Rate--An interest rate which is fixed for the term of the loan. Payments as well are fixed at one amount.

FHA Loan--More appropriately termed "FHA Insured Loan." A loan for which the Federal Housing Administration insures the lender against losses the lender may incur due to your default.

Good Faith Estimate--A written estimate of closing costs which a lender must provide you within three days of submitting an application.

Grace Period--A period of time during which a loan payment may be paid after its due date but not incur a late penalty. Such late payments may be reported on your credit report.

Gross Income--For qualifying purposes, the income of the borrower before taxes or expenses are deducted.

Home Equity Line of Credit--A loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Simple interest (interest-only payments on the outstanding balance) is usually tax-deductible. Often used for home improvements, major purchases or expenses, and debt consolidation.

Home Equity Loan--A fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax -deductible. Often used for home improvement or freeing of equity for investment in other real estate or investment. Recommended by many to replace or substitute for consumer loans whose interest is not tax-deductible, such as auto or boat loans, credit card debt, medical debt, and education loans.

Hazard Insurance--A contract between purchaser and an insurer, to compensate the insured for loss of property due to hazards (fire, hail damage, etc.), for a premium.

HUD I Settlement Statement--A form utilized at loan closing to itemize the costs associated with purchasing the home. Used universally by mandate of HUD, the Department of Housing and Urban Development.

Index--A number, usually a percentage, upon which future interest rates for adjustable rate mortgages are based. Common indexes include the Cost of Funds for the Eleventh Federal District of banks or the average rate of a one year Government Treasury Security.

Interest Rate--The periodic charge, expressed as a percentage, for use of credit.

Jumbo Loan--Mortgage loans over $203,150. Terms and underwriting requirements may vary from conforming loans.

Loan to Value Ratio (LTV)--A ratio determined by dividing the sales price or appraised value into the loan amount, expressed as a percentage. For example, with a sales price of $100,000 and a mortgage loan of $80,000, your loan to value ratio would be 80%. Loans with an LTV over 80% may require Private Mortgage Insurance, defined below.

Lock or Lock In--A commitment you obtain from a lender assuring you a particular interest rate or feature for a definite time period. Provides protection should interest rates rise between the time you apply for a loan, acquire loan approval, and, subsequently, close the loan and receive the funds you have borrowed.

Margin--An amount, usually a percentage, which is added to the index to determine the interest rate for adjustable rate mortgages.

Minimum Payment--The minimum amount that you must pay, usually monthly, on a home equity loan or line of credit. In some plans, the minimum payment may be "interest only," (simple interest). In other plans, the minimum payment may include principal and interest (amortized).

Mortgage Banker--Originates mortgage loans, loaning you their funds and closing the loan in their name.

Mortgage Broker--As do mortgage bankers, takes loan application and processes the necessary paperwork. Unlike a mortgage banker, brokers do not fund the loan with their own money, but work on behalf of several investors, such as mortgage bankers, S and L's, banks, or investment bankers.

Mortgage Insurance (MIP or PMI)--Insurance purchased by the borrower to insure the lender or the government against loss should you default. MIP, or Mortgage Insurance Premium, is paid on government-insured loans (FHA or VA loans) regardless of your LTV (loan-to-value). Should you pay off a government-insured loan in advance of maturity, you may be entitled to a small refund of MIP. PMI, or Private Mortgage Insurance, is paid on those loans which are not government-insured and whose LTV is greater than 80%. When you have accumulated 20% of your home's value as equity, your lender may waive PMI at your request. Please note that such insurance does not constitute a form of life insurance which pays off the loan in case of death.

Mortgage Loan--A loan which utilizes real estate as security or collateral to provide for repayment should you default on the terms of your loan. The mortgage or Deed of Trust is your agreement to pledge your home or other real estate as security.

Mortgagee--The lender in a mortgage loan transaction.

Mortgagor--The borrower in a mortgage loan transaction.

Negative Amortization--Amortization in which the payment made is insufficient to fund complete repayment of the loan at its termination. Usually occurs when the increase in the monthly payment is limited by a ceiling. The portion of the payment which should be paid is added to the remaining balance owed. The balance owed may increase, rather than decrease over the life of the loan.

Origination Fees--A fee charged by lenders, in addition to interest, for services in connection with granting of a loan. Usually a percentage of the loan amount.

PITI--Principal, interest, taxes and insurance, which comprise your monthly mortgage payment.

Points--The amount paid either to maintain or lower the interest rate charged. Each point is equal to one percent (1%) of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000).

Prepayment Penalty--A fee paid to the lending institution for paying a loan prior to the scheduled maturity date.

Principal--Money borrowed from the lender, not including any fees or interest.

Qualify--The ability to meet a lender's mortgage approval requirements.

Qualifying Ratios--Comparisons of a borrower's debts and gross monthly income.

Right to Rescission--The legal right to void or cancel your mortgage contract in such a way as to treat the contract as if it never existed. Right of rescission is not applicable to mortgages made to purchase a home, but may be applicable to other mortgages, such as home equity loans.

Security Interest--An interest that a lender takes in the borrower's property to assure repayment of a debt.

Servicing a Loan--The ongoing process of collecting your monthly mortgage payment, including accounting for and payment of your yearly tax and/or homeowners insurance bills.

Title--The written evidence that proves the right of ownership of a specific piece of property.

Title Insurance--Protection for lenders or homeowners against financial loss resulting from legal defects in the title.

Transaction Fee--A fee which may be charged each time you draw on a home equity credit line.

Underwriting--The process of verifying data and approving a loan.

Variable Rate--An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

VA Loan--More appropriately termed "VA Insured Loan." A loan for which the Veteran's Administration insures the lender against losses the lender may incur due to your default. Available only to veterans possessing a Certificate of Eligibility

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