Understanding Mortgage Loans
What is a "mortgage loan"?
A mortgage loan is, for example, let's say you want to go buy a house for $500,000 and you and the seller agree upon the terms. If you don't have $500,000 sitting in your bank account, then you need to get a mortgage loan. Let's say you do have $100,000 to put down for a down payment. Well, you have $100,000 but you still need to come up with the additional $400,000; that's where the mortgage loan comes into play.
What is an "interest only" mortgage loan?
An interest only mortgage loan is where the payment that you're not making is not a principle payment to reduce the mortgage. You're just making enough interest payments to the bank to satisfy the lender; you're not making any principal reductions into the mortgage loan.
What is a "fixed rate" mortgage loan?
A fixed rate mortgage loan is where the payment will never change. For example, it is possible to get a 3 year fixed rate mortgage loan, and if you get a six and a half rate, it stays with you for 3 years if you keep that loan that long. But if you want to get an adjustable mortgage loan, in simple terms it just means that the rate, after a period of time, can adjust.
Do I pay a higher rate in exchange for the security of a fixed rate mortgage loan?
Yes, you do pay a higher rate in exchange for the security of a fixed-rate mortgage loan, and the reason for that is that you are not participating in the bank's risk. If you get a rate today at six-and-a-half, you get that rate for the next 3 years. However, as an example, if rates go up to eight percent next year, that bank lent you money at a six-and-a-half rate compared to what they could get today on the open market at eight percent.
What is the difference between a conforming and non-conforming loan?
With a conforming loan for a one-unit property, the loan balance is anything up to $417,000. Anything above that is considered jumbo or non-conforming. In the simplest terms, conforming loans; those loans can be with Fannie Mae and Freddie Mac. If it's a jumbo or non-conforming loan, those loans have to be sold to Wall Street.
What are the pros and cons of 15 year mortgage loans?
A 15 year mortgage loan nowadays is a rarity with most of my clients. In the old days, if you got a 15 year fixed mortgage loan, the rate would be much lower than a 3 year fixed. Well today there's not much of a spread between the 15 year money and the 3 year money. So why get a 15 year fixed rate mortgage loan with a much higher payment, because it's only amortized over 15 years, compared with 3 years? You're much better off with a 3 year fixed rate mortgage loan.
What are the pros and cons of 30 year mortgage loans?
The pro for a 30 year fixed mortgage loan is if you do plan on being in that house for a long period of time, you are always going to know what your rate is. The downside to a 30 year fixed mortgage loan, especially with today's market, is that most clients are only in their house 5-7 years, and with rates going up and down, there's a lot of refinancing that occurs. So, in reality you're only going to be in a 30 year fixed for maybe a couple of years. Therefore the thought process behind that is: "Knowing that you are not going to be living in that home for 30 years, why not take a hybrid product like a 5 or 7 year fixed mortgage loan, which will give you a much lower rate than a 30 year fixed mortgage loan?"
What is an Adjustable Rate Mortgage ARM?
An Adjustable Rate Mortgage allows you to get a cheaper rate in today's market, but you're now participating in the bank's risk. This is because after a period of time, that loan that you obtain now will adjust, and therefore could be at a higher interest rate. If you get a thirty-year fixed, that's a security blanket because you don't have to worry about the rate moving in a period of time. With an adjustable rate mortgage, you do.
What determines how my mortgage loan interest rate goes up or down?
Well, once you actually have the loan the rate can't change on you unless you have an adjustable. So, if all of a sudden you have bad credit or what-have-you, your rate's still going to stay the same.
