What Mortgage Loan Program Is Right For You?
When considering the many mortgage loan programs that are available, you may find yourself overwhelmed. Click on a mortgage loan type to get a primer (in layman’s terms) on how a particular mortgage plan works.
Fixed-Rate Mortgage – A mortgage loan program where the interest rate does not change for the life of the loan.
Adjustable Rate Mortgage (ARM) – A mortgage loan program in which the interest rate is adjusted periodically based on an index. Also called a variable rate mortgage.
Balloon Mortgage – Behaves like a fixed-rate mortgage loan for a set number of years (usually five or seven) and then must be paid off in full in a single “balloon” payment. Balloon mortgage loan programs are popular with those expecting to sell or refinance their property within a definite period of time.
Two-Step Mortgage – A mortgage loan program where the interest rate is fixed for the first seven years and then is adjusted one time for the balance of the loan period.
Conforming Loan – A mortgage loan program for up to and including $417,000.00 in the continental United States (Alaska and Hawaii limits are higher).
Jumbo Loan – A mortgage loan program for $417,001.00 or more in the continental United States (Alaska and Hawaii limits are higher). These limits are set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
There are certain standard costs associated with closing the sale of a house. These fees are split between the buyer and the seller, as spelled out in the sales contract. You will receive a “Good Faith Estimate” of closing costs at the time the loan application is submitted to the lender. The estimate is based on the loan officer’s past experience and may not include all the closing costs.
Homeowner’s Insurance – This insurance covers replacement costs for damages caused by fire, wind or other disaster that might affect the value of the property. Typically, the insurance also includes personal liability and theft coverage.
Flood or Quake Insurance – Additional hazard insurance coverage that is required for homes located in a designated hazard zone as established by the Federal Emergency Management Agency (FEMA).
Private Mortgage Insurance (PMI)- Insurance required for conventional mortgage loans when the borrower’s down payment on the house is less than 20 percent of the loan value.
Title Insurance – This policy protects both the buyer and lender by insuring a clear chain of title. (In other words, it insures that that the person who sells the house has the legal right to do so.)
Loan Origination Fee – This covers the administrative expenses in setting-up and processing the loan. The loan origination fee may be a percentage of the mortgage amount.
Points (optional) – An option for the home buyer is to pay points to lower the interest rate at which the loan will be repaid. Each point equals 1 percent of the mortgage amount. For example: on a $150,000 loan, 1 point would equal $1,500.
Appraisal Fee – The fee for having the house appraised may be incorporated into the closing costs or payment may be required by the lender at the time the loan application is submitted.
Credit Report – The lender uses a credit report to determine the creditworthiness of the loan applicant. This fee is often paid when the loan application is submitted.
Interest Payment – Typically the you are required to pay interest on the mortgage loan to cover the time between the closing date and when the first mortgage payment period begins. For example: If closing is on May 15. Your first monthly payment begins to accrue interest on June 1 with your first mortgage payment due July 1. At closing an interest payment covering the accrual period between May 15 and May 31 may be required.
Escrow Account – At closing a payment may be required to fund the escrow account if the lender is paying home insurance, property taxes and/or other expenses out of the escrow account.
Property Taxes – This is the one closing cost that is often prorated between you and Seller. If the Seller has already paid the annual property taxes, typically you will reimburses the Seller for the period in which you will be occupying the property. Likewise, if the taxes have not yet been paid, the Seller typically reimburses you for the period in which the Seller occupied the property.
Transfer Taxes and Recording Fees – This is the cost for transferring ownership of the property and recording the purchase documents. The fee is often calculated as a percentage of the sales price.
Attorney and CoOp Fees – Most CoOps have fees associated with moving into the building. Some of these will be reimbursable, some will not – depending on the building. These fees along with the fee for your attorney and the CoOp’s attorney will be paid at the closing.