What Is Loan APR (Annual Percentage Rate)

Annual percentage is a measure of the cost of taking out the mortgage loan or any other form of credit that must be reported by the lenders under Truth in Lending regulations.

The APR was designed to be complete and accurate measure of all costs concerned with taking out the mortgage. It was supposed to be significant that a borrower could use to compare bilious loans with each other as well as compare different offers from different loan providers. Under the federal regulations whenever lenders disclose an interest rate they must also disclose the APR alongside with it. For certain reasons even though the APR is supposed to be a full disclosure of the actual costs of using credit it has not served its purpose adequately more of which can be read about in the next post.

The Comprehension Problem with APR

Despite the noble purpose behind creating the APR and implementing it with federal regulations it has quite failed to serve its purpose in many circumstances. It is true that the majority of people do not understand APR and what it implies. Field officers or mortgage brokers understand it either and even people who are seasoned lenders often get it wrong.. Very few people understand that the APR which is expressed as percentage the same as interest rate except that the API does some artwork opposite of percentage rate and dollar costs. The whole process gets more complicated when dealing with an ARM because the ARM rate is subject to unknown changes in the future.

To serve its purpose the APR should include all charges that would not arise in an all cash transaction. In fact charges paid to third parties such as title insurance premiums and appraisal fees are not included. In principle this is an easy problem to fix and in its 2009 proposal to amend truth in lending regulations the Federal Reserve promised to fix it.

Meanwhile incomplete fee coverage means that APR understands the true credit cost. If the understatement was consistent this would not be a major problem but it is not consistent under. Fees that are not included in the APR is sometimes paid by the lender in exchange for a higher interest rate. The APR in such cases indirectly includes fees that are excluded when paid by the borrower. Watergate shoppers should not rely on APR compare loans for the peace settlement costs and with loans where the lender pays them.

An APR Assumes That the Loan Runs to Term

The APR calculation assumes that the loan runs to its full term. When in fact more than 90% of all loans are paid off before to. Because the APR calculation spreads upfront fees or the life of the loan along with his young life to lower the APR. This automatically means that if a borrower was expecting to be out of her house in 10 years time over a 30 year mortgage the APR over 10 years would be higher and even higher over five years period. Mortgage shoppers with short-term time horizons should not use APR to compare loans. They should use time horizon cost of interest cost calculator for their own time horizon.

APR Should Be Ignored When Comparing Cash out Refinance with Second Mortgage

The APR can be inaccurate when trying to choose between a cash out refinance and taking out a second mortgage. This is because the EPR ignores the interest rate which is already being paid off on the existing mortgage. For example if you have a $100,000 mortgage at 7% and the need to raise $10,000 in cash you might be comparing taking out a second mortgage for $10,000 at an APR of 8.5% as compared to an APR of 7.5% if you take out a second mortgage. This kind of an API comparison will make the cash out refinance appeared cheaper and a better option. This is not necessarily the case because the APR for the cash out refinance does not take the loss that will occur to the borrower from increasing the APR on the 100,000 mortgage from 7% to 7.5% into consideration. If the APR was to take this fact into consideration the APR of the cash out refinance would be well above the 8.5% mark as on the second mortgage.

For this reason it is advised to borrowers and loan consultants alike that they should ignore the APR when trying to decide between a cash out refinance and a second mortgage.

APR on ARMs

You will be well aware of the fact that the interest rate that is initially offered on an ARM is only temporary. The interest rate on the ARM is likely to change and fluctuate once the initial interest duration is over. In order to calculate the APR on an ARM certain guesses and assumptions have to be made regarding what the interest rate is going to be at the end of this generation.

The rule that is usually implemented is that the initial rate is used for as long as it lasts and no change or stimulate scenario is taken into consideration when the interest index used by the ARM stays the same for the life of the loan.

Under a stable rate scenario at the end of the initial dates duration the APR adjusts to equal the fully indexed rate subject to the adjustment cap.

The full indexed rate is the value of the interest rate index at the time the ARM was written plus a margin that the mortgage lender specifies in the mortgage contract.

For example, if the stock trade on a 3/1 ARM is 4%, the current index 2% and the margin 2.25%, the APR calculation use 4% for three years and 4.25% for 27 years. But if the current index is 4% and the rate adjustment Is 2%, the API integration with useful percent for three years, 6% for one year and 6.25% for 26 years.

When the fully indexed rate is about the initial rate the APR increases on a no change scenario.

The APR is about the initial rate even if there are no lender fees. When the fully indexed rate is below the initial rate the rate decreases on unknown change scenario. If not offset by high upfront fees this would produce an APR below the initial rate.

While there is nothing particularly wrong or incorrect about this method of calculating the APR for an ARM, it is difficult for mortgage borrowers to understand this procedure also. Also it does not end to words the risk involved in taking out the ARM and does nothing to warn them about it which is a major concern for the borrowers in the first place.

APR on a HELOC

The APR calculation on a HELOC takes the initial interest rate into account and is equal and to the initial interest rate. It does not take other features into account such as points, upfront costs  and expected future rates. Also the most important price feature the margin is not required disclosure for a HELOC.

What Is Amortization

The schedule of payments that cover the repayment of interest as well as the principal owed on the loan is called amortization schedule. Amortization is the repayment of the principal of the loan amount as well as the interest due on the loan.

Scheduled mortgage payment is payment that the borrower is required to make under the contract of the mortgage loan. The scheduled payment plus the interest equals amortization. The loan balance declines for the amount of the amortization plus the amount of any extra payment. If such payment is less than the interest the balance rises which is called negative amortization.

The Fully Amortizing Payment

The monthly mortgage payment that will completely pay off the mortgage at the end of the term is called the fully amortizing payment. On a fixed-rate mortgage the fully amortizing payment is calculated right at the beginning of the loan and this amount does not change over the entire life of the loan. For example an FRM taken of $400,000 at 6% to eight years will have a fully amortized payment of $599.56 every month. If the borrower continues to experiment everyone particularly the balance owed on the market will be completely paid off at the end of the 360th month.

On an ARM, adjustable-rate mortgage, the fully amortizing payment keeps shifting because the interest rate being charged is tied to a variable index rate. If this rate remains the same the fully amortizing payment on the market also remains the same. However when this rate changes the fully amortizing payment also changes. For example and ARM taken out for $100,000 at 6% for 30 years would have a fully amortizing payment of $599.55 in the beginning. If the rate rose to 7% after five years the fully amortized payment would jump to $657.69.

Amortization Calculation on Standard Loans

Except for simple interest loans the accounting for amortized home loans takes into consideration only 12 days in a year which consist of the first day of each month. The account begins on the first day of the month following the date the loan closes. The borrower pays interest for the period between the closing date and the date the record begins. The first payment due on the first day of the month after that.

For example, if a 6% 30 year $100,000 loan closes on March 15 borrower pays interest at the closing of the. March 15 to April 1 and the first payment of $599.56 is due on first may.

The payment is allocated between interest and principle which is a reduction in the loan balance. The interest payment is calculated by multiplying 1/12 of the interest rate times the loan balance in the previous month. For example, 1/12th of 0.06 is .005. The interest due on May 1  is .005 times $100,000 or $500. The remaining $99.56 is the principle that reduces the balance to $99,900.44.

This process repeats itself every month but the portion that is allocated to the interest gradually decreases whereas the balance that goes towards paying off the principal owner of the home mortgage rate increases.

All the payment is usually due on the first day of each month and the lenders usually gives a grace period Of 15 days to the borrower. The payment receipt of the 15 state is treated exactly as the payment would have been treated had been received on the first day of the month. Any payment received  after the 15th however is charged with a late fee of 4% to 5% of the payment amount.

Amortization Schedule

It is highly recommended that people who are undertaking a home loan should make a amortization schedule and tables for themselves. In many circumstances the borrower will be presented with an amortization schedule from the mortgage company itself but you can undertake this exercise yourself to get a good understanding of your loan. Amortization schedules that are prepared by the lenders will also show tax and insurance payment if made by the lenders as well as the balance of the tax and insurance escrow amount..

Payment rigidity

The the payment requirements for of fully amortized mortgage payments are rigid. You need to make the payments on your mortgage every month. If you happened to skip a payment in any particular month you will have to make two payments the next month and also suffer a late payment to report on your credit file. You will also make payment on the penalty charges for late payment which is typically 4 to 5% of the payment amount. If you miss payments on two successive months you will need to make three payments in the third month and might risk having your account recorded as late or delinquent to the credit bureau. Usually an account is reported as late to the credit bureau by the lender when it is more than 60 days late and reported as delinquent when it is more than 180 days late.

Falling behind on your mortgage payments is a slippery slope and missing one or two payments can make it that much harder to get back on schedule.

Amortization on a Simple Interest Mortgage

Simple interest mortgage interest is calculated on a daily payment basis rather than monthly as on a standard mortgage.

For example using a rate of 7.25% and a balance of $100,000 on both the standard mortgage would have an interest payment in month one of .0725 times $100,000 divided by 12 or $604.17. On a simple interest mortgage the interest payment per day would be .0725 times $100,000 divided by 365 or $19.86. Over 30 days this would amount to $589.89 . For 31 days it would amount to $615.75. The person who makes the payment on the first of every month will not feel any difference between these two different can of mortgages. But a buyer who takes advantage of the grace period afforded by the mortgage lender and pays on the 10th or 15th day of the month will be better off with the standard mortgage as they will get the first 10 to 15 days of the month interest free whereas the interest will accumulate on these days for a simple interest mortgage.

Also borrowers who make extra payments towards the principle of the mortgage will do better with the standard mortgage. For example if they make an extra payment of $1000 on the 15th of the month they pay 15 days of interest on $1000 on the simple interest mortgage which they would save on standard mortgage.

Borrowers who make the payment early on their mortgage will do better with a simple interest mortgage since they will save the interest by paying early. If a borrower makes the payment 10 days before it is you he will receive immediate credit with a simple interest mortgage and save interest of the portion of the payment that goes to the principal reduction for 10 days. With a standard mortgage payment received 10 days before or 10 days later within the grace period of the due date is treated and credited on the due date itself.

Cosigning On A Home Loan – Why You Should Rethink That

Learn all about cosigning, what does it mean to cosign a loan application, should you do it and how you can get out of it.

Cosigning is the process by which another person shares the responsibility for paying off somebody else’s debt obligation in the event that the primary party defaults on the payment.

The economic crisis of the year 2007-2008 battered the credit scores of many borrowers. At the same time the requirement by lenders regarding the credit rating increased and became more strict.

The result was that many borrowers required and needed someone with a good credit rating to sign on their loan application in order to be qualified. This person was to be someone who is willing to share the responsibility and expressed his intent to come through with the payment if the primary party went into default. However, finding cosigners for loan applications is not the easiest thing. In fact, mortgage loans are the kind where you will see the least amount of cosigners.

Cosigning provides limited help on a mortgage loan application

As already mentioned cosigners are rare on a home loan application. Even if the borrower who cannot qualify for a home loan on his own account finds a person to cosign the lender will still look at the credit rating of the person who is applying for the loan. They will not use the credit of the cosigner. While the cosigner cannot improve the credit score used to price the loan the cosigner’s income may be added to the borrowers income in determining the size of the loan for which the borrower qualifies.

On FHA loans hundred percent of the cosigners income can be used to raise the qualifying loan amount up to the FHA loan limit. However the cosigner’s debt is also added in determining the qualifying loan amount. This means a cosigners with a large debt could add little or nothing to the qualifying loan amount.

On conventional loans which are essentially non-FHA and non-VA loans, non-occupant cosigners are not allowed at all. Those that do allow it limit the incremental income to 50% of the cosigner’s income but they include hundred percent of the cosigner’s debt. As a result there are not many cosigners on conventional loans.

The reasons why cosigners are not there on mortgage loans is that this is a very serious responsibility to undertake and apart from somebody like a parent who is trying to help out their child with the first loan, no one else will be ready to take on this burden. 

It has been known for cosigners to suffer and have their lives seriously disrupted if the primary borrower missed a payment or stopped making payments all together. Usually people realize all too late that they should not have cosigned on a loan application.

It should be clearly understood that the lender has all rights to collect from the cosigner if the primary party defaults on a payment. In fact the lender can straightaway try to recover the money from the cosigner without trying to recover from the primary party as both are legally responsible. This is prohibited in some states where the lender is first supposed to try to recover the money from the primary borrower. Check this law in your state with an attorney if you are considering becoming a cosigner for someone.

Cosigning for Someone You Know Extremely Well

Cosigning does not always necessarily have to be a negative experience for the person. Sometimes a person cosigns for another person because they have information about the person that the lender does not. Parents cosigning for the children to help them establish their first credit is common.

Many of these situations have a happy ending. However, it must be kept in consideration there are also circumstances in life which could prevent the primary party to be unable to pay on the loan no matter how noble the intent or character of the person be.  Such circumstances include but are not limited to sudden and serious illness or job loss. In such a case the cosigner will have to take responsibility for making the payment on the loan. Such a risk with cosigning on a loan application is something that cannot be avoided.

Cosigning for Somebody Who Is Not Responsible

This is the single biggest mistake that a person can make when considering to cosign for a person. Usually people only cosign for a person whom they know extremely well and whom they have great faith in.

They also cosign for the reason that the person could be getting denied for a loan that has nothing to do with the financial situation of that person. Just because a person has a poor credit rating or a lack of credit history doesn’t mean the person does not have the resources for paying off the loan.

If you know a person and you know the person to be responsible who will follow through on his commitments then cosigning could be an all right thing to do. In fact most of the cosigning instance between family such as parents and children have an happy ending. However, it also stands that just because a person has the resources to pay the loan does not mean that he will.

The biggest mistake that you can make is when you end up cosigning for somebody who you did not know that well and about whom you had no information regarding his/her capacity or the willingness to repay the loan.

If you end up cosigning because you get taken up by the distress of the person or the persuasiveness of the person without really contemplating the practicality of the whole situation then you could be in for trouble. In fact most of the disasters that happen from having cosigned on loan application happens for these reasons. People cosign when there is no evidence to suggest that the borrower is reliable and has the resources to repay the loan in the future.

People get taken in by strong feelings of obligation to help relative, friend or a lover. The guilt of refusing along with the fear that the refusal would impact a relationship overwhelms better judgment. As everyone will know it is hard to say no to someone near and dear. But if you have reason to suspect that the cosigning is not a good idea then go through with your instinct. Because if the person does happen to default it will affect the relationship anyway.

If you’re not fully confident that absent unusual circumstances the borrower will meet his or her loan obligations you should say a firm and definite no to cosigning a loan application. If the person chooses to end the relationship because of this then there is nothing you can do about it.

But saying yes to such a person means jeopardizing your financial security and that of your family is really not worth the risk

How Can You Get out of a Cosigning Obligation

The truth is once you have co-signed on a loan application you cannot be taken off it till the loan is repaid by you or by the borrower. If the primary borrower has defaulted then the lender has no reason to take you off the list because he has you there for this very reason in the first place. The lender needed you to cosign to safeguard himself against the very eventuality that the primary borrower will default on the payment. Now he has you to recover the loan from. So you have no option but to either pay off the debt to end the obligation or get the primary borrower to pay it off. Apart from that there is nothing much you can.

Cosigning Can Affect Your Qualification for Loan

Being a cosigner on somebody else’s loan or mortgage can impact your own ability to get a loan yourself. This is because the other person’s loan will show as an existing liability on your credit report. Since you are already responsible to pay off one mortgage loan, your ability to take on a second mortgage loan will be tremendously hindered in the eyes of the lender.

However, if the primary party has been making regular payments on the existing loan for a certain period of time, you may be able to provide documentation to the lender proving this fact. In this case the lender to whom you’re applying for a loan yourself may be willing to overlook your current obligation. It will not remove your obligation from the loan contract from the other party or from your credit file but with an understanding lender you might be able to get a mortgage of your own and qualify for a loan amount of the sum that you want.

Cosigning for the Lease Contract

The only difference between cosigning for a house purchase and a lease is that your obligation is likely to be shorter.

3 Simple Steps To Choose The Right Mortgage Loan

“What is the right mortgage loan for me?” Ask yourself the following 3 questions to get the right answer.

How long do you intend to stay in your home

This is a very important question to answer before you decide which kind of a mortgage loan is correct for yourself. Borrowers who do not stay our intent to stay in their home for a very long time may be better off with an adjustable-rate mortgage. The reason is that an ARM starts at a lower interest rate than a fixed rate mortgage. So you have a potential for saving money in the initial few years of the ARM.

3 steps to the right mortage plan

With an FRM, the mortgage lender is taking a risk by assuring you of a fixed rate over the entire term of the mortgage. In order to ensure himself against great changes in the future he is going to judge you a slightly higher rate to begin with.

In the case of an ARM, the interest rate is locked in for a very short amount of time after which it fluctuates according to the index rate that the mortgage is tied to.

The interest rates used to determine most ARMs are short-term interest rate while long-term interest rates dictate the terms of fixed-rate mortgages. During most time periods long-term interest rates are higher than short-term interest rates because of the greater risk lender accepts in blocking a certain interest rate for the entire duration of the mortgage.

Certain kind of ARMs have a hybrid features which means that the interest rate can be fixed for 3, 5, 7 and up to even 10 years. If the interest rates that you’re getting on a hybrid ARM is lower than a fixed rate and you’re pretty sure that you’re not going to stay in the home beyond the time period of the initial interest rate, then you’ll come out ahead by choosing ARM over and FRM.

The downside to an adjustable rate mortgage is that if you stay in the home beyond the period of the initial rate interest, you may find yourself paying much more interest in the future as compared to a fixed rate loan.

However, even if the initial interest rate is for a year, in most cases people come out ahead with an adjustable rate mortgages if they stay in the home for 5 years or less. This is because most of the ARMs come with a maximum Limit as to how much the interest rate can increase every year. However, if you do expect to stay in your home for a long period of time then choosing a fixed-rate mortgage maybe a better idea. Also, if you feel that you’re not in a financial position to withstand fluctuating monthly payments that almost always come with an ARM, then it is better to stick with the consistency and predictability often FRM.

How much financial risk can you accept?

Mortgage rates tend to him fluctuate all the time. While the interest rate is stable on a fixed-rate mortgage it will fluctuate according to market conditions in any ARM. However, in many cases offend ARM, if the borrower decides to stick with the bad periods with an interest rate increases as well as the good periods where the interest rate decreases, he’ll find that he does not do much worse than taking out in FRM and in many cases comes out ahead. However, the problem that many borrowers face with an ARM is that they cannot afford to make the monthly installment payments on the mortgage and interest rate increases. If the interest rate increases then most probably it is liable to go down sometime in the future. But most people bailout on the mortgage during the high interest. Because the payment becomes too much for them to handle. So the 2nd question that you need to consider is how much financial risk can you accept and how much you can really afford to pay. You can consider taking an AFM only if you can answer yes to all of the following questions: your monthly budget should be such that you can afford the highest mortgage payment that your mortgage loan conducting and still accomplish other financial personal goals such as saving for retirement, children’s education, Michigan vacations section

Do you have enough savings to provide you with the financial question of living expenses of 6 months to one year? This will also help you deal with the higher mortgage payments when the interest rate rises.

Can you afford the fluctuations in your monthly mortgage payment without a serious disruption to your peace of mind and financial abilities?

Never taken near them without understanding your liability and the potential risk. Always constant maximum amounts that you might have to. On a ARM before considering it. This is not so difficult to calculate because all airlines now come with a maximum amount liability. There is a certain limit to which a mortgage payment can increase in a given year and there is also a limit to the lifetime increase that can happen on the mortgage monthly payment.

Even the lenders who gave out ARMs are more likely to qualify you for this kind of a mortgage based on inability to afford the maximum loan payment rather than the artificially low interest rate and payments that are applicable during the initial. Of the mortgage.

Do you have a stable income and job? X factor if you’re stretching the limits to borrow the maximum that the lender will allow you tomorrow, can you be sure that you will be able to sustain or even increase your level of income in the future to keep making the loan payment. If you are two-income household, can you continue to make the loan payment if one refuses your job? Future plans for a family such as having children can also increase expenses. Have you accounted for this increase inexpensive and disposable income when you have calculated your mortgage payment?

If you find that you are financially sound to take on the additional risk of an ARM, then by all means go ahead and consider one. As mentioned before the odds are that you will end up saving on an adjustable-rate mortgage as long as you’re prepared to stick it out through the highs and lows of mortgage payment fluctuations. Many people just give in when the mortgage payment increases. Relative to a fixed interest mortgage interest rate on an ARM should stocks lower and should state lowered if the world level of interest rate does not change.

You should also note that ARMs tend to work better for borrowers who take out small loans and their qualified for but who consistently save more than 10% of their monthly income. Once again, we would like to emphasize the importance of having a savings cushion that allows you to foot the larger mortgage payments in the event that the interest rates happened to rise on average mortgage.

How much money do you need?

The 3rd question that you need to ask yourself in order to hone in to the perfect mortgage Lord for yourself is how much money do you really need? One mortgage lender maybe a better choice than the other simply on the basis of who’s giving you up D. The amount of money that you can borrow and as close to homogeneity makes the make difference in which markets and the desire to work with.

Please understand that this is different from just choosing a mortgage lender who is ready to lend you the maximum amount of money on a mortgage. As we have discussed earlier in the day, calculating how much money you can afford to borrow on a mortgage is the 1st and the very important step that you need to take. How much mortgage you can afford to pay has nothing to do with how much mortgage lender is ready to lend you. The maximum amount that a mortgage lender can approve you for maybe an amount that you will find extremely difficult to pay off in the future.

Another aspect that comes in here is whether the amount you are borrowing comes within the limits of conventional mortgage that stay with Fannie Mae and Freddie Mac the limits or not. These limits change an established every year by the Congress. The loans that come within these borrowing limits of code conforming loans. Mortgages that exceed the maximum permissible loan amount adequate to as Jumbo loans, jumbo conforming loans, nonconforming loans etc.

Check with your mortgage lender what the current conforming loan limits are for the kind of property you want to purchase and in the 80 editor purchasing.

The amount of money you borrow is important and whether it stays within the conforming loan limits: not easy being both because that in itself will have an impact on the mortgage interest rates that you get. Interest rates on conforming mortgages are anywhere from half percent to 1 1/2% lower than Jumbo loans. Therefore keeping the amount you borrow under that conforming limit is going to save you a lot of money over the life of the loan.

In case your mortgage does increase the limits set by Freddie Mac and Fannie Mae and is not a confirmed on, you can bring down the loan amount in the following ways so as to take maximum advantage of the best interest rate.

Buy a cheaper home this is the most obvious solution of bringing your mortgage loan within conforming limits is to choose a home that costs less.

Increasing down payment by increasing the down payment you will have to borrow the 70 and therefore can’t painkillers borrowed amount just within the conforming loan limit.

Using the 80-10-10 Method

If you cannot make a high enough down payment you can use this innovative financing technique to bring the amount of the 1st mortgage under conforming loan limits.

Private Mortgage Insurance, PMI

Pvt. mortgage insurance or PMI is the insurance that you usually have to pay to the mortgage lender if you are making a down payment of less than 20%.

Pvt. mortgage insurance protects the lender against default by the borrower and covers his losses for the entire foreclosure proceedings . Lenders mostly suffer loss when they have to undergo foreclosure to recover the money that they have lent to the borrower. This is because sometimes the equity remaining in the house is less than the amount owed on the mortgage as well as due to the costs of the foreclosure proceedings.

It is called private mortgage insurance because it is funded by private insurance companies. As mentioned before government agencies like the FHA and VA insured loans given out by their approved lenders. This accounts for almost 20% of the mortgage market. For the remaining 80% of mortgage loans, it is private insurance companies that insure the amount for the mortgage lender.

If you are making less than 20% cash down payment on the mortgage you are an additional risk to the lender. In this case he will make it a mandatory for you to purchase PMI as well. There is usually no option to avoid this has almost all vendors follow this rule.

Pvt. mortgage insurance makes sense to the lender because they believe that for a person who has made less than 20% down payment is more liable to walk away from the investment in the property when things get tough. The person may face financial difficulties in the future, fail to make payments and to make matters worse a recession might cause the property values to drop. In this case the mortgage lender will not be able to recover the money owed on the mortgage through the foreclosure process. Foreclosure means paying Real Estate Commission, property transfer tax and other customary expenses associated with the resale of the house. All this will make it hard for the lender to recover the money he has lost. In fact, this is exactly what happened to many mortgage lenders when the real estate market slumped in the late 2000.

You may be able to deduct your PMI premiums on your federal tax returns.

How much do you have to spend on the PMI

The amount that the private mortgage insurance costs you depends on several factors:

Type of loan

ARMs will generally have a higher private mortgage insurance premium than FRM’s.

Read more: How Much Does A PMI Cost

Mortgage Prepayment Penalties

One of the warnings that one issues regarding a mortgage loan is to always watch out for a pre-payment penalty clause in your contract. A prepayment penalty is the charge that the lender levies on a borrower for paying off the mortgage before its due date. The paint penalties are not allowed on FHA, VA and FmHA home loans.

The amount of the prepaid penalty may depend from one lender to another as well as from one state to another. They may even vary from one kind of a mortgage loan to another with the same lender. Though some lenders while having the pre-payment penalty clause in the contract will waive this fee if you refinance your mortgage with them or if you’re forced to pay off the loan because you sell your house. This is usually called a provisional prepayment penalty clause and should be declared in the good-faith estimate.

Make sure the mortgage does not have a prepayment penalty clause by reading the truth in lending disclosure clause. A mortgage lender mayforce you to play anywhere from 3% to 6 months interest on your outstanding loan balance. This means that you have to pay 4000 per hundred thousand dollars of principal if you repay the loan early, accounting for 6 months interest at 8%.

How To Know If Home Loan Has Prepayment Penalty

The easiest way to find out if the mortgage has a prepayment penalty is to simply ask the lender. If the loan officer informed you that it does, it is a good idea to keep looking for a mortgage loan that is not.

The federal law demands that the lender reveaal this information in the federal truth in lending disclosure statement which he is supposed to give you soon after submitting your loan application.

You should always verify this fact yourself because sometimes even loan officers are not aware of all the subtle points of a mortgage loan. You should check and double check and scrutinize every last document to make sure that it does not have a prepayment penalty. Also make sure that this clause does not somehow managed to creep into your mortgage just before you sign the final loan documents.

Some mortgages have what is called a soft prepayment penalty which may be wavered at the lender’s discretion if you sell the owner occupied 1 to 4 unit property after you owned the property for at least one year. Soft prepayment penalties are infinitely preferable to hard prepayment and he’s.

Avoid the pre-payment penalty clause in your mortgage even if you were 100% sure that you are not going to pay off the mortgage loan early. We say this because financial situations have a way of changing. Unforeseen circumstances may force you to sell the property or refinance. You may get divorced, lose your job or not be able to avoid moving to another city. For all these reasons which you cannot foresee try and avoid a prepayment penalty in your mortgage.

When Prepayment Penalty Is Unavoidable

In a situation where a prepayment penalty is unavoidable with your mortgage contract make sure that you understand the terms and conditions of this clause. The following information should be carefully understood:

Amount you can pay without penalty

Some lenders will allow you to pay up to 20% of your original loan amount or make an extra payment every year without a pre-payment can be. The more you can pay without a penalty charge the better.

When can you pay without penalty

Certain mortgage lenders will allow you to prepay mortgage after you have completed a certain term on the mortgage on. Other lenders will allow you to make a single large payment or 2 payments on the mortgage. The faster you can prepay without penalty the better.

Duration of the prepayment penalty

Certain loan contracts have the clause that the prepayment penalty expires after certain duration of time. For example you cannot prepay for the 1st 5 years but after that the penalty is no longer applicable. The faster the prepayment penalty banishes the better.

Severity of prepayment penalty

Some repayment penalties diminish in their seriousness with the term of the mortgage. For example you can be penalized 5% within one year of loan origination, 4% in the 2nd year and 3rd percent in the 3rd year and so on. Other mortgages may impose the same penalty as long as the prepayment clauses in effect. Declining prepayment penalties are better.

Long-Term and Short-Term Mortgages

Any mortgage loan that is taken for the duration more than 30 years is considered to be a long-term mortgage. Conversely any mortgage that has a term for less than 30 years is considered to be a short-term mortgage.

A few years back 30 year mortgages were the most common kind of mortgages that could be found.. Short-term mortgages were not really in vogue. However, you could find short-term mortgages with a balloon payment clause included in them. This means that you paid the fixed monthly amount the same as the 30 year mortgage but at the end of a fixed period such as 10, 15 or 20 years you were expected to make a large payment, also known as a balloon payment, to pay off your mortgage obligation completely.

It goes without saying that the total interest charges on a short-term market is far less as compared to a long-term mortgage. While it is common to find a lower rate of interest on a short-term mortgage, even if the interest rate on both the mortgage is same, a short-term mortgage of 15 years is preferable to a 30 year mortgage. Since you are endeavoring to pay off the mortgage in 15 years the payment is going to be higher as compared to long-term mortgage. However, you can save almost half the amount of money on interest as compared to 30 year mortgage. Generally speaking the 15 year fixed-rate mortgage is about half percent point lower than a 30 year FRM.

Another point to note is that while you may be making higher monthly payments on a short-term mortgage for 15 years, it is precisely for that reason that it may be more difficult to qualify. Because a higher monthly payment will increase your debt to income ratio, it might go beyond the acceptable limits of the lender which is usually that your debt should not exceed 45% of your gross monthly income. Another thing to consider when taking a short-term mortgage is that you should not feel tied up for cash due to the higher monthly payment. You should not be in a position where you feel that your cash reserves are getting so depleted so as to not have a safe financial cushion to account for emergencies. If you are unsure about how much mortgage you can afford, we suggest you go back to the section to see how much mortgage you can really afford.

What Are Conforming and Jumbo Loans

Conforming loans are mortgages that fall within the limits of Fannie Mae and Freddie Mac’s purchasing limits. The mortgage that exceeds this maximum permissible amount is called jumbo conforming loans, jumbo loans or nonconforming loans.

As mentioned before, the limits set on Fannie Mae’s and Freddie Mac’s purchasing amount varies and has changed a couple of times in the recent figures. This has been done in order to accommodate the changing mortgage market environment and to stimulate the housing market.

True conforming loans

And true conforming loans mortgage amounts that come within the traditional limits of Fannie Mae and Freddie Mac’s limits. These kind of loans also have the lowest interest rate.

Jumbo conforming loans

This is a hybrid between a jumbo loan and the conforming loan and are also known as conforming jumbo’s, super conforming or jumbo light loads. Because the worsening limit on these loans is beyond the true conventional limit of Freddie Mae and Freddie Mac the interest rate may be up to a full 1% higher than true conforming loans.

True jumbo loans

True jumbo loans are once that well exceeded the limit set on Freddie Mac and Fannie Mae. The interest rate on these loans is even higher and can be up to 1% higher than the jumbo conforming loans.

Fannie Mae and Freddie Mac have both imposed certain guidelines on the loans that qualified. One of these guidelines could be that the home is supposed to be a single-family dwelling for personal purpose.

Whenever you choose to borrow a nonconforming loan, you should be prepared to pay a high price. Typically candidates will demand a higher down payment. Whereas 20% is usually the magic figure where you can avoid paying for insurance and private mortgage insurance, you may be required to pay up to 25% down payment for a high nonconforming loan amount. Interest on non-conforming fixed-rate mortgages can run up to .5% higher than conforming fixed-rate mortgages are. The difference between a conforming FRM and a jumbo loan is less when economy conditions are favorable and there is plenty of lending money. However, as lending becomes tighter, the interest rate on jumbo loans increase because the risk to the mortgage lender also increases.

If you find yourself in a situation where you are, above the prescribed limit of Freddie Mac or Fannie Mae you can avoid paying the higher cost by bringing your loan amount just below the conforming limit. You can do this buy increasing your down payment just enough so as to bring your loan amount under the limit.

Primary and secondary mortgage market

Most of the mortgage lenders that lend you money sell off that mortgage further on to other institutions. The ones that keep the mortgage that they originate with themselves are called the primary mortgage lenders. This market of mortgage lending where the mortgage loan originator keeps control of the mortgage is called the primary market.

However, most of them sell to other financial institutions such as pension funds, insurance companies and private investors as well as government agencies. Most mortgages are sold in the secondary market so that the mortgage lender can earn a quick profit and obtained more funds to lend further.

This market of financial institutions that buys existing mortgages from lenders is called the secondary market.

The 2 most common and popular federally chartered government organizations in the secondary market backed by mortgages from primary lenders is the Federal National Mortgage Association, Fannie Mae And the Federal Home Loan Mortgage Corporation, Freddie Mac. These 2 financial institutions were established by the government to stimulate residential housing purchases and they fulfill this purpose by pumping money into the secondary mortgage market. These 2 federal financial institutions further sell the mortgage loans to private investors by converting them into securities and bonds.

Fannie Mae and Freddie Mac are the 2 largest investors in the United States of America in the mortgage market. Loans purchased by Fannie Mae and Freddie Mac annually account for well over 20% of the total US mortgage funds.

The Congress has set limits on the maximum amount of mortgage that Fannie Mae and Freddie Mac are authorized to purchase. Because of this reason only a certain segment of loans can be sold in this secondary market.

The limit set on the highest amount that Fannie Mae and Freddie Mac can purchase varies with market conditions and different amendments brought about by the government in order to meet the housing needs. In the year 2008 the maximum mortgage amount for one, 2, 3 and 4 unit homes was $417,000, $533,850, $645,300 and $801,950 respectively. These prices apply for the major part of the continental US whereas the areas where the construction cost is supposed be higher such as Alaska, Hawaii, Guam and US Virgin Islands have a higher limit set on them.

When you seek a mortgage loan you can ask the lender if he keeps the mortgage or sells it in the secondary market. This may also make a difference to the amount that you can borrow from the mortgage lender.

3 Government Run Home Loan Programs

There are a few government agencies that also provide housing loans to people. It is estimated that about 20% of residential mortgages are funded by one government agency or the other. These loans are referred to as government housing loans or as conventional housing loans.

Here is a quick summary of the different types of loans that you can get from the government for your housing needs:

Federal Housing Administration, FHA

The Federal housing administration was established in 1934 in the thick of the great depression. The purpose was to stimulate the housing market. It helps the low to moderate income people get mortgages by issuing federal insurance against loss to the lenders who made FHA loans. FHA itself is not a loan lender. It only ensures the mortgage loans given out by approved FHA lenders. The FHA has seen varying levels of popularity at different points of time. FHA was not very popular in the early 2000’s when the loan limits set by FHA were less than what people were borrowing to buy escalated and inflated properties during the boom time.

Also the process was considered to be slower and more cumbersome than nonconventional mortgages that were being given to almost anyone who cared to apply for one. However, this scenario has now changed because of several reasons. Some of the reasons why FHA loans may be gaining in popularity is that they give out mortgage loans at lower down payments, your interest rate that is usually lower and FHA is less stringent about credit checks as compared to non-conventional home loan lenders in today’s time and date. Also, keen effort has been made to make the FHA mortgage approval process more streamlined. The result is quicker application processing and approvals. In fact the Streamlined FHA Refinance program has been designed to make the refinancing with FHA almost paperwork free.

We have discussed FHA in great detail in another section. So if you are looking for more information on FHA home loans headed straight over there.

Department of Veterans Affairs, VA

Congress passed the Serviceman’s Readjustment Act, commonly known as the G.I. Bill Of Rights, in 1944. One of the provisions of this bill enables the VA to help eligible people on active duty and veterans to buy family residences. Like the FHA the VA only guarantees the loan granted by conventional lending institution that participate in the VA mortgage programs.

Farmers Home Administration, FmHA

Just like the other government housing agencies such as the FHA and VA, the FmHA isn’t a direct lender as well. In spite of its name you do not have to be a farmer to get a Farmers Home Administration loan. You do however have to buy a home in the outskirts in an area which will qualify to be a farmland. The FmHA also ensures the mortgage granted by participating lenders to qualified buyers who live in rural areas.

All of these government housing programs have attractive features. FHA, VA and FmHA have less strict requirements in terms of down payment, loan terms, loan penalties and even interest rate. A person who cannot afford to make a large down payment can take advantage of an FHA loan. VA loans are also assumable.

In spite of the advantages a majority of the people choose nonconventional loans to fund their purchases. This is because government hormones are not for everyone and are targeted for specific types of home buyers. 1st of all, there are not as many FHA or VA mortgage lenders as there are nonconventional ones. For this reason you may find it easier to get a home loan from your own bank rather than go looking for an FHA lender specifically.

There is a limit on the amount you can borrow on an FHA loan and although this limit has been greatly increased in recent past, many people can still find it limiting. However government home loans can still take longer than a nonconventional home loan. In a situation where homes generate multiple offers, using government loans almost always goes to people utilizing conventional mortgages that can be funded quicker.