What Are Assumable Mortgages

Assumable mortgages mean that the current mortgage can be assumed and undertaken by another person who buys the home from the current owner under the same terms and conditions or a variation in the terms and conditions if stipulated in the mortgage contract.

In eligible mortgage the home buyer assumes all responsibility for the sellers existing mortgage and all obligations to make future payments as if the loan had been taken by the home buyer himself.

Value of an Assumable Mortgage To Buyers and Seller

The main advantage that a buyer has when taking on an assumable  mortgage is that he could find lower interest rate on a mortgage than the ones that could be existing in the current market scenario. If a home seller has a 5.5 mortgage for example and the best mortgage rate that can be found in the current market is 7.5% then both the buyer and the seller can benefit from having an assumable mortgage. Taking on and an assumable mortgage also helps avoid settlement and closing costs on a new mortgage. During the period that the market rates are low there is little interest in assumptions. But when the market mortgage rate interest is high, assumable mortgages can not only help the buyer secure a lower rate of interest and save money but also help the seller in finding more buyers for the home.

The value of taking on an assumption depends upon the difference in the current interest rate and the interest rate on the mortgage as well as the durations that is left on the current assumable mortgage along with the balance remaining. Other factors such as how long the buyer expects to have the mortgage and the investment rate the buyer could on on savings from the low rate also make a difference the larger the balance on the mortgage, the larger the difference in the current mortgage rate and that of the assumable mortgage, the longer the buyer expects to be in the home the more he can benefit by assuming an existing mortgage. For example if a 5.5% loan has a 100,000 balance with 200 months remaining while the 7% loan on the same mortgage should be for 30 years, assuming that the buyer expects to be in the house for five years and can run 4% on investments the value of the assumable mortgage is about $7000. This value does not even include the settlement costs and losing costs that would need to be paid for a new mortgage.

On the other hand the saving could be substantially less if the buyer has to supplement the existing loan balance with new the new second mortgage at a higher rate which could be the case if the value of the house has appreciated since the assumable mortgage was taken. The buyers who stand to benefit the most from taking on an assumable mortgage are the ones who have the cash to pay the difference between the sale price and the balance of the old loan.

However, a buyer should not typically expect to take on the full advantage of assumption. The seller usually hopes to benefit as well by sharing the savings that the buyer will experience from the resumption. The sellers share of benefit could also be in the form of a higher price for the house.

Assumable Mortgages Come At a Cost to the Lenders

assumable mortgages come at a cost to the lender. While both the seller and the buyer can benefit from the zoomable mortgage, the lender faces a second disadvantage. While he could have had the old mortgage loan with interest rate of 5.5% completely paid off when the house was sold and the new modesty in other higher rate of interest the old mortgage loan at the 5.5% has to continue on the books. In the earlier years of 1970s and 1980s lenders couldn’t do anything about this and the courts ruled that the lenders could not prevent assumable mortgages.

However, after that experience the lenders began to insert the one sale clauses in their contract notes. These clauses stipulated that if the property is sold the loan must be repaid. Even with due on sale clause the lender may allow resumption keeping loan on books, awarding the cost of making the new loan but with the interest rate being bumped to the current market rate. FHA mortgages and VA mortgages are an exception to this clause. They are still completely assumable which is one more reason why they seem attractive to new mortgage borrowers.

Illegal Assumption of Mortgages

This is also known as a wraparound mortgage. Raising the interest rate on an assumable mortgage the most most of the benefit to both the buyer and the seller. In some cases the seller attempts to retain the benefit buying agreeing to a sale using the wraparound mortgage without the knowledge of the lender. In this case the seller takes on a mortgage from the buyer which is larger than the amount the balance of the old loan and continues to pay the old mortgage out of the proceeds of new one.

This is an extremely risky process. It is risky and more than one ways. First of all if the lender happens to find out that such a proceeding has taken place, he may hold the seller in violation of the loan contract. If this happens the lender can demand the complete and full payment of the mortgage immediately. This can put the seller into a lot of problems. Also if the buyer refuses to make good on the arrangement with the seller and the future there is very little that the seller will be able to do. He has already given up the ownership of the house but will retain the liability of the original mortgage.

Legal Assumptions on the Garn-St. Germain

Whether the mortgage includes the due on sale clause or not certain assumptions are explicitly unknowable on certain types of transactions under the Garn-St. Germain act of 1982. Some such examples are when the title is transferred after the death or divorce or the transfer is to an inter vivos living trust where the borrower is the beneficiary and remains occupant.

Under these circumstances the due on sale clause cannot be implemented. Borrowers with low rate mortgages were involved in a transfer of ownership that is something other than the standard arms length purchase and sale should consult an attorney on whether the transaction falls under the Garn-St. Germain exemption.

Offering a Assumability For Price As an Option

Certain lenders are willing to offer the adjustability feature on a mortgage loan for a certain price. When the borrower is duly concerned with the interest rate which could go higher they may be willing to pay extra for a suitable mortgage which will give them an edge when they want to sell their house in the future. For example a borrower willing to take a 6.5% 30 year FRM might be willing to pay 6.85% for the right to make his mortgage assumable. If the interest rate on the mortgage was to become extremely high in the future being able to offer a 6.85% loan to prospective buyers would have a great value and fetch a good price for the house.

An assumable mortgage has some features and differences to a portable mortgage. If your mortgage is the assumable when you sell your home it can be transferred to the buyer. If the mortgage is portable it can be shifted to a new property that you want to buy.

Portability will not be of much use to you if you decide to rent, go to a nursing home or die whereas an assumable mortgage retains its value in these situations. On the other hand some portion of the value of an assumable mortgage has to be shared with the buyer as well. A mortgage that is both portable and assumable will have the greatest value to homeowner.
Lenders who offer to make a mortgage assumable would require that the new borrower must meet the lenders  qualification requirements. Borrowers purchasing the option will need to be confident that the lender won’t tighten its requirements when the market-rate increases.

The best kind of assurance will be if the lender commits to accept the approval of the new buyer under one of the automated underwriting systems developed by Fannie Mae or Freddie Mac.

FHA and VA Loans Are Assumable

Loans insured by the FHA or guaranteed by the VA have always been a  assumable. This has always given them a certain advantage over other kinds of loans. This also gives the borrower an advantage when he wants to sell his house in the future if the interest rate are expected to increase.

Old FHA closed before December 14, 1989 and VA loans closed before 1 March 1988 are assumable by anyone. Byers for these mortgages don’t have to meet any requirements but the seller remains responsible for the mortgage if the buyer doesn’t pay. These Loans are now very difficult to find since they are from a long time ago. However, any seller who is allowing an assumption on the mortgage without signing a release of liability is looking for trouble. Even if the new buyer continues to pay the mortgage the seller’s ability to obtain a new mortgage would be prejudiced by the continued liability on the old one.

The liability on the assumed mortgage can be removed if the seller requests the agency to underwrite the new buyer. If the agency approves the buyer then the seller will be released from liability on the FHA or VA  assumable mortgage.

Assumption of FHA and VA loans that have been closed after the above-mentioned dates required approval of the buyer by the lender. The approval process is pretty much the same as it would be for a new borrower.

Upon the approval of the new buyer the seller of the house is really of liability on the mortgage. The FHA allows the lenders to charge a $500 assumption. And the fee for the report as well. The VA allows the $255 processing fee and a $45 closing fee. The VA itself receives the funding fee of half of 1% of the loan balance.

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.

Annual Percentage Rate, APR of a Mortgage

The truth in lending now requires that lenders calculate an annual percentage rate when quoting the interest rate for a home loan to the borrower. That annual percentage rate, APR, is supposed to take into consideration the entire cost of the loan which includes the loan origination fee, processing fee, closing costs and any other charges that the borrowers have to pay. In theory this kind of calculation is supposed to give you the total cost of the loan and help you compare different mortgage loans with different features such as comparing a 30 year fixed-rate loan at 7.5% with a 1 point purchase with a 7.25% with a two-point purchase.

Since the annual percentage of the mortgage includes other costs, it is higher than the interest rate quoted by the lender. The only exception is when the mortgage loan is no point and no fee mortgage in which case APR will be the same as the interest rate on the mortgage.

The APR greatly depends upon the time of the mortgage is help. When the APR is calculated, the lender does not take into account the fact that you might not stay in the home for the prescribed term of the mortgage. Since the cost of the loan is spread out over the entire term of the mortgage, leaving the home before the term is over, increases the APR because the costs have a lesser time to spread over. The calculating of the APR for an adjustable-rate mortgage which may or may not adjust monthly or annually based on the movement of an index that’s impossible to predict, can be a brainstorming process and really quite futile. At best you can get an approximate idea based on the maximum limit set on the adjustable-rate mortgage. These limits are how high the interest rate can increase every year and also during the entire term of the mortgage.

In order to rightfully compare mortgage loans make sure the mortgage lender provides interest rate quotes for loans with identical points and term.

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.

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.

Mortgage Or Deed Of Trust – Know The Difference

The security instrument used in your mortgage can differ from one state to the other. Mortgages and deeds of trust are the most common types of security instruments. Let us discuss both of them separately.

Mortgage Contracts

Mortgage contracts as a security instrument have been around for much longer than deeds of trust. Which is why even in states where deeds of trust are a common security instrument, places such as California, Texas and Washington, people still refer to home loans as mortgages.

“31 states currently use mortgages as security instruments whereas with the 19 states plus the District of Columbia and the Virgin Islands use deeds of trust. You can check the mortgage broker which kind of security instrument is used when your property is located.”

Type of instrument

A mortgage is a written contract that specifies how your real property will be used as security for a loan without actually delivering possession of the property to your lender.

Parties involved

A mortgage has 2 parties involved in the transaction which is the mortgagor, you and the mortgagee, the lending institution.

People tend to think the process of mortgage the other way around. Many people think that you get a mortgage loan from a lender. However the right way to look on it is that you give the lender a mortgage on your property in return for which he gives you the loan he needs to purchase the property.

Title

The title refers to the right of ownership that you have on the property was purchased. It also gives you the right of possession and inhabitation.

Effect of mortgage loan on the title

The mortgage contract creates a lien against the property. If you do not pay back the loan as agreed the lender has the right to start foreclosure proceedings for which he usually has to go to court. If the court approves the lender’s case against you the lender can sell off the property to recover his debt.

Deeds of Trust Contracts

Mortgages and deeds of trust are both used as security instruments when taking a home loan. Although both of these documents serve the same purpose, there are some differences between the procedure as well as implications of choosing one over the other.

These are some of the highlights of using a deed of trust as a security instrument as compared to mortgage contract.

Type of instrument

The security given is not a written contract but is a special kind of deed called trust deed.

Parties involved

There are 3 parties involved as compared to 2 in a mortgage contract. There is the truster (you, the borrower), the beneficiary which is the lender and the trustee, a third-party who is neutral to your interest as well as lender’s. The third-party used is most commonly an insurance company or an attorney.

Title

The trust deed transfers the properties legal title to the trustee who holds it until you repay your loan. That title is held by the lender as a security against the loan. However you retain the right of possession of the property.

Effect on title

Just like a mortgage, trust deed also creates a lien against the property. However the difference from a mortgages is that in case it comes down to a foreclosure, the lender does not have to go to court. The process of foreclosing on a home loan with a deed of trust as security, is much simpler for the lender.

He simply has to give a borrower an advance notice and advise the trustee of your default. He then has to ask the trustee to follow the procedure for foreclosure as set by the agreed terms and conditions in the contract and the state laws.

For this reason many lenders prefer to have the home loan secured by a deed of trust. As compared to a mortgage the process for foreclosure is much faster, less expensive and less paperwork involved.

What Is a Mortgage

If you ask people, most of them will think that mortgage is another word for a home loan. They will tell you that it is a loan that is taken out to buy the property. While for all practical purposes this definition is correct, in order to understand how about this really works, you should be made aware of a more accurate meaning of mortgage. Mortgage is a word that lenders use to describe the legal documentation required to lend you the money needed to buy or refinance the property. The definition of real property is the actual land as well as any improvements on it such as homes, grudges, commercial real estate, shopping centers that are to be built on it. The emphasis is on real property because anything else that is not real property is considered as personal property i.e. property such as furniture dishwashers, clothes, curtains etc. are all examples of personal property.

A distinguishing factor between the real and personal property is that while personal property is sometimes included in the sale of a home, you are likely to only get a mortgage loan for the worth of the real property. A mortgage is made by the promise of repayment of a debt using the real property as security. The 1st mortgage that is taken out of the property is called the 1st mortgage whereas subsequent loans that are taken out of the property with it as security accord 2nd, 3rd mortgage and so on. The 1st mortgage is also referred to as senior mortgage by many mortgage lenders and subsequent loans are called junior mortgages.

There is also a difference in the kind of security that is based on the property. The financial claim based on the real property is called a lien. The property lien has 2 parts.

2 Parts of Mortgage / Property Lien

Promissory note

The promises the note is the evidence of your date and the money that you borrowed which comprises of a promise on your part to pay back.

Security instrument

Security instrument is the document that gives the lender the right to take steps to have the property sold to recover the debt in case you cannot fulfill your promise to repay the money. The legal process that the mortgage lender undertakes to recover his debt from the sale of the property is called a foreclosure.

From the lenders perspective, each subsequent mortgage that is taken out on our home is more risky than the 1st one. This is because in the unfortunate circumstances when the foreclosure proceeding has to be initiated, the 1st mortgage has to be paid off 1st before 2nd or 3rd mortgages can be recovered. So the 1st mortgage lender will get paid 1st and if there is money remaining from the sale of the house then only the 2nd and subsequent mortgage lenders can be paid off. If the sale of the house doesn’t generate enough money than it could be a complete write-off for the 2nd mortgage lender. Due to this reason subsequent mortgages on a home come with higher interest rate.