What Is A Mortgage?
A mortgage is a legal document where your home is put up as collateral for the repayment of a loan. Basically, the lending company gives you the loan and, in exchange, you pay monthly PITI (Principal, Interest, Taxes and Insurance). The lender can repossess the property if the borrower defaults on the payments.
Basic Types of Mortgages
• Adjustable Rate Mortgages (ARM), are loans with interest rates that fluctuate periodically based on the Prime Lending Rate (PLR). These mortgages must specify just how these rates change, normally tied to a national index such as Treasury bill (T-Bill) rates. A rate cap limits the amount by which the interest rate can change.
• In contrast, fixed-rate mortgages are loans in which the interest rates and payments remain the same for the entire life of the loan. These are usually the preferred type of mortgage.
Interest Rates
Interest is the amount of money that a financial institution charges for lending funds with which to purchase a piece of property. Since interest is ‘front-loaded’ on a mortgage, for the first few years of your loan you will be mainly paying on the interest charges. However, the good news is that the money you pay on the interest portion of your loan is tax deductible.
If you watch TV news, you know that interest rates are constantly changing. Rates normally go up when money is tight and there are many people looking to borrow money. Lenders can pick and choose to whom they wish to give mortgage loans. When money is not so tight or when there are fewer people seeking mortgages, interest rates normally fall. The economy is usually a good indicator on what the current interest rate
will be. By closely following the activity of the Federal Reserve Board and by checking our website, you can keep on top of where interest rates currently sit and where they are apt to go.
Applying For Your Mortgage
When you first apply for a mortgage, your lender may ask if you want to ‘lock-in’ the loan agreement with the current interest rate for up to sixty days, or if you want to ‘float the rate’. So…if you close on your home within the sixty days, the interest rate that you had agreed upon will be the rate applied to the loan. If you DO NOT close within that time, the current interest rate becomes the rate on the loan. This may be higher OR lower than the originally agreed upon rate.
If you have chosen to float your interest rate until closing, you have the option of locking in an interest rate at ANY TIME during the sixty days. If you think that interest rates may go down, this may be a good option. However, this is a gamble since rates MAY go up during that time frame.
One last word on mortgage interest rates – points. Points, often referred to as ‘discount points’, are used to reduce the mortgage interest rate. One point is usually one percent of the purchase price. Generally, the lower the interest rate, the more points you will need to pay. Be careful here – some lenders promise exceedingly low interest rates. However, they may require from one to three points at closing and each point can be up to 1% of your loan amount!
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