Know your mortgage features
Knowledge is power. Whether you're negotiating for the purchase of a home or trying to outsmart your computer, it's best to be fully armed. The same with negotiating the maze of home financing and refinancing, tedious as it may be, it's essential to know the ins and outs.
Last week we discussed the advantages and disadvantages of refinancing your existing home mortgage based on the recent reduction in mortgage rates. If your decision is to go forward with a refinance or if you're considering the purchase of a home or second home before prices start to go up along with demand, time to get up to speed on mortgage financing.
Usually when making a property purchase, one of the first things to do is to determine the loan-to-value ratio. The LTV ratio is the mortgage amount expressed as a percent of the home's value. For example, if the purchase price or the appraised value of the property is $200,000 and your down payment or existing equity in the home is $40,000 (20 percent of the value); your loan amount will be $160,000 or 80 percent of the value making the LTV 80 percent.
The next major decision will be what types of mortgage best suits your needs. A fixed-rate mortgage is one where the interest rate remains the same over the entire term of the mortgage. Usually, these are either 30-year or 15-year terms, with 15-year terms having lower interest rates and a higher principal reduction. Adjustable rate mortgages have interest rates that change at scheduled dates to reflect market conditions with the initial rate generally lower than a fixed rate. With interest rates as low as they have been this year, adjustable rate mortgages are not as attractive as they were in the past, but may still be advantageous if the property you're purchasing is for a short period of time.
Another point that always creates stress in the minds of a buyer is whether or not to lock in a mortgage interest rate or let it float. If you lock in a rate at the time of application, that will be the mortgage rate at the time of closing regardless of what may happen in the marketplace. Normally, you can lock in for 30, 60 or 90 days. If you allow the rate to float, then, essentially, you're playing the market, which could result in either a higher or lower interest rate at the time of closing.
And if you've ever been confused when interest rates are quoted as both an interest rate and an annual percentage rate (APR), you're not alone. The interest rate is just that – the actual rate that the mortgage is amortized on. The annual percentage rate (APR) represents the interest rate as well as certain fees, points, closing costs and other expenses, even if these expenses are paid at application or before or at closing, stating what the loan is actually costing expressed in a percentage.
Finally don't let the term points confuse you either. Each point is equal to one percent of the mortgage amount. If you choose to pay a point or more at closing, it will lower your interest rate, which is called a rate buy-down. This decision should be base both on cash on hand and qualifying capabilities.
This information is just the tip of the iceberg when it comes to home financing. More information can be obtained on the Internet and on individual bank websites. However you do it, this holiday season give yourself the gift of knowledge in home financing. Don't repeat the mistakes of the past. Happy holidays!