Frequently Ask Questions (FAQs)2017-10-16T15:29:46-07:00
What is an Acceleration Clause?2017-03-15T18:06:33-07:00
If you miss a payment on your mortgage, the acceleration clause can be used by the lender to demand the full amount of the loan. Some acceleration clauses start when a person is only 30 days late on their first payment, and some are more forgiving than that. Before signing a mortgage agreement, it’s important to read it and understand what the acceleration clause really says. Most people don’t have the cash to pay the full mortgage amount if the acceleration clause takes affect, so the lender may foreclose on the home and/or sue the buyer for the balance of the loan.

Example: A buyer stops paying on his $250,000 mortgage, which has an acceleration clause on the first missed payment. As soon as that payment is thirty days late, the total remaining loan balance is due and payable to the lender. Since the buyer doesn’t have that much money, the lender will sue the buyer and take back the home.

What is a Loan Amortization?2017-03-15T18:05:53-07:00

A loan amortization is the total amount owed on the principle of the loan, plus the interest that the bank charges to the buyer for borrowing the money. When a buyer wants to see his loan amortization, it can be provided through a schedule that shows the date of each required payment. The payment will be broken down into how much goes toward the principle balance and how much goes toward the interest. That way a buyer can see how his loan is amortized, and how much interest he is paying each month, when he makes his payment. Paying extra on the principle, a change in interest rate, or other factors can cause the amount of the payment – and therefore the amortization schedule – to change.

Example: A buyer selects a house for $200,000. With the interest rate on the house, he may pay closer to $350,000 when the house is amortized over a 30-year mortgage. Seeing the breakdown of the payments and the total amount owed if every payment is made on time may cause him to shop for a better interest rate or a shorter term. He may also try to pay the mortgage off early.

What is a Buydown Mortgage?2017-03-15T18:05:12-07:00

In a buydown mortgage, you pay an up-front fee to get a lower interest rate on your loan, which should save you money if it’s done properly. Essentially, you are “buying down” the rate of interest on your mortgage, so you can have smaller payments over the life of your loan. The buydown fee is often several thousand dollars, but it can still save you money over the course of the loan, since you’ll pay less interest. If you consider a buydown mortgage, you should calculate how much you’re saving before you decide if it’s worth paying the fee. Some lenders may offer the buydown option, but in the long run it might not actually provide you with savings – especially if you intend to refinance your loan, pay your mortgage off very early, or sell your house in a few years.

Example: A buyer pays a $3,000 buydown fee, and gets a 0.5% deduction in interest. If that deduction in the interest rate will save the buyer more than $3,000 over the life of the loan, the buydown mortgage could be a good value and the right choice for that buyer.

What Does a Balloon Payment Look Like?2017-03-15T18:04:36-07:00

A balloon payment can be the total amount you originally financed if you made interest-only payments throughout your loan period. The payment can also be a large percentage of the original balance if you’ve paid the principal down during the life of the loan. While a balloon payment can vary, it will always equal the balance that is still owed on the loan, and will be due and payable in one lump sum on a specified date. Refinancing into a different loan when a balloon payment is coming due is common.

Example: A buyer uses a $250,000 balloon loan for a property, with the balloon payment due in five years. During that 5-year period, he pays the loan balance down by $25,000 through regular monthly payments. At the end of the five years, he has a payment of $225,000 due on his loan, as the balloon payment.

What is a Balance Sheet?2017-03-15T18:02:50-07:00

A balance sheet shows a person’s (or a business’) net worth, expressed as the difference between liabilities and assets. Liabilities are things you owe, like credit card debt and student loans, while assets would include money in the bank, a car that’s paid for, and other items of value. Companies often use balance sheets to see what they owe, what they have, and where they can make changes to improve their financial standing. When getting a mortgage, a self-employed person may be asked for a balance sheet, in order to determine how successful the person is and analyze their ability to pay back the loan.

Example: A buyer has been self-employed for five years, and applies for a mortgage. The bank asks for a balance sheet from the current year, in addition to the past two years of tax returns. This is done to help determine whether the buyer is a good credit risk, and likely to pay back the loan. If the balance sheet shows too many liabilities and not enough assets, the buyer may not qualify for the mortgage.

How Does Paying the Loan Off Early Benefit You?2017-03-15T18:02:22-07:00

By paying the loan off early, you reduce the amount of interest paid to your mortgage company and have the potential to save yourself a lot of money. Your interest payments are calculated on the loan balance that you still owe. When you pay extra and/or pay off the loan early, you avoid a lot of interest that you would have been charged if you would have just continued making your payments for the life of the loan. Paying a loan off early is an excellent way to save a lot of money that can be used for something else or put into savings.

Example: A buyer has a loan for 30 years. The payments he makes are based on the principle and interest, calculated over that 30 year period. If he chooses to pay the loan off after 15 years, he will save tens of thousands of dollars in interest that would have been calculated on his loan balance for the remaining 15 year period.

What Does the Term Adjustment Date Mean in Real Estate?2017-03-15T18:01:20-07:00

In its simplest form, the term Adjustment Date refers to a pre-determined date on which certain financial adjustments will be made to a contract, loan or other part of a real estate transaction. However, it is most often used to refer to the date on which interest rates are adjusted up or down in an Adjustable Rate Mortgage or ARM.

An ARM differs from a Fixed Rate Mortgage in that interest rates are adjusted up or down during the term of the loan. This is in contrast to a Fixed Rate Mortgage, in which the interest rate remains constant throughout the length of the loan. The Adjustment Period is the length of time, typically 12 months, during which interest rates remain constant with an ARM. The Adjustment Date is the point at which rates are adjusted to reflect changes in the interest rates in the financial markets. This is then reflected in adjustments to the monthly mortgage payment.

How is a Certificate of Eligibility Obtained?2017-03-15T18:00:31-07:00

Applying for a COE is usually a quick and straightforward process. Your home lender will apply for you by accessing the Department of Veterans Affairs website known as the Web LGY. This area of the VA’s website houses the loan guaranty program and is not accessible by the public. By utilizing this website, loan officers can establish eligibility quickly, issuing a COE online.  If additional information is required, prospective borrowers may need to complete a Form 26-1880 before obtaining their COE. This simple one-page form, which can be submitted electronically or via U.S. Postal Service, allows eligible veterans to provide missing information, including service status, dates of service and any previous VA loans. Active service personnel will also need to provide a signed statement of service, while veterans will be required to provide official discharge papers.

Reservists, National Guard members, surviving spouses and other potentially eligible borrowers may instead be asked to fill out a similar form, Form 26-1817. Unlike Form 26-1880, this form may not be completed online. Instead, it should be mailed in once completed, which means a longer loan approval process can be expected.

Which Loans are Assumable?2017-03-15T17:59:50-07:00

FHA loans are assumable. However, except for a very few circumstances, conventional loans are not. This means a home buyer who opts for FHA financing will have the marketing advantage of offering potential buyers an assumable lower-rate FHA loan when he or she eventually sells the house. Enjoying this advantage assumes, however, that current interest rates will be less favorable than they were at the time of the original purchase.

Use of Assignment in Real Estate?2017-03-15T17:59:18-07:00

Assignment is used most often in real estate in the case of property investment. Working on behalf of investors, a buyer may write a contract to purchase a property, listing himself as the buyer “or assignee.” This allows a person specializing in property investment to research properties and earn a fee for bringing them to the attention of investors, who then finalize the purchase of the property.

What is Appraised Value?2017-03-15T17:57:22-07:00

Appraised value refers to an evaluation of residential, agricultural or commercial property. The appraisal is conducted by a professional property appraiser and is based on the property’s value at specific moment in time. Although there are other reasons for an appraisal, it is typically done by the lender as part of the mortgage origination process. The borrower almost always bears the cost of the appraisal.

What is CAP?2017-03-15T17:56:00-07:00

CAP is a loan modification used to help borrowers who have mortgages they cannot pay. For qualified borrowers, CAP lets them stay in their home and avoid foreclosure. Their mortgage is modified to be brought current, and their payment is reduced based on the value of their home and how much they can afford to pay. While this doesn’t guarantee that the buyer will be able to keep up with his new mortgage, it does give him a chance to keep his home, and provides him with a mortgage that is more in-line with the current value of the home. Not every buyer who is having trouble paying his mortgage will qualify for CAP, as there are strict requirements.

Example: A buyer purchased his house at the top of the market, before the housing bubble burst. Since that time he has lost his job and his house’s value has plummeted to 1/2 of what it was. He is behind in his payments, but meets the criteria for CAP. His mortgage amount may be reduced and his payments brought current, so he has the opportunity to keep his home, but he will still have to make the new payments in a timely manner.

What is Before Tax Income?2017-03-15T17:55:14-07:00

Before tax income is what you earn before any taxes are taken out. It can also be referred to as gross income, and is differentiated from net income. When filling out a mortgage application, pay careful attention to whether the lender is asking for your gross (before tax) income or your net income, as they are often very different numbers. Your before tax income is how much your employer pays you, and your net income is the end result of what the check your receive actually gives you. Taxes are not the only thing subtracted, as child support payments, insurance, contributions to a retirement account, and other items may also come out of your before tax income to make up your net income (i.e. take-home pay) amount.

Example: A buyer makes $20 per hour, on a 40-hour per week job. His before tax income is $20 X 40, or $800. Once taxes and other items come out, the amount he takes home to his family and uses to pay bills will be less than that.

How is the Balance Sheet Used?2017-03-15T17:54:15-07:00

The balance sheet shows whether a person is a good risk to be approved for a loan. By looking carefully at the information on it, a lender can see the level of assets and liabilities the buyer has. While most lenders don’t ask for a balance sheet for standard loans with employed buyers, a balance sheet may be required if a company is making the purchase or if the buyer is self-employed. While important, the balance sheet is not the only document used to determine if a buyer should qualify for a mortgage loan.

Example: A buyer wants to purchase a home, but has been self-employed for the last 10 years. In addition to asking for the last two years of tax returns, the lender may also require a balance sheet for the current year. If the buyer does not typically produce a balance sheet for his self-employment, he may need to create one to provide to the bank.

What is the Meaning of Adjusted Basis?2017-03-15T17:51:18-07:00

An adjusted basis is an important tax and accounting term because it is used to determine the taxable portion of profit from selling property. Your basis can be thought of as the amount of your property investment that is considered for tax purposes. Rather than simply subtracting your purchase price from your later sales price to determine the capital gain that will be taxed, you are allowed to figure your gain based on an adjusted basis, which can reduce your tax liability.

The adjusted basis is determined by taking the original acquisition cost of a property, then applying the following adjustments to calculate a new basis that is higher or lower than the original purchase price:

*Capitalized closing costs, which increase the basis.
*Depreciation, which decreases the basis.
*Capital improvements, such as a new roof, which increase the basis.

Once these adjustments are tallied and applied to the original price or basis, you have the adjusted basis. The difference between this adjusted basis and the eventual sale price of the property will give you the portion of the sale’s profit that is taxable, also referred to as your gain or loss.

For Example

You buy a $300,000 vacation home. You make $25,000 worth of improvements to your property. Your basis is adjusted upward. But, later you end up taking a deduction for a casualty loss of $10,000. Your basis is adjusted downward. It is your adjusted basis, $315,000 that is then used to calculate your profit for tax purposes when you sell the property for $425,000. Rather than taxing a profit of $125,000 your adjusted basis leaves a taxable profit of just $110,000.

Why is it important?

Not only is it important to understand how to determine adjusted basis for the purpose of completing your taxes, but it can also help you evaluate potential property purchases. How? If you are considering several properties for investment, you can estimate your adjusted basis between the date of purchase and some anticipated future date of sale, then consider what adjustments you are likely to make for each property. Evaluate each according to how these adjustments will affect the portion of your profit that will be taxed.

What is a 2/1 Buydown Loan?2017-03-15T17:47:27-07:00

2/1 buydown loans let you qualify for an interest rate below market rates at the beginning of your loan, but the rate rises 1% per year for the first two years. Buydown loans can be great ways to pay a fee and get a better rate of interest, but the rise in rates for the first two years has to be taken into consideration. It’s important to calculate how much you’ll actually be saving versus how much the fee is, to decide if you’re getting a good deal.

In some cases, it’s better to pay the higher interest rate instead of paying the fee, as you’ll actually save more money doing things that way. For people who plan on refinancing or selling soon, or people who are going to pay their mortgage off quickly, paying a fee for a lower rate may not be the right choice. Carefully weighing all your options is important when you’re considering a 2/1 buydown loan, so you make the best choice for your specific mortgage needs.

Example: A buyer chooses a 2/1 buydown loan for a house, and is asked to pay a $5,000 fee. If the interest saved on the loan isn’t significantly more than $5,000 there’s really not much benefit to the buyer – and that buyer must remember that the rate will rise for two years in a row, making the payment and amount of interest paid higher, as well.

How do I Qualify for an FHA Loan?2020-10-13T17:07:28-07:00

FHA loans require a minimum credit score of 620 or above. Even with a 620 credit score, though, most lenders have “overlays” that they require to be covered. These are specifics that are over and above FHA requirements, and may raise the minimum acceptable credit score to 620 or above, depending on the lender. You must also live in the home as your primary residence, as FHA isn’t used for buying a second (vacation) home or an investment property. You will need proof of your income and a 3.5% down payment (which can be a gift from someone else or come from your own funds), and you can’t owe back taxes or other federal debt.

If you’ve defaulted on a government loan, you won’t qualify for an FHA loan, either. Despite these requirements, an FHA mortgage is actually one of the easiest loans to get. That’s largely because the down payment is small and the credit score requirements are not as difficult to meet as they would be with a traditional mortgage. Since FHA allows the down payment money to be a gift from someone else, buyers really don’t need to have any savings of their own to qualify.

Example: A buyer wants an FHA loan, but owes back taxes. He won’t qualify, but if he pays those taxes than he can be considered for the FHA loan program. Paying off the back taxes may also raise his credit score, helping him qualify through FHA.

Why Would Someone Choose a Balloon Loan?2017-03-15T17:43:48-07:00

Balloon loans are best for commercial properties. They are not good choices for residential purchases because of the size of the payment that has to be made at the end of the loan term.. A business might choose a balloon loan because they intend to sell the property (or refinance it) before the balloon payment is due, and they only want to make small monthly payments until that time. Another reason they might choose a balloon loan is because they expect to get a large infusion of cash before the balloon payment is due, so they can make that payment without worry.

For most non-commercial mortgage purposes, a balloon loan should be avoided. There is simply too much risk involved for the bank and the buyer. The bank takes a lot of risk because such a large amount of money is expected in a lump sum payment. The buyer takes a risk because he is asked to come up with a large amount of money all at once. If he could easily do this, the loan would most likely not be needed. However, depending on the plans the buyer has for the property, a balloon loan can be the right choice in a commercial setting.

Example: A company uses a 5-year, $500,000 balloon loan to purchase a building and rehab it. Before the balloon payment is due, they sell the building for $850,000. They can make the balloon payment and still see a profit. They benefited from this type of loan because they made only small payments each month over the life of the loan, saving them money when compared to a more traditional loan.

How to Calculate the Annual Percentage Rate2017-03-15T17:37:46-07:00

The annual percentage rate (APR) is calculated on the entire loan, including the insurance, origination fees, and interest. It is the cost of borrowing money. Banks get their APR calculations from the prime rate charged by the federal government, plus an added percentage that they charge you for borrowing from them. “Prime + 3%” and other statements are commonly seen when borrowing money, allowing a buyer to determine how much the bank is charging as a yearly rate of interest. Home loans are often around 4% to 6% APR, but there are exceptions.

There is a cap on the APR that can be charged by a lender, as the law protects buyers by stopping banks and other lending institutions from charging completely exorbitant rates of interest. Still, within the guidelines banks can charge whatever they want for interest, so it’s important for buyers to consider the APR they are being offered. If you think your APR is too high, you might want to shop around for a different mortgage loan and see if you can get a better deal. Just be aware that the APR isn’t the only part of the loan that matters, and other terms should also be important.

Example: If a buyer borrowers $1,000 at a 10% APR, at the end of one year that buyer will owe $100 in interest on his loan, because 10% of 1,000 is 100. To calculate the dollar amount of the interest for the monthly payment, the APR is divided by 12.

When and why is an Acceleration Clause Used?2017-03-15T17:36:17-07:00

An acceleration clause is used when the buyer isn’t repaying the loan properly, and the loan’s entire balance becomes due and payable to the lender because the buyer is considered to be in default. Not all loans have an acceleration clause, but many do. Those that do have the clause also have very specific terms under which that clause can be used. If the clause takes effect and the buyer cannot repay the full balance of the loan, that buyer can be sued for the balance. Often, the home is sold in an attempt to pay off the loan, or the bank forecloses and takes back the property from the buyer.

Example: A buyer takes out a $250,000 loan on a house, and stops making payments when the loan balance is $185,000. With an acceleration clause in the loan, the total $185,000 would be due to the bank based on the terms of that clause, because the buyer failed to make the payments as agreed.

What is an Adjustment Period?2017-03-15T17:34:22-07:00

To understand what an adjustment period is, you first need to understand the basics of how an Adjustable Rate Mortgage, or ARM, works.

An ARM, sometimes referred to as a Variable Rate Mortgage, is a type of long-term loan used for financing real estate. Unlike a fixed-rate mortgage, where the interest rate remains constant throughout the term of the loan, the interest on an ARM changes, or is adjusted, during the loans term. Home buyers may find ARMs attractive because they typically offer a lower rate than a fixed-rate mortgage for the same loan term length, and prospective home buyers may find it easier to qualify for ARMs.

However, these advantages should be weighed against the increased risk. Interest rates may rise, increasing monthly mortgage payments. While it is also true that interest rates may drop, decreasing payments, home buyers should consider the likelihood of interest rates traveling upward before deciding to take on an ARM.

What is a Certificate of Eligibility?2017-03-15T18:34:45-07:00

To understand what a Certificate of Eligibility is, you first need to understand how a VA loan differs from other mortgage loans. A VA loan is guaranteed by the U.S. Department of Veterans Affairs (VA), but is issued by approved mortgage lenders. Its purpose is to provide home financing for qualifying American service members, veterans and eligible surviving spouses. For eligible military personnel and their families, a VA loan offers home financing without the down payment or mortgage insurance required in a majority of other home loan situations.

Every mortgage loan, including a VA loan, has its own unique approval process and accompanying paperwork. Perhaps the most critical piece of paperwork for VA loan approval is the Certificate of Eligibility. The Certificate of Eligibility, or COE, provides necessary proof of a prospective home buyer’s VA loan eligibility. The CEO guarantees to the mortgage lender that the borrower meets or exceeds minimum standards for a VA home loan. It also states the term of service requirements. While securing a VA loan without a COE may not be impossible, it is extremely challenging.

What is Loan Assumability?2017-03-15T18:34:12-07:00

Assumability of a loan refers to a type of financing whereby the current outstanding mortgage and its terms are transferred to the new buyer of a property. The original lender, who has sold the property, is then relieved of all liability under the loan. In assuming the loan, the buyer hopes to enjoy a lower interest rate than he or she would have been able to obtain in today’s marketplace, making assumable loans particularly attractive when interest rates are expected to rise. Buyers taking over assumable loans also avoid the settlement costs associated with a new mortgage, providing they do not need to take out a second mortgage for down payment to cover the gap between sale price and mortgage loan balance.

How Do Contract Assignments Work?2017-03-15T18:33:00-07:00

The process for assignment of contract can proceed in a number of ways, depending on how the contract is written, among other factors. For example, a contract may contain a clause that prohibits assignment altogether. Often, a contract includes language requiring that a party consent to the assignment. It is important to note that even if a contract can be assigned, it does not always relieve the assignor completely of liability. Some contracts can contain language stating that the original party must still guarantee contract performance, in whole or in part.

How Does Appraised Value Differ From Market Value?2017-03-15T18:32:38-07:00

Market Value and Appraised Value are often confused by home owners. Both are used in transactions involving residential, commercial and other properties. However, there are important differences between how the values are determined. Appraised Value refers to a specific number and is determined by a professional appraiser’s judgment and gathering of relevant data. The Market Value, on the other hand, can be influenced greatly by prospective buyers and fluctuates with changing market conditions. Market Value is often thought of in terms of what a buyer is willing to pay at a given time for the property. Market Value may be higher, lower or about the same as Appraised Value. Because of these differences, home owners should not rely on Appraised Value in determining how much they might expect to receive for their home if they decide to put it on the market.

What is Owner Financing?2017-03-15T18:31:49-07:00

Owner financing is when the seller agrees to carry the mortgage note for the property. The buyer makes payments to the seller. This is only an option for properties where the seller doesn’t have a mortgage, as otherwise the seller can’t sell the property to someone else on payments. The mortgage would have to be paid off at closing, which would not happen with an owner financing situation. Essentially, the seller acts like the bank, and the buyer makes the payments to the seller in the same way he would make the payments to a mortgage lender.

A contract is drawn up and a closing takes place, just as it would with a more traditional sale and mortgage. Owner financing (sometimes also called seller financing) typically carries a higher rate of interest, and may also be for a shorter term than a traditional loan. A larger down payment can also be required, to mitigate the risk the seller is taking by carrying the mortgage note himself.

Example: A buyer chooses a house but can’t qualify for a mortgage. The seller agrees to carry the mortgage note, but the buyer must put 25% of the purchase price down in cash and agree to a 10% interest rate on a 20-year loan. While these terms are far different than a traditional mortgage, they are more typical of owner financing options.

Why Use a Mortgage Broker?2019-04-15T10:51:39-07:00

Mortgage brokers can give you access to many lenders, helping you get the best loan. When you work with a mortgage broker you have access to more than just your local bank or credit union. You also have someone on your side who can advocate for you and get your information in front of lender you might not know about, or might not have considered. Mortgage brokers generally also know about loan programs that might not be as common, but that might help you get the loan you’re looking for and get into your dream home. Another good reason to use a mortgage broker is because it keeps you from needing to apply at a bunch of different banks. You can work through one broker, and let them find the best lender for your needs.

Example: A buyer works with a mortgage broker instead of filling out mortgage applications at six different local lenders, so less time is spent providing information and the best loan for the buyer’s needs can be found.

What is a Balloon Payment?2017-03-15T18:29:14-07:00

A balloon payment is a large payment made at the end of a loan. Most residential mortgages don’t work this way, because there is a significant risk to the buyer and to the bank. For commercial properties, though, loans that have a balloon payment are more popular. The buyer will still make payments on the loan each month, but the loan is typically shorter term – often five or 10 years. At the end of the loan term, the entire balance of the loan is due and payable. To avoid the balloon payment, many buyers sell the property or refinance it before the balloon payment comes due. The advantage to the balloon payment loan is a generally lower interest rate, providing the buyer with a smaller payment each month.

Example: A buyer gets a mortgage on a commercial building for $300,000 at a low interest rate. He pays a small monthly payment on his mortgage for five years, at which time he still owes $275,000 on the loan. That $275,000 is his balloon payment, and must be repaid to the lender in a lump sum unless he refinances the loan.

What is an Assumption Fee?2017-03-15T18:28:05-07:00

The assumption fee is paid to a lender to allow a new buyer to take over a mortgage that already exists. The new buyer “assumes” the mortgage that the seller had with the lender. While this can be done, it’s generally not a common way to get a mortgage or purchase a home. The new buyer has to qualify for the mortgage the same way the current owner of the home did when he was purchasing the house. It’s not possible to just “hand over” the mortgage to someone else and have them be legally responsible for paying the mortgage company, without going through an assumption.

Example: A buyer wants to take over the current mortgage on the home instead of getting his own, because the current mortgage has good terms and a low interest rate. The buyer must contact the seller’s mortgage company and follow the steps necessary to qualify and assume the mortgage. If the mortgage company refuses, or if the buyer can’t qualify, he will need to get a mortgage of his own in order to purchase the home.

What is an Additional Principal Payment?2017-03-15T18:26:54-07:00

You can reduce the length of time it takes to pay off your loan by making additional principle payments, which come straight off the total amount you financed. When you make a payment each month, a percentage of that payment goes to the principle and the rest goes to interest. Since interest is calculated on the principle amount you owe, having a lower principle amount means less interest. That can save you a significant amount of money and help you pay off your mortgage years earlier than planned.

Example: A homeowner pays $1,500 per month for a house payment, and adds an additional principle payment of $500 each month. That $500 is subtracted straight from the total principle owed on the loan, reducing the balance and the amount of money interest is calculated on. Buying doing that every month, the buyer can pay off his home years earlier, depending on his rate of interest and other factors.

How does an adjustment period impact an ARM?2017-03-15T18:24:56-07:00

Adjustments to the interest rate of an ARM are based on changes to one of the publicly reported indexes reflecting the ups and downs of market rates. The adjustment is typically made once a year, and is often capped annually and over the length of the loan.

The adjustment period is the length of time the interest rate of an ARM will remain unchanged. At the end of the adjustment period, the rate will be reset, allowing the monthly mortgage loan payment to be recalculated.

What are the Closing Costs for a Home Loan?2017-03-15T18:24:10-07:00

Closing costs include lender fees, escrow costs, appraisal fees, title insurance, property taxes, and other items that must be paid by the buyer (and some by the seller) at the time of the loan closing. They are everything but the principal and interest, and are required to close the loan. A cashier’s check is typically required to pay these costs, in order to ensure that the money is available. The buyer will generally pay a fee to the lender for getting the loan, and will pay a fee to have the home appraised.   A buyer also often has to put money into escrow for property taxes and insurance, pay for a title insurance policy to protect the lender, and cover at least some of the costs the title company has in preparing the paperwork. Some closing costs will also be paid by the seller, and it is possible to negotiate the closing costs. Many buyers ask for seller assistance with their closing costs, so they don’t have to pay as much out of their pocket when they buy their house.   Example: A buyer is ready to close on a house, and is asked to bring $4000 to the closing table. This money will be distributed to the lender, the title company, the county for property taxes, the appraiser, and others. Where the money went will be shown on the closing statement, so the buyer understands what he is paying for and exactly what dollar amount went to each company or person who required closing costs to be paid to them.

What is a Bridge Loan?2017-03-15T18:22:38-07:00

Bridge loans are short-term, and used while looking for a permanent financing solution. They can be used when refinancing, or when buying one house before another house has sold. Refinancing is not always easy, and sometimes a homeowner needs to get out of one loan due to bad terms, but may not have found a permanent solution yet. Buying a second home can be financially stressful, as well, and a bridge loan can help keep the buyer from losing the new house while waiting for his current house to sell and close.

Bridge loans are often hard to get, and not every bank will offer them. They also generally have high rates of interest, because the bank is taking a big risk by loaning money to someone who otherwise wouldn’t qualify for a loan. Still, these loans are only for a few months at most, and there are banks that will offer them to the right buyers, depending on a variety of circumstances. Qualifying for a bridge loan doesn’t have the same criteria as qualifying for a traditional mortgage. Buyers who may need a bridge loan should start shopping for one early in the process.

Example: A buyer is trying to close on a new house. The house he’s moving out of has been sold, but hasn’t closed yet, so he still owes the mortgage payment. That might mean his debt is too high to get a traditional loan on the new house until the old house is officially closed. A bridge loan can be used until the old house closes, at which time he can get permanent financing for the new house.

What is a Balloon Loan?2017-03-15T18:21:54-07:00

Balloon loans have a large payment due at the end of the loan period. This is the “balloon payment” on the loan. Most people prefer not to choose balloon loans because of the size of the payment they have to make at the end, but these kinds of loans can be good choices for commercial properties and businesses. They are not common for a standard mortgage, and not all banks offer them. Most people don’t have the high level of cash needed to make a balloon loan work for them, and banks that issue balloon loans take on significant risk. Balloon loans can have low interest rates, which make them popular choices for some companies and mortgage purchases.

Example: A buyer gets a 5-year balloon loan for $100,000. He pays on the loan with monthly payments for the entire five years. At that time, he still owes $85,000. The $85,000 is the balloon payment, and is due at the end of the loan term. If he knows he will not be able to pay this balloon payment, he should refinance the loan before the balloon payment comes due.

What is an Amortization Period?2017-03-15T18:21:23-07:00

The amortization period is how long it takes to pay off the loan, assuming you make all of your payments as scheduled. A loan is “amortized” by taking the total amount of the principle and interest that will be paid over the life of the loan, and calculating how much of the monthly payment is applied to the principle versus applied to the interest each month. Early on in the loan most of the payment goes to the interest owed to the bank. Over time, more of the payment goes toward the principle and less goes to the interest. While the monthly payment may remain the same, where the money from that payment goes changes just a little bit every month.

Example: A buyer gets a 30 year mortgage with a $1,000 per month payment. His amortization period for the loan is 30 years. For the first few years, most of his $1,000 payment will be applied to interest, but that will slowly change over time. By the time he nears the end of his loan agreement, the majority of the $1,000 payment will be applied to the loan principle each month.

What is a Biweekly Payment Loan?2017-03-15T18:20:42-07:00

A biweekly payment loan means that payments to that loan are made every two weeks, instead of once per month. Because a payment is made every two weeks, the principal amount of the loan is reduced more frequently. That can result in a loan that is paid off earlier, and with less interest, than the same loan with a once-monthly payment. This happens because the loan’s interest is calculated on the total loan balance, which is reduced twice per month with a biweekly payment loan, meaning a smaller balance on which that interest is calculated.

Technically, payments on a biweekly loan should be made once every two weeks, regardless of the day of the month. However, some loans are paid twice monthly, and still called biweekly payment loans. Since there are 4.3 weeks in each month, this is technically inaccurate. Still, making two smaller payments each month instead of one bigger payment can be easier for some people, and can also help them pay down the loan’s principle balance faster.

Example: A loan with biweekly payments would mean a payment would be made on the 1st of the month and the 15th of the month, instead of only on the 1st. A biweekly payment loan could also have a payment due every other week on a specific day, regardless of what day of the month that day fell on.

Are There Disadvantages to Assumable Mortgages?2017-03-15T18:19:54-07:00

There are several circumstances where a buyer or seller may not want to utilize a loan’s assumability. The first instance is the one already alluded to: if interest rates were not more favorable at the time the assumable mortgage was taken out, the advantage to assuming the loan fast evaporates.

Second, there could be a sizable gap between the purchase price of the home and the balance of the assumable mortgage. This gap could cause the prospective buyer to secure a separate mortgage at a higher interest rate that could eliminate all or most of the advantage of assuming the mortgage.

Example: A buyer purchases a home for $300,000. However, the seller’s assumable mortgage balance is only $130,000. The buyer will then need to come up with a sizable down payment of $170,000 to cover the difference or obtain a separate mortgage to gain access to the necessary funds.
Finally, just because an assumable mortgage is offered is no guarantee to the seller that his or her house will sell for a price that is above the loan balance.

When is Assignment Prohibited?2017-03-15T18:17:53-07:00

There are typically three scenarios under which a contract assignment cannot be enforced. One, as noted above, contract language may prohibit assignment or void any assignments made. Second, if assignment materially changes a contract’s performance, the value of the contract is decreased or risks to the assignee are increased, the contract assignment may be successfully challenged legally. An assignment may also be deemed illegal if it somehow violates the law or public policy.

What is Assignment?2017-03-15T18:17:11-07:00

An assignment refers to one party handing off a contract’s benefits and obligations to another party. The party originally holding the contract is known as the assignor while the party taking over the contract is then referred to as the assignee. In order for an assignment of contract to occur, the second party must be properly notified.

What is an FHA Loan?2020-10-13T17:06:45-07:00

FHA loans are government-backed mortgages offered by the Federal Housing Administration. They are generally provided to buyers who are lower-income, and who may not be able to qualify for a traditional mortgage. A minimum credit score of 620 is required, but many lenders request a score higher than that because they have lender “overlays” that prevent them from accepting a buyer with a credit score that low. Buyers with a 620 score or higher may be able to get an FHA loan, even with lender overlays. An FHA loan also requires the buyer to use the house he’s purchasing as his primary residence, and not to have any federal tax debt. Buyers who get an FHA loan must put down a 3.5% down payment, which can come from their own funds or be a gift from someone else.

Example: A buyer who wants a mortgage has a low credit score and a small down payment, but makes enough money to make the monthly payments and has steady employment. While he might not qualify for a traditional mortgage, an FHA loan could get him into a house he can call his own.

How is a Bridge Loan Used?2017-03-15T18:15:29-07:00

Bridge loans are generally used while trying to secure more permanent financing. The most common scenario for a bridge loan is when someone is trying to sell their house and buy a new house at the same time. Even if the old house is under contract, if it hasn’t yet closed the sellers are still responsible for the mortgage payment. With that payment required of them, they may not qualify to buy another house – but their current mortgage payment is only temporary, until the house they are selling closes and their mortgage is paid off at that time. If they are a good credit risk otherwise and meet the lender’s specific criteria, they may be able to get a bridge loan for a few months, after which they will have to secure more permanent financing for their new house. These loans are generally considered to be somewhat risky, and carry higher interest rates.

Example: A buyer has found a great house, but is still waiting for his old house to close. He needs to carry both mortgages, but only for a few months’ time. If his credit and income show this can be done, and the lender is willing to work with him, a bridge loan may be the answer.

What Does Amortize Mean?2017-03-15T18:14:54-07:00

Amortize means figuring the payments across the life of the loan. When the loan is amortized, the total of the principal and interest is added up and divided by the number of payments that will be made by the buyer, in order to determine how much the monthly payment will be. There is more to the specifics of amortization than just dividing the amount by the number of payments, though. Early on in the life of the loan, much more of the monthly payment goes toward interest. As the loan is paid down over the years, more and more of the monthly payment starts to go toward the principle balance. When the loan is amortized, how much goes toward principle and how much goes toward interest is calculated for every monthly payment.

Example: A buyer will pay mostly interest for the first few years of a 30-year loan, with only a small amount going toward the principle, because banks amortize their loans to make sure they earn the interest the buyer has agreed to pay on the mortgage on the “front end” of the loan.

What is an Annual Percentage Rate?2017-03-15T18:14:16-07:00

The APR (annual percentage rate) is the rate of interest you must pay to the lender on the money you borrowed. There are several different options for an APR on a mortgage, including a fixed rate of interest that doesn’t change, and a variable rate that can adjust at specified intervals. These intervals are usually one, two, or three-year periods, but may be different than that depending on the lender. While the APR is not the only term you should consider when getting a mortgage, the rate of interest you’re asked to pay can significantly affect the amount of your monthly payment.

Example: A buyer shopping for a mortgage is offered a $200,000 loan with an APR of 5%. The yearly cost of interest on the loan would be $10,000, since 10,000 is five percent of 200,000. With an APR of 4%, a year’s worth of interest would amount to $8,000, based on the same $200,000 loan amount.

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