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Home | K&S Blog | YOUR HOME MORTGAGE: WHAT TO LOOK FOR: KEY TERMS (PART II)
YOUR HOME MORTGAGE: WHAT TO LOOK FOR: KEY TERMS (PART II)

03/22/2012

   We began this series last week.  It is important to understand the basic elements of a typical home mortgage in order to complete the financing or re-financing of your home or condominium.  Some of the salient points, including choosing the right broker and carefully analyzing the commitment letter, were analyzed last week.  This week we will review a few more critical elements of the mortgage process.

FIXED RATE MORTGAGE vs. ADJUSTABLE RATE MORTGAGE

   A mortgage which has a fixed interest rate and monthly mortgage principal payment that remains unchanged throughout the term of the mortgage is called a “fixed rate mortgage.”  

   An adjustable rate mortgage (“ARM”) provides for a period of time between the changes of the interest rate or the monthly amortization.  For example, an adjustable rate can change monthly, yearly, or every five years.

   My personal view is that fixed rate mortgages are the best bet for most consumers.  The ARMs have proven very difficult to deal with for millions of borrowers throughout the country.  Even though you have a teaser interest rate that begins very low, the large increase in your monthly payment after the 1, 2 or 5-year initial period, is too much for most people to bear.  In addition, with the economy’s lower-interest rate environment, there is not much utility to having a variable-rate mortgage.  Just go with the low fixed rate that is currently available.

APPRAISAL OF THE PROPERTY
 
   A written evaluation of the current market value of your property will be required for every loan.  The intelligent lenders choose their appraisers, thereby eliminating the possibility of influencing the appraisal process.  However, there are a select group of lenders who will allow the mortgage broker to choose the appraiser.  Such an option certainly improves the borrower’s ability to secure all the proceeds he or she wants.

   In most cases, you will have to make the house available for the appraiser to inspect.  You will also secure better proceeds if you are able to supply applicable comparative property sales to the home, you are trying to finance.  I’ve had appraisers accept my data with no questions asked.  Obviously, this is an ideal situation.  However, in most cases a qualified appraiser will vet the data you send and include it as part of the data that he compiles independently.

   The appraisal fee is almost always paid for by the borrower, even though the lender often selects the appraiser.

ANNUAL PERCENTAGE RATE
 
   The annual percentage rate (APR) is the measure of the total cost that the borrower undertakes with each loan.  It takes into account all the charges by the lender, the interest rate, the points and comes up with a gross figure.  The APR is adjusted for the time value of money.  That means that there is a discount for future dollars versus present dollars.  A discount on future payments is standard.
It is important to note that the APR is calculated for the full term of the loan, so this measure is almost useless for borrowers with short time perspectives (less than 10‑12 years).

BRIDGE LOAN

   This is usually a short-term loan that covers the gap period between the closing date of one home purchase and the second closing date of a separate home sale.  It provides an option for a family who is buying and selling simultaneously.  There are unsecured and secured versions of said loans available.  Obviously, a secured bridge loan is cheaper than an unsecured one.  The lead time of securing such a loan is almost the same as a regular financing.

   Bridge loans almost always require a seasoned broker to navigate this area.

CASH OUT FINANCE
 
   Simply put, this is a situation where you are completing a second re-finance of your home or condominium.  You have already completed your earlier financing when you originally bought the property.  You are now applying to re‑finance your first mortgage.  You can either re‑finance because you want to take a lower interest rate loan or you can re‑finance to take cash out of the transaction.  This is a good option for raising cash out of the equity in your home.  It is simpler than taking a second home equity loan in many cases.

   I will address the complications with the “cash out re‑financing” at the beginning of my next installment.

   There is much more to know about the mortgage lending process.  I hope to address some of the remaining basic issues in the next several installments of this series.

   Please call or e-mail me if there are any particular questions you may have regarding any aspect of the mortgage process.
 
 
 

 

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