Banks all over the world are offering loans and credits and other forms of financial assistance. People use those products in various moments and for various purposes. However, one type of loans has a distinctive purpose, since it is used for the process of buying a home, or some other kind of property. These loans are widely known as mortgage loans. The term comes from the French law, meaning “death pledge”, but other synonyms are also present, and these loans are today called “home loans” as well.
Mortgage is something which is familiar to American ears. Since today’s homes in United States are largely bought through this principle. This clearly shows the importance of this method and demonstrates how effective and attractive this type of loans can actually be. In fact, the introduction of these loans and the appearance of Federal Housing Administration (FHA) in 1934 largely changed the numbers and statistics of home-ownership in United States. Nowadays more than two-thirds of American citizens live in their own homes.
How It Works?
The basic idea behind a mortgage loan is fairly simple one! Even though a lot of people are scared of those fancy bank terms and financial mambo-jumbo, but in reality the process is very straightforward. The client comes to the bank and asks for a loan which could cover the price of the property he wants to buy. The bank checks his record and financial condition and either allows or doesn’t allow him to have the money. If the answer is yes, he pays a certain amount as a guarantee. This is called the down payment, which usually takes about 20% of the property’s purchase price.
What is left of the total requested amount is known as the principal. And this is the actual amount that the client has to return to the bank. Also, they sign an agreement which puts the property as another form of guarantee called a collateral. Which means that the house can be seized by the bank if the client does not follow the deal. Additionally, the two parties will agree on the length of the loan and the subsequent size of the monthly payments, as well as the size of the interest rates.
Mortgage loans can have fixed and adjustable credit rates. This is something that clients can choose according to their preferences and desires. Fixed rate means that the payments to the bank will be the same every month for the duration of the loan, and when it comes to adjustable rate mortgages (ARMs), the size of the monthly installment can fluctuate and be lower or higher, according to several external factors.
The process of gradually reducing the loan is called amortization. Banks use this to make everything easier for their clients. Mortgage loans are mostly taken for loan periods of 30 years. Also there are other options as well and the period can be higher or lower. Depending on the agreement between the bank and the client.
When it comes time to buying a house, you will have to acquire a mortgage in New York. That’s just how it goes for most of us. There are several different types of mortgages you can get, and some things you should know about fees and documentation. We will guide you through the process and discuss the basics of how mortgages work.
Points and Fees
When applying for a mortgage you will be confronted with a lot of paperwork. In the midst of all this paper you will find one important piece of paper that discloses your interest rate, down payment, points/fees, and closing costs. Some of these numbers will be estimates, but generally the numbers are pretty close.
Points – one point equals one percent. This is what a bank charges to do the loan, this is their fee.
Negotiating Fees – you can negotiate fees with the seller. You can ask the seller to pay for most fees with the exception of: Prepaid interest, impound taxes/insurance, and down payment.
Types of Mortgages
Mortgages basically come in two types – fixed rate and adjustable rate. Let’s look at the fixed rate first.
15 Year Fixed – the interest rate on a 15 year loan is generally lower compared to a longer term mortgage. If you can afford the higher payments and you plan to stay in the home for a long time, then this loan will save you quite a bit of money in interest over the life of the loan.
30 Year Fixed – this is your typical mortgage that the majority of people get when buying a home. Interest rates are a bit higher than a 15 year fixed, but there is an advantage. The advantage is – lower payments. Here’s one thing to remember: If you have extra money, you can add more to your monthly payment (principal) and turn a 30 year fixed into a 15 year mortgage. The times where your monthly budget is tight you can revert back to paying your regular payment…this is the flexibility aspect of this type of loan.
These mortgages come in all shapes and sizes. The typical adjustable mortgage goes something like this: The first five years your interest rate is much lower than a 30 year fixed, then year six and beyond your mortgage interest rate will adjust higher. One of the caveats with this loan is what is called “negative amortization.” This means you can owe more than what your originally borrowed after the first five years…this is something to be aware of. On the other hand if you plan to stay in the home for a short time and then sell it, this could be the perfect loan for you.
These are less common these days, but still found with some banks. Banks use this to protect themselves from house flippers by adding prepayment penalties clauses in their contracts. Prepayment penalties are not as common these days because banks protect themselves by building protection into the point system. Plus, more and more people are holding onto their homes longer, which gives banks time to make a profit on the mortgage.Once you get approved for a mortgage, then all you’ll need to do next is make the payments and enjoy your new home.
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