Renovo Financial

What is Mortgage Loan

A loan that is secured by property or real estate is called a mortgage. In exchange for funds received by the homebuyer to buy property or a home, a lender gets the promise of that buyer to pay back the funds within a certain time frame for a certain cost. The mortgage is legally binding and secures the note in giving the lender the right to have legal claim against the borrowerâ€™s home if the borrower defaults on the terms of the note. Basically, the borrower has possession of the property or the home, but the lender is the one who owns it until it is completely paid off.

Fixed-Rate Mortgages An interest rate on a liability, such as a loan or mortgage, that remains fixed either for the entire term of the loan or for part of this term. A fixed interest rate may be attractive to a borrower who feels that the interest rate might rise over the term of the loan, which would increase his or her interest expense. A fixed interest rate, therefore, avoids the interest rate risk that comes with a floating or variable interest rate, wherein the interest rate payable on a debt obligation depends on a benchmark interest rate or index. While a home buyer in the United States can obtain a mortgage with a fixed interest rate for the full 30year term of his or her mortgage, in USA, a home buyer can only "lock in" or obtain a fixed interest rate for a maximum of five to seven years of a 25-year mortgage. Borrowers are more likely to opt for fixed interest rates during periods of low interest rates, since the opportunity cost, if interest rates go lower, is still much less than during periods of high interest rates.

Principal:1. The amount borrowed or the amount still owed on a loan, separate from interest. 2. The original amount invested, separate from earnings. 3. The face value of a bond. 4. The owner of a private company. 5. The main party to a transaction, acting as either a buyer or seller for his/her own account and risk.

Interest:The charge for the privilege of borrowing money, typically expressed as an annual percentage rate. The amount of ownership a stockholder has in a company, usually expressed as a percentage. Lenders make money from interest, borrowers pay it. Someone who holds more than 5-10% of the stock in a company is said to hold significant interest. Interest is commonly calculated using one of two methods: simple interest calculation compound interest calculation.

Plain Vanilla:The most basic or standard version of a financial instrument, usually options, bonds, futures and swaps. Plain vanilla is the opposite of an exotic instrument, which alters the components of a traditional financial instrument, resulting in a more complex security. For example:- a plain vanilla option is the standard type of option, one with a simple expiration date and strike price and no additional features. With an exotic option, such as a knock-in option, an additional contingency is added so that the option only becomes active once the underlying stock hits a set price point.

Prepayment Penalty:A clause in a mortgage contract that says if the mortgage is prepaid within a certain time period, a penalty will be assessed. The penalty is usually based on percentage of the remaining mortgage balance or a certain number of months worth of interest. A prepayment penalty that applies to both the sale of a home and a refinancing transaction is called a "hard" prepayment penalty. A prepayment penalty that applies to refinancing only is called a "soft" prepayment penalty. Lenders write prepayment penalties into mortgage contracts to compensate for prepayment risk. As the incentive for a borrower to refinance a subprime mortgage is high, many subprime mortgages have prepayment penalties. A borrower should be aware of the risks associated with a prepayment penalty. A prepayment penalty can substantially increase the cost of refinancing a mortgage when it would otherwise be economical.

Variable-Rate Mortgages

When to Choose a Variable-Rate Loan Variable-rate loans are generally the recommended option for people who anticipate declining interest rates, only plan to live in a particular home for a limited number of years, or anticipate being able to pay off their mortgages before the interest rate adjustment period is reached. Although they are often used by borrowers seeking to purchase more home than they can actually afford, this is not the financially prudent way to borrow money. Likewise, even when a variable-rate mortgage is more cost effective than a traditional loan and the borrower can afford the property being purchased, the borrower also needs to be comfortable with the potential for the interest rate to increase and the payment to go up. If the thought of higher payment would keep you up at night, you might want to reconsider your choice of loan. While variable-rate loan are certainly more complicated than fixed-rate loans and are not the right choice for everyone, they can be a powerful tool that results in significant financial savings. Adjustable-Rate Mortgage A type of mortgage in which the interest rate paid on the outstanding balance varies according to a specific benchmark. The initial interest rate is normally fixed for a period of time after which it is reset periodically, often every month. The interest rate paid by the borrower will be based on a benchmark plus an additional spread, called an ARM margin. An adjustable rate mortgage is also known as a "variable-rate mortgage" or a "floating-rate mortgage". Both 2/28 and 3/27 mortgages are examples of ARMs. A 2/28 mortgage's initial interest rate is fixed for a period of two years and then resets to a floating rate for the remaining 28 years of the mortgage. A 3/27 mortgage is typically the same as a 2/28 mortgage, except that the interest rate is fixed for three years and then floats for the remaining 27 years of the mortgage.

Costs

People generally think about a mortgage in terms of the monthly payment. While that payment represents the amount of money needed each month to cover the debt on the property, the payment itself is actually made up of a series of underlying expenses. Regardless of whether a mortgage is based on a fixed-rate loan or a variable-rate loan, the series of underlying components that combine to equal the amount of the monthly payment typically includes both principal and interest. Principal simply refers to the amount of money originally borrowed. Interest is a fee charged to the borrower for the privilege of borrowing money. In a mortgage made up of just principal and interest, the payment will remain the same over time, but the amount of the payment dedicated to each of the underlying components will change. Consider, for example, a $1,000 monthly mortgage payment. The initial years of a mortgage payment consist primarily of interest payments, so the first payment might be $900 dollars in interest and $100 in principal. In later years, this equation reverses, because after each mortgage payment, a portion of the initial amount owed is reduced. Therefore, the majority of the monthly payment at this point in time goes towards principal repayments. Toward the end of the life of the mortgage, the $1,000 payment might consist of $900 in principal and $100 in interest. The subcomponents of most, but not all, mortgages also include real estate taxes and insurance.

Down Payment:A type of payment made in cash during the onset of the purchase of an expensive good/service. The payment typically represents only a percentage of the full purchase price; in some cases it is not refundable if the deal falls through. Financing arrangements are made by the purchaser to cover the remaining amount owed to the seller. Making a down payment and then paying the rest of the price through installments is a method that makes expensive assets more affordable for the typical person. For example because houses are extremely expensive assets, home buyers typically pay down payments that equal 5-25% of the total value of a home. The remaining 75-95% of the price will be covered by a bank or other financial institutions through a mortgage loan.

Closing Costs:The expenses, over and above the price of the property that buyers and sellers normally incur to complete a real estate transaction. Costs incurred include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges. Also known as settlement costs. Closing costs are separated into two categories: nonrecurring closing costs and prepaid costs. Nonrecurring costs are one-time costs associated with buying a property or obtaining a loan. Prepaid costs are those that recur over time, such as property taxes and homeowners' insurance. These costs are estimated by the lender on what is called a "good-faith estimate", which the lender must issue to the borrower within three days of a home loan application.

Property Tax

A tax assessed on real estate by the local government. The tax is usually based on the value of the property (including the land) you own.

Loan Eligibility It's a critical question that every homebuyer faces, and one that many people answer by going to a lender and taking out the largest mortgage that the lender will approve. While this strategy will help you get the largest, most expensive house that you can qualify for, being eligible for a loan and being able to afford From a lender's perspective, loan eligibility is based on a formula. The most common rule of thumb is that your monthly mortgage payment should not exceed 28% of your gross income. This calculation includes more than just the base price of the house. Consider, for example, a $50,000 gross income. Based on 28% of that amount, the mortgage payment would be $14,000 per year or $1,166.66 per month. That $1,166.66 needs to cover all four potential components of a mortgage: principal, interest, taxes and insurance, often referred to as PITI. If your credit history is good, the lender may let you take out a mortgage with a monthly payment equal to 30% or even 40% of your gross monthly income. In our example, 40% would get you a yearly mortgage payment of $20,000 or $1,666.66 per month. The $500 per month difference would let you afford a more expensive home, but you should take a close look at your finances before making such a decision.

Gross Income An individual's total personal income before taking taxes or deductions into account. A company's revenue minus cost of goods sold. Also called gross margin and gross profit.

How To Get A Mortgage Loan Once you've learned the terminology and figured out how much you can afford to spend on a new house, the next thing you will need to do is get a mortgage. Because you will be borrowing money, lenders will examine your credit score, a metric used by lenders to determine the likelihood of an individual paying back the money he or she has borrowed.

credit score: A statistically derived numeric expression of a person's creditworthiness that is used by lenders to access the likelihood that a person will repay his or her debts. A credit score is based on, among other things, a person's past credit history. It is a number between 300 and 850 - the higher the number, the more creditworthy the person is deemed to be. A FICO score is the most widely used credit scoring system. FICO is an acronym for Fair Isaac Corporation, the company that provides the credit score model to financial institutions. There are other providers of credit scoring systems as well. Consumers can typically keep their credit scores high by maintaining a long history of always paying their bills on time and not having too much debt. A credit score plays a large role in a lender's decision to extend credit and under what terms. For example, borrowers with a credit score that is under 600 will be unable to receive a prime mortgage and will typically need to go to a subprime lender for a subprime mortgage, which will typically have a higher interest rate.

Pre-Qualification and Pre-Approval To get a good idea of how much you can borrow, a lender can pre-qualify you for a mortgage. To prequalify, you meet with a lender and provide information about your assets, income and liabilities. Based on that information, the lender will provide an estimate how much money you will be able to borrow. Knowing this amount beforehand will allow you to determine the price range of homes before you go house hunting. The entire pre-qualification process is informal. The lender does not verify the information provided, does not charge you a fee and does not formally agree to approve a mortgage for the amount you are pre-qualified to borrow. However, if you are serious about buying a house, you will want to get pre-approved for a loan. With pre-approval, the lender checks your credit, verifies your financial and employment information and confirms your ability to qualify for a mortgage. Pre-approval strengthens your position to make an offer when you find a property that you like. Sellers are generally more willing to accept offers from preapproved buyers, because it shows that the buyer actually possesses sufficient resources available to purchase the house.

Contact Us Address Renovo Financial, LLC 1016 W. Jackson Blvd., Suite 316 Chicago , IL60607 USA Phone : 312.243.3288 Fax : 773-442-0600 E-mail : drosen@renovofinancial.com

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