Residential Real Estate:

Understanding Mortgages

A mortgage is a long-term loan for property, and the buildings on that property.  Lending institutions such as banks and mortgage companies are the largest mortgage lenders, but some credit unions also offer mortgages. Sometimes a seller will finance the home he or she is selling and some mortgages are assumable from the current homeowner. Lenders offer loans of their own deposits, but usually make loans and sell them to investors. Historically, loans made to be sold have followed strict guidelines, but mortgage products with more flexible guidelines have also been developed.

Most mortgages generally require down payments as a firm commitment of the buyer's intention to repay the loan. Some lenders will offer mortgages for 95% or 97% of the value of the property. The borrower is then required to make only a 3% or 5% down payment. Typically, when a mortgage is made with less than a 20% down payment, mortgage insurance is required.  Some lenders may be more restrictive.

The interest rate is the lender's charge for your use of the funds. Lenders charge a rate based on their current cost of funds. When comparing lenders, consider the rate, the term, and points.

The most common type of mortgage is currently a 30-year fixed interest rate mortgage insured by the Federal government. Some other types are listed below:

  • Adjustable Rate Mortgages (ARMS): These start at a low rate which adjusts following a set schedule. If you are training in a career that pays more money after training is completed, you might choose a lower payment to get started in your home, expecting to have the house payment increase in the future.

  • Balloon Mortgages: These have low monthly payments, but require re-financing or pay off at the end of the initial term. If you will be moving and selling at the same time your balloon mortgage is due, this might be an option for you.

  • THDA Mortgages: These are fixed rate and designed for families of low or moderate incomes. THDA mortgages are offered at lower-than-market interest rates through local lenders.

Keep in mind the amount you feel comfortable borrowing. You do NOT have to borrow as much as the lender is willing to lend.

There are one-time taxes and fees required in making a mortgage. Some of these costs are charged when you apply for a mortgage and others are charged at closing, when the loan becomes official. Lenders usually charge points as part of their cost to make the loan. One point equals 1% of the mortgage amount Some points and closing costs can be wrapped in, or added, to the loan amount. If they are not added to the loan, closing costs are paid by the buyer at closing.

Listed below are several types of closing costs:

  • Loan application fee
  • Credit report
  • Property appraisal
  • Loan origination fee (covers administrative costs of the lender)
  • Title search and title insurance fees
  • Hazard insurance
  • Private or Federal mortgage insurance premium
  • Inspection fees (structural and mechanical, termite, etc.)
  • Survey fee
  • Recording fees (local government office)
  • Transfer fees
  • Buyer's attorney's fees
  • Deposit for appropriate escrow items (insurance, taxes, mortgage insurance, etc.)
  • Pro-rated interest until the first regular payment

Exact closing costs will depend on fees charged in your area, how much you are borrowing, how you finance your mortgage, and your closing date (where it falls in the month). Closing costs are added in addition to your down payment and are usually about 5% of the loan amount.