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Understanding Home Loans/Mortgages

Conventional Loans, FHA or VA Home Loans - 30, 20, 15 or 10 year fixed interest rate loans.  Usually the interest rate is lower on the shorter-term loan. Conventional Loans are offered by Banks, Mortgage Companies and Credit Unions and usually have more competitive interest rates but these loans do require good credit.  FHA and VA are government loans that take less money down, allow the seller to pay part or all of your costs, and are more lenient with past credit problems.

Adjustable Rate Loans- low first year interest rate with an increase of 5-6% over the first 5 years, usually not to exceed 2% per year and no more than 5-6% total increase or cap rate.  If you plan to sell in 1-2 years, or a large wage increase you may benefit.   If you re-finance 2 years later, you will pay closing costs again and a higher interest. 
Example- 6.50% Fixed Rate for 30 years or 5.25% Adjustable Rate that will adjust 2% per year, 1 year later 7.25%, already higher than the original fixed rate.  The 2nd year 9.25%, the 3rd year 10.25%-11.25% depending on the cap rate.  Make sure you know where your money is going.    

Private Mortgage Insurance (PMI)/ Mortgage Insurance Premium (MIP) A premium charged by the lender if you put less than 20% down.  The amount is based on your down payment and mortgage.  About  $40-75 per month.  As soon as you can prove you have 20% invested in the home, the lender will remove the fee.  You can prove this by an appraisal, or your state equalized value on your yearly tax assessment mailed in March. Extensive remodeling to increase the value, I recommend you check into the value.  An appraisal may be worth the savings.  The lender won’t do it for you.  The burden of proof is on you.

Closing Costs, Pre-Paids, Down Payment, Home Insurance, and Property Tax Closing Costs-are fees the lender charges to give the loan.  A reasonable fee should be $1200.00 -$1500.00 depending on your loan amount.   
Pre-Paids-are your tax payment, homeowner insurance, and interest to bring the loan current to the day your first payment is due.  The lender gives you the loan but the payment is not due for 30-45 days.  At closing the lender charges you, up front, for 30-45 days of interest, 2 months tax, and 2 months home owner insurance. 
Down Payment-the amount you agreed to have available for down payment.  There are loans available with 0, 3%, 5%, 10% or more down payment.  The less down payment you have, the larger the MIP/PMI monthly premium.     
Homeowner Insurance and Property Tax - 
1/12 homeowner insurance premium and 1/12 of your monthly property tax will be added to your payment, in addition to the MIP/PMI.  These funds are held in an escrow account for payment at a later date.  Homeowner insurance has increased recently so, compare companies for the best rate.  Usually you can save if you insure where your vehicle is with a multiple policy discount. You select the company and coverage to meet your needs and purchase the first year policy.  Bring the policy and proof of payment to closing.  From that point, 1/12 of the premium is collected monthly by the lender and placed in an escrow account, when the policy is due in 12 months, the lender will receive the bill and pay the full premium.  Occasionally you will find a lender that will allow you to pay your own taxes and insurance when due if you have a large down payment.  City property tax is billed twice a year, July and December, county taxes are billed once a year in December.  If you plan to deduct the full tax bill in the year it is due, notify your lender to pay the bill prior to the year-end. 

See Payment Finder Chart, Modest Income Article or Loan Types for specific details.