Copy - 8.2.2 Mortgage Rates, Terms, and Amortization

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Mortgage Rates, Terms, and Amortization

What will you learn in this lesson? - Compare different types of mortgages - Determine rates and terms for mortgages - Explain the amortization process in relation to payment, principal, and interest

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Many times, when you purchase expensive items that are important to you, you spend more time selecting the item.

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It is exciting when you find a home you want to buy. There is a process that you will go through to become the owner of a home. First, you will need to select a lender who will provide you with a loan

When looking for a mortgage lender you need to make an informed decision:~ Select a lender who will give you a loan~ Select a broker~ Select a mortgage company

Selecting a Mortgage Lender

Mortgage Company- a financial institution that specializes in lending money to home buyers only Advantage: The loan process is more favorable for people with low credit scores. Disadvantage: Mortgage companies often sell the loan to other loan services

Mortgage Broker-A mortgage broker works with many lending institutions and helps find the buyer a mortgage lender Advantage: The broker has acess to more mortgage options Disadvantage: Brokers charge a fee for their service

Bank- The bank will serve as a direct lender to the borrower Advantage: You may save money because you may be able to negotiate fees Disadvantage: Banks may have stricter polocies about income and credit scores

Different Types of Lenders

• The loan is not insured
• Need a credit score of 620 or higher
• Need to make a down payment of 3% of the price of the mortgage

• Insured by the government
• Need a credit score between 500-580
• Need to make a down payment of 3.5%- 10% of the price of the mortgage

Conventional Loan:

FHA Loans:

Different types of loans

Different Types of Loans

Interest Rates

Length of the Loan: ~ The first factor is the length of the loan ~Mortgages are typically financed for 15 years or 30 years ~The longer the loan is, the lower the monthly payment will be. However, because it takes longer to pay back the money, you will pay more interest over time Interest Rates~ The second factor is the interest rate ~ The interest rate you pay depends on your credit score ~The higher your credit score is, the lower the interest rate you will pay

Length of Loan and Interest Rate

Amount of the Loan ~ The third factor is the amount borrowed ~The amount you borrow will impact how much you pay in interest over time ~If you give a larger amount of money as a down payment, you are borrowing less. The less you borrow, the less you have to pay in interest over the course of the loanBuy Points~ The fourth factor is the amount of points ~Points is when you prepay interest upfront ~ Buying points allows you to buy a lower interest rate~It benefits you to buy points if you plan on living in the home for a long period of time

Amount of the Loan and Points

There are different interest structures you can choose from to determine the interest rate. A fixed- rate mortgage structure: the rate stays the same for the length of the loan Adjustable Rate Mortgage (ARM): the introductory interest rate is lower than a fixed mortgage interest rate. An ARM allows the rates to change. The rate could go up or down depending on the economy

Interest Rate Sturctures

~ A down Payment is how much cash you pay upfront, so you do not have to borrow so much from the lender ~ Mortgage Loan Application: applying for a loan involves providing basic information such as name, address, loan amount, social security number, and property address. You must also share income information and indicate how much you are borrowing from the bank ~Income information: will include copies of your W-2 to show proof of income, pay stubs to show you are currently employed, bank statements to show you have money in your account

Down Payments and Mortgage Application

Amortization Table- a break down of each payment you will make, how much of the payment goes to the principal of the loan amount, and how much goes to pay the interest

Amortization Table

Ending Balance-the amount owed to the bank after the monthly payment has been made

Interest- the amount the bank received from the payment

Principal- the amount deducted from the loan amount

Payment Number- the number of months the payments have been made

Amortization Table Breakdown

ARM Example

Mortgage Payment

William: Plans to make a 5% down payment of 7,500 Loan amount $150,000- $7500 down payment= $142,500

Angelo: Plans to make a 20% payment of 30,000. Loan amount $150,000- $30,000 down payment = $120,000

Down Payment Example

Down Payment Example continued

• The loan amount and people involved must be listed
• The payment section stating the payment amount, interest, due dates, and late fees
• Date when payment is due

• All people involved in the loan must sign the agreement

Upon approval of a mortgage, you will have to sign a loan agreement. Just like a rental application, there are certain requirements.

Loan Agreement

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