Home Mortgages and Refinancing

Mortgages:

Very few potential home buyers are wealthy enough to buy a home for up front cash. Practically every home buyer must arrange a loan (mortgage) from a lender to assume such a purchase - the largest financial obligation most of us will ever incur. Accordingly, the importance of knowing what mortgages are all about, and what types of financial transactions are available to home buyersand home owners can not be overestimated. As a courtesy to our current and future clients, VIP Realty presents a brief overview of the most common type of financing agreements.

Fixed Rate (Annuity) Mortgage: Interest rate fixed for the life of the mortgage –usually 15 or 30 years. If there is no prepayment penalty clause, prepayment of a 30 year mortgage can save the borrower thousands of dollars in interest. It is important to note that due to its shorter duration, a 15 year mortgage saves the borrower thousands in interest as well, but monthly payments are naturally higher. Under a fixed mortgage the larger amount of monthly payments are credited to interest for the first few years. After the first five years or so, more of the payment is credited toward the principle sum owed, and as the mortgage ages the larger part of the monthly payment is credited toward the principle until the loan is finally paid in full.
Points: Lenders charge certain fees for originating a home loan, points being foremost. A “point” is equivalent to one percent of the loan amount. Lenders can vary in the number of points charged to a loan, and other one-time only loan fees may be applied as well. Due to these variations in lender costs, it is in the borrower’s best interests to “shop” the loan until the lender with the most competitive rates is found.
Adjustable Rate Mortgage: An adjustable rate mortgages (ARM) offers a lower initial interest rate for a limited time – usually one to five years, sometimes as much as ten. After the prespecified time has elapsed, rates will adjust to a figure based upon a number of indexes, which generally result in higher monthly costs to the borrower. All ARM loans are “capped,” meaning that the interest rate can fluctuate but reach no higher or lower than a certain percentage of the loan amount over the life of the ARM. Caps vary from lender to lender and index to index and the formulation is complex.

Refinancing:

If you are considering a home refinance, careful consideration should be given as to the reason for doing so. For example, refinancing for a vacation or some frivolous purchase doesn’t make financial sense. Refinancing to take advantage of a lower interest rate, which in effect would lower monthly payments, or to make needed home improvements for example, is wiser.
Refinancing in order to withdraw a portion of the home’s built up equity, is known as a “cash out” refinance. In this type of transaction, the amount of cash the lender is willing to release to the homeowner is based upon a number of factors, but in its simplest terms is calculated by the balance remaining on the current mortgage versus the estimated “market value” of the property. As an example, a home with a mortgage balance of $100,000 and an estimated market value of $175,000 would have built up an “equity” of $75,000. It should be noted that loan origination fees will apply, and vary from lender to lender, and all offers should be carefully examined and compared before deciding.
Any large real estate financing transaction, from the initial mortgage to a refinance, should not be undertaken without the guidance of a real estate attorney, who can best protect the lenders interests, and explain the advantages and disadvantages of a particular loan to the lender.