What are the Loan Obligations:

• There are three parts:
  
  
  1. principal: the original amount that you borrow with an obligation to repay the amount over a set term.
     
     
  2. interest: a percentage amount that you agree to pay the lender for use of the principal amount until the full amount is repaid.
     
     
  3. term: the length of time (generally in months) to repay the loan amount .
     
     Example: the lender gives a home buyer $100,000 (principal) to buy a home. The buyer agrees to pay 10% annually (interest) on the loan balance until the entire amount has been repaid.
     
     If the buyer pays interest-only payments, s/he will pay the lender $10,000 each year for use of the loan:
     
     (calculated as: $100,000 X 10% = $10,000)
     
     
     
• However, the buyer wants to repay the loan over a length of time (term),
  
  so s/he will make additional payments over the required interest payment to reduce the principal amount to zero.
  
  There is a mathematical formula that displays in an amortization schedule the monthly amount the buyer must pay in order to reduce the loan to zero over a certain period; i.e., 30 years.
  
  All amortization schedules use a term: the most common term is 30 years (360 months). But other terms may include 15, 20 and 25 years; there are even 40-year and 50-year mortgages in some markets.
  
  
  
• During the first few years, the monthly payment will almost entirely be of interest with a little amount left over to repay the principal.
  
  But as time goes on, more of the payment will repay the principal amount and less on the interest.
  
  Here is an illustration of a 360-month amortization schedule for $100,000 borrowed at 10%:
  
  Note: the 10% rate is for example only. Current mortgage interest may differ. View current rates.
  
  

Month Starting Balance Monthly Payment Int Prin Ending Balance 1 $100,000.00 $877.57 $833.33 $44.24 $99,955.76 2 99,955.76 877.57 832.96 44.61 99,911.15 3 99,911.16 877.57 832.59 44.98 99,866.18 4 99,820.84 877.57 832.22 45.35 99,820.82 5 99,775.12 877.57 831.84 45.73 99,775.09 356 4,289.04 877.57 35.67 841.90 3,438.36 357 3,447.21 877.57 28.65 848.92 2,589.44 358 2,598.37 877.57 21.58 855.99 1,733.45 359 1,742.45 877.57 14.45 863.13 870.32 360 870.24 877.57 7.25 870.32 -0- In this example: The borrower would like to repay his loan obligation in 360 payments (each month for 30 years). An amortization schedule is calculated that shows that the borrower must pay $877.57 each month for 360 months in order to meet the interest obligation and to pay down the borrowed amount to $0. The interest charges for the first month is calculated as such: $100,000 X 10% (divided by) 12 months = $833.33 In the first payment, the borrower pays the lender $833.33 in interest. The remaining amount of $44.24 will repay the loan and reduce the borrowed amount to $99,955.76. The interest charges for the second month is calculated as such: $99,955.76 X 10% (divided by) 12 months = $832.96 In the second payment, the borrower pays the lender $832.59 in interest. The remaining amount of $44.61 will repay the loan balance and reduce the borrowed amount to $99,911.16. This will continue all the way through the 360th payment, where the interest charges for the 360th payment is calculated as such: $870.32 X 10% (divided by) 12 months = $7.25 In the final payment, the borrower pays the lender $7.25 in interest. The remaining amount of $870.24 will repay the loan balance and reduce the borrowed amount to $0. The loan obligation has been paid off. You can download FREE our amortization worksheet (Excel file): — click to download

Mortgage Lending Components

The Purchase Price:

• This is the the agreed upon purchase price of the home between the seller and buyer.
  

• The down payment is an amount that you pay out of your own pocket on the purchase price of the home.
  
  The remaining portion is the amount borrowed from the lender.
  
  Most lending institutions require that you pay at least 5% percent of the home purchase price.
  
  (There are government sponsored mortgage loans that require less than 5% down payment: see programs)
  
  
  
• Any down payment that is less than 20% of the purchase price may require Private Mortgage Insurance (PMI).
  
  PMI protects the bank against potential losses in the event of a loan default or foreclosure.
  
  PMI adds to your total monthly payment. Since PMI is not tax deductible, it is in your advantage to put down 20% or more to avoid PMI.
  
  For more information about PMI: click here
  
  
  
• Relatives can help with the down payment by "gifting" some of the money.
  
  You will be required to report this gift when applying for a mortgage loan. If you are obligated to repay the "gift", this obligation may impact your debt-to-income ratios (or PITI ratio).
  
  For more information ratios: click here

• If your qualify, your lending institution will give you a loan that pays the seller for the purchase price of the home minus your down payment.
  
  The type of loan the lender gives you depends on the your qualifications and how you want to repay the loan.
  
  When you sign a mortgage agreement, you agree to repay monthly the amount you borrowed (the principal) plus the interest that the lender charges for the borrowed amount.
  
  See mortgage loan calculation for estimating your mortgage monthly payment.
  

• Lenders use an amortization schedule to figure your monthly mortgage payments.
  
  Most amortization schedules use a 30-year repayment period; however, you can get a 15-, 20-, or 25-year repayment schedule.
  
  The amortization schedule first calculates the interest charges for the month on the amount you borrowed and then adds an amount to repay the loan based on a 30- or 15-year repayment schedule.
  
  You can download our Loan Amortization worksheet to analyze your own numbers (Excel worksheet):
  download loan amortization worksheet

• See interest rate notes

The First Mortgage:

• Generally referred to as the first loan on the home. It is the mortgage loan that purchased your home.

The Second Mortgage:

• Any second loans on the home are referred to as second mortgages.
  
  Lenders will lend money secured by the equity in your home for making home improvements, consolidating debts, sending your child to college, etc.
  
  You can calculate equity by subtracting your home's market value from the amount you owe on your first mortgage.
  
  The equity value in most new home purchases is the down payment. Some lenders will allow you to borrow against your down payment.
  
  Calculate your equity value: click here
  
  For more information about home equity products (second mortgages): link to our affiliated site YourEquity.com

The Escrow:

• The escrow is a depository account that the bank manages.
  
  Part of your total monthly payment includes bank collections for property taxes, hazardous insurance, PMI, and other expenses related to your home. These collections are held in escrow until payments are due.
  
  These escrow charges can add to your total monthly payment: see our information on escrow charges and to estimate your monthly escrow payment.

Points:

• Points are prepaid interest that lenders charge for the cost of borrowing money.
  
  A point equals 1% of the amount you borrow. Charging points is a standard practice among mortgage lenders.
  
  Points can raise your APR. One point is roughly equivalent to one-eighth raise in your initial rate on a 30-year mortgage. Example, a 30-year mortgage rate at 9% and 2 points is roughly equivalent to an APR of 9.25%.
  
  For more information about APR: see rate notes
  
  
  
• Sometimes you can pay additional points to reduce your interest rate.
  
  A lender may quote an initial rate of 9.25% and another rate at 9.0% if you pay 2 points. Points in most cases are tax deductible.
  
  we have more information about points
  
  Compare rates vs. points calculation:
  www.dinkytown.net
  

• Closing costs are fees for professional appraisals, surveys, title searches,
  
  loan documentation, inspections, points, and other services required by law and your lender that are related to the purchase of your home.
  
  You will be obligated to pay these costs before taking ownership of your home: view our closing cost checklist
  
  Upon completion of your application, you will receive a "Good Faith" estimate that itemizes your projected closing costs. This is an estimate only and does not signify the true amount of your closing costs. Costs may vary by area.
  

Pre-payment Penalties:

• Some mortgage lenders charge pre-payment fees
  if you pre-pay your mortgage loan prior to a specified date. Check with your lender on pre-payment penalties.
  
  You want want to avoid prepayment clauses if you plan to pay down your mortgage early or to refinance it at a later time.

• Some homeowners who are looking to borrow against their down payment
  
  will close a home equity loan or home equity line of credit in addition to their home mortgage loan.
  
  The advantage is that all the paper work required for closing your mortgage can be used to close your home equity.
  
  Homeowners will use this extra borrowing to make home improvements, buy furniture, landscape the yard, or fix-up their home purchase.
  
  
  
• You need to request from your mortgage lender information
  
  about closing a home equity along with your mortgage loan.
  
  For more information about home equities, click to visit our affiliate site at: www.YourEquity.com

Continued on next page:

mortgage loan programs
who are the players
don't forget about closing