Elements of Your Loan You Should Understand

In essence, mortgage and refinance loans are both mortgage loans, so the process and eligibility requirements, rates, and fees are very similar. Here are some issues to consider:

Eligibility & Process
Qualifying for a loan depends on many factors that influence your ability and likelihood to repay the loan. Mortgage companies look at your credit history and credit score. Your employment history is a factor, including your income, your current field and how long you’ve been with your current employer. Your monthly income is weighed against your monthly costs to determine what you can afford. Your income is further weighed against your total debt to see if you can afford your loan over the long term.

You need to provide all of your personal information, including income and employment. You will likely be required to provide two or three years’ worth of tax returns. The company will pull a credit report and consider all of your information before determining if you qualify for a loan and the amount you qualify for.

Many factors determine your rates, and they differ from lender to lender.Keep in mind that rates for mortgage loans constantly fluctuate.One option with mortgages is to have a fixed rate. While rate differences may seem relatively insignificant, a few percentage points can make an enormous difference over 30 years, so finding the loan with the lowest fees is important.

If you go the route of an adjustable rate mortgage (ARM), companies should specify a rate cap, which is the highest your ARM rate may go. Some companies may also set a floor, which is the lowest you can expect your rate to drop.

You can expect to pay certain fees no matter which type of loan you choose. Origination and closing fees are standard, and while some companies may waive closing costs as an incentive, you cannot count on that generosity. Other fees may include an appraisal fee, which should be a third-party appraiser. Keep in mind that by law, lenders are no longer allowed to have in house appraisers as they did in the past.

Some companies may charge a fee for loan maintenance, though not all do. Other services may charge a fee for early payoff, so ask the lender if they charge that fee. None of the companies on our lineup charge early payoff fees. However, some that waive closing or origination costs may expect you to pay them if you pay off your loan early.

Payments & Terms
The longer the term for a loan, the lower your monthly payments are, but also the longer you are paying interest. The most common term for a mortgage loan is 30 years, though you may be eligible for a 15-year loan depending on multiple factors. Other loan terms range from 10 to 40 years, but again, the average person will most often receive a set, 30-year loan.

Monthly payments include principal, interest, taxes and most insurance, or PITI.The first years of your loan, you are mostly paying down interest, so your mortgage balance will not drop significantly. In fact, you may only pay off a few thousand dollars of your principal amount the first five or 10 years of your mortgage, depending on your total payment, total mortgage and other factors.

Types of Mortgage & Refinancing Loans

As its name suggests, a fixed rate mortgage comes with a set interest rate over the life of the loan, which is typically 15 or 30 years for a first mortgage. The most attractive feature of a fixed rate mortgage is you can predict what your payments will be. Local taxes may affect your payment, but what you pay on principal and interest remains the same. The least attractive feature is that your closing costs will likely be higher than with an adjustable rate mortgage.

Rates are always subject to change. If you receive your loan when interest rates are low, a fixed rate mortgage will benefit you, because even if rates increase in the future, your rate will stay the same. The opposite is also true, however, that if rates go even lower, you are stuck with the higher rate unless you choose to refinance your loan, in which case, you’ll pay additional closing costs and other fees.

Adjustable Rate Mortgage (ARM): Adjustable rate loans typically come with a fixed rate for a certain number of years, after which, the rate becomes adjustable. For example, a 5 year ARM comes with a fixed rate for five years and then the rates adjust and change over the remaining years of the loan, most commonly every year. All lenders are required to have a rate cap, which is the highest percentage your rate may increase to. This cap protects you from paying extreme rates.

Benefits of ARMs are your closing costs are typically lower and your initial fixed-rate period often has lower rates than a fixed rate mortgage, though only temporarily. The downside is after the fixed rate period ends, your rates will fluctuate to reflect the current industry rates, usually every year, so you cannot predict what your monthly payments may be for any future year.

The rates may flux higher than what you would have with a fixed rate, so the risk is you may pay more over the course of your loan. On the other hand, those rates may also drop below what you might have received for a fixed rate.

Federal Housing Administration (FHA) Loans: Often, first time homebuyers don’t have the credit or a sufficient down payment to qualify for a standard mortgage loan. So they take out an FHA loan. This type of mortgage loan is insured by the FHA and requires the borrowers to pay for mortgage insurance, protecting the lender from loss in case the borrower defaults.

With the mortgage insurance, you are responsible for two premiums. The first is an upfront premium payment. The second is the annual premium, which varies depending on the length of the loan and your down payment amount.

FHA loans can have fixed rates or adjustable rates just like traditional loans. The interest rates are comparable and vary depending on how you qualify, including your credit score and the down payment you can afford to put down.

The good that comes from an FHA loan is that many who would not qualify for a standard loan can become homeowners. Rather than come up with a large down payment, with an FHA loan, you may pay a much smaller percent of the total loan. You must have a good to average credit score to qualify for an FHA loan. If you aren’t sure whether you meet the eligibility requirements, meet with a financial counselor to discuss your options.

Refinancing Loans: You have two choices for refinance: One option is rate and term refinancing, which entails refinancing the remaining balance on your loan to take advantage of lower interest rates.

The second option, cash out refinance, is where you refinance your mortgage but for more than the remaining balance and keep the additional money. This may be a course of action if you need additional money rather than if you wanted to pay less each month.

Construction Loans: The borrower uses this type of loan to build a home. The borrowed amount starts a construction loan while the house is being built. Construction loans typically come with terms of one year and have higher rates than a standard mortgage loan. After construction is complete, you receive a certificate of occupancy and all contractors are paid. At that point, the loan rolls over to a standalone mortgage with standard loan rates depending on the type you choose.

A risk of these types of loans is that construction might cost more than expected. Typically, there will be ongoing inspections from the lender to determine the value and cost of construction.

Interest Only,Jumbo Loans: Less common loan options include interest only loans and jumbo loans. A jumbo mortgage loan exceeds the Office of Federal Housing Enterprise Oversight conforming loan limits, which applies to loans over $417,000. These are higher risk loans and typically come with higher interest rates.

Interest only loans allow the borrower to only pay interest over a certain number of years five or ten rather than pay against the principal amount, which remains untouched during the interest only period. After the predetermined period, the loan reverts to a typical mortgage loan where the borrower pays both interest and principal, meaning monthly payments will increase. You should avoid these types of loans if you cannot afford the higher payments after the interest only period.