How Home Loans Work
Here are the most fundamental aspects of a Home Loan. We believe that there are no stupid question. We encourage our clients to ask any question and never feel embarrassed about asking any question. Our goal is to have our client" have a complete understanding of the the loan process.
A down payment is the cash amount you pay toward the purchase price of your home at closing. Your home loan is the amount of money you borrow. Together, the down payment plus the loan make up the purchase price of the home you are buying.
The interest rate is the basic cost of borrowing money. It is expressed as a percentage.
Many references to monthly payments refer only to monthly loan payments of principal and interest. However, when considering the total monthly "house" payment you can afford, remember to bear in mind other potential monthly costs such as taxes and insurance.
Term of the Loan
The term of the loan is the length of time you have to repay your loan. Generally, 15-year and 30-year terms for home loans are available. In some areas, other loan terms may be offered.
A point is equal to one percent of the amount of money you borrow. Points are usually charged at the beginning of the loan and are part of the cost of borrowing money. Points are also referred to as the loan origination fee. If you pay more points than your lender customarily charges in order to reduce the interest rate, margin, or lifetime cap, the additional points may be considered a buy down fee. Such a fee may not be tax deductible during the year the loan was made. You should consult a tax advisor if you have questions.
In a purchase transaction, the buyer and seller each pay for certain closing costs. Who pays for which costs depends on the custom in the area where the home is located and on negotiations between you and the seller. Closing costs include fees you pay for the services of the lender and other costs involved with the sale of the home. Some of the other costs may include:
Escrow is the practice of delivering all required money and documents to a neutral third party to hold until you, the seller, and the lender have fulfilled all of the conditions of the agreements. The escrow agent prepares documents, pays off existing loans, requests title insurance, and divides tax and insurance payments between you and the seller.
The billing and processing of loan payments is called servicing. If the bank transfers servicing of your loan to a third party, both the bank and the third party will notify you of this and of the new address to which your payments should be sent.
APR for Comparing Loan Options
The Annual Percentage Rate (APR) is the percentage relationship of the total finance charges to the amount of your loan. It is a measure of the cost of credit, expressed as a yearly rate. It includes interest as well as other finance charges. Because all lenders follow the same rules to calculate APR, it is a good way for you to compare the overall cost among your loan options.
When a home is sold, the seller may be able to transfer the loan to the new buyer. This means the home loan is assumable. Lenders generally require a credit review of the new borrower and may charge a fee for the assumption.
Some home loans contain a due-on-sale clause, which means that the home loan may not be transferable to a new buyer. Instead, the lender may make you pay the entire balance that is due when you sell the home. Assumability can help you attract buyers if you sell your home. Our ARM loans may be assumable.
Disclosures from Lenders
Federal law requires the lender to give you specific information when you get a home loan. You should get a written summary of important terms and costs of the loan. Some of these are the finance charge, the annual percentage rate, and the payment terms.
If you choose an adjustable rate loan, the lender is required to give you specific information about the kind of adjustable rate home loan for which you have applied. This information should include the circumstances under which the rate could increase (for example, a rise in the index), what the effects of an increase would be (for example, an increase in your payments or in the length of the loan), and any limitations on the increase (such as any interest rate caps).
Selecting a home loan may be the most important financial decision you will make, and you are entitled to all the information you need to make the right decision. We don't want our clients to ever hesitate to ask questions about their loan.