What is a Loan-To-Value (LTV) ratio? How does it determine the size of the loan?

The loan to value ratio is the amount of money you borrow compared with the purchase price or appraised value of the home you are borrowing against. For example: with a 80% LTV loan on a home priced at $250,000, you could borrow up to $200,000 (80% of $250,000), and would have to pay $50,000 as a down payment on a purchase or $50,000 in available equity for a refinance.

The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV ratio, the less cash home buyers are required to pay out of their own funds. So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require a mortgage insurance policy.

What types of loans are available and what are the advantages of each?

Fixed Rate Mortgages: Payments remain the same for the life of the loan.

Types: 15-year & 30-year
Advantages: Predictable and housing cost remains unaffected by interest rate changes and inflation.

What are the advantages of 15 and 30 year fixed rate loan?

15-year:
The loan is usually made at a lower interest rate.
The Equity is built faster because early payments pay more principal.
30-Year:
In the first 23 years of the loan, more interest is paid off than principal, meaning larger tax deductions.
As inflation and costs of living increase, mortgage payments become a smaller part of overall expenses.

Payments are much lower than 15 year loans.

Adjustable Rate Mortgages (ARM's): Payments increase or decrease on a regular schedule with changes in interest rates; increases subject to limits. ARM's are linked to a specific financial index. They generally offer lower initial interest rates. Monthly payments can be lower which may allow borrower to qualify for a larger loan amount.

When do ARMS make sense?

An ARM may make sense if you are confident that your income will increase steadily over the years or if you anticipate a move in the near future and aren't concerned about potential increases in interest rates.

What is a Balloon Mortgage?

Offers very low rates for an initial period of time (usually 5, 7, or 10 years); when time has elapsed, the balance is due or refinanced (though not automatically)

What is a Two-Step Mortgage?

Interest rate adjusts only once and remains the same for the life of the loan. Also, the first period may be interest only payments, and the second period changes to pay both principle and interest.

Can I pay off my loan ahead of schedule?

Yes. By sending in extra money each month or making an extra payment at the end of the year, you can accelerate the process of paying off the loan. When you send extra money, be sure to indicate that the excess payment is to be applied to the principal. Most lenders allow loan prepayment, though you may have to pay a prepayment penalty to do so. Ask your lender for details.

Are there special mortgages for first time home buyers?

Yes. Lenders now offer several affordable mortgage options, which can help first-time home buyers, overcome obstacles that made purchasing a home difficult in the past. Lenders may now be able to help borrowers who don't have a lot of money saved for the down payment and closing costs, have no or a poor credit history, have quite a bit of long-term debt, or have experienced income irregularities.

How large of a down payment do I need?

There are Government mortgage options now available that only require a down payment of 3.5% or less of the purchase price. But the larger the down payment, the less you have to borrow, and the more equity you'll have. Mortgages with less than a 20% down payment generally require a mortgage insurance policy to secure the loan. When considering the size of your down payment, consider that you'll also need money for closing costs, moving expenses, and possibly repairs and decorating.

What is included in a monthly mortgage payment?

The monthly mortgage payment usually pays off principal and interest and there are also interest only repayment loans. But most lenders also include local real estate taxes, homeowner's insurance, and mortgage insurance (if applicable).

What factors effect mortgage payments?

The amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.

What are discount points?

Discount points allow you to lower your interest rate buy paying a premium to the lender. They are essentially prepaid interest, with each point equaling 1% of the total loan amount. Generally, for each point paid on a 30-year mortgage, the interest rate is reduced by 0.375% to 0.50%. Discount points are smart if you plan to stay in a home for at least 4 years or longer since they can lower the monthly loan payment.

What is an escrow account or impound account? Do I need one?

Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner's insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property taxes or homeowner's insurance, make sure you are not penalized for late payments since it is the lender's responsibility to make those payments.