Adjustable Rate Mortgage
Mortgage Terms and Definitions
The mortgage process can be a little confusing if you aren’t familiar with the terms used in the process. To help you out, here is a list of terms with corresponding mortgage definitions.
Broker: An independent mortgage professional that oversees the entire home loan process.
Lender: The business entity providing and funding the home loan.
Processor: Prepares your loan for underwriting. The processor makes certain your income is properly documented and verified, the appraisal is being performed, and title and escrow are opened.
Escrow: Works with title to certify payoff demands for all existing liens. Escrow is an independent group which disburses monies to all parties in the loan transaction and ensures full payment.
Underwriters: Make the decision to approve or deny the loan. Hired by the lender, their job is to review all aspects of the loan based on the lender’s approval guidelines.
Automated Underwriting: A computer generated loan approval. This automated process only takes minutes and is the quickest path to approval.
ARM: Adjustable Rate Mortgage. An ARM has a fixed rate for a specified amount of time. After the initial term, the loan becomes adjustable and the rate can fluctuate depending on market conditions. ARM payments are initially lower than fixed rate payments. This is an excellent option for people with damaged credit, those who plan to sell their homes short term or who simply want to save money on their monthly payment.
DTI: Debt to Income Ratio or your total monthly debt in relation to your gross monthly income. For example if you have 2,500 in total monthly debts with a total income of 5,000, your DTI is 50%. The higher the DTI, the higher the lender’s risk and 50% is typically the maximum allowable DTI.
Equity — The amount of vested or owned interest in your property. Subtract the total balance owed on the property from the appraised value to determine your equity.
FICO Scores: Most lenders use the FICO scoring system to qualify borrowers. The FICO score is a number assigned from each of the three main credit repositories (Experian, Trans-Union, and Equifax). This number is calculated based on your complete credit profile and takes into account late payments, balances on trade lines, inquiries for additional credit, judgments, bankruptcies, total debt, length of credit history, and more. The lower the FICO score, the higher the lender’s risk.
LTV: Loan to Value Ratio. For example: a loan amount of 75,000 on a home valued at 100,000 equals an LTV of 75%. Your equity would equal 25,000, or 25%. The higher the LTV ratio, the higher the lender’s risk.
Stated Income: Your own statement of income on the application versus income that can be independently verified. Use of stated income is an excellent option for self-employed individuals or those with hard to prove income.
Getting a mortgage for a home purchase can be stressful. If you understand the lingo being used, you will find it less so.
Mortgage Refinancing Basics
Your mortgage may have a 30-year term, but not many homeowners stay with the same loan for that long. In fact, the average American refinances his or her mortgage every four years, according to the Mortgage Bankers Association. Thats because paying off your present mortgage and taking out a new one can mean big savings over several years. However, refinancing comes with a price in the short term, so its important to consider both the costs and benefits before making your decision.
Why refinance?
Here are some reasons to consider refinancing your mortgage:
1. To obtain a lower fixed rate. If you took out a fixed-rate mortgage several years ago and interest rates have since dropped, refinancing may lower your payments considerably. A 150,000 mortgage with a 30-year term and a rate of 8 percent, for example, carries a monthly payment of 1,100. The same mortgage at 6 percent will have a payment of less than 900 a month.
2. To switch to a fixed rate or an adjustable rate mortgage. Adjustable-rate mortgages (ARMs) offer lower interest rates initially, but some homeowners find the fluctuations stressful. If rates are on the way up, you might consider locking in at a fixed rate and consistent monthly payment. On the other hand, if you want to reduce your monthly payments and are comfortable with the interest rate changes of an ARM, it could save you money to refinance to an ARM.
3. To reduce your monthly payments. Refinancing for a longer term will lower the amount you have to pay each month. You will end up paying more in interest charges over the life of your loan, but if youre having difficulty making your current payments, this strategy could provide some relief.
4. To turn home equity into cash. You may want to take out a new mortgage with a larger principal, in order to turn some of your home equity into cash for a major expense. This is called cash-out refinancing. The advantage of taking out a loan secured by your home is that you can get a lower rate of interest than you can with an unsecured loan or credit card. However, if the interest rate offered for your refinanced mortgage is higher than your current rate, a home equity loan or line of credit might be a better choice.
Is refinancing right for you?
If youre refinancing in order to pay less interest, you wont usually see the savings right away. Thats because lenders typically charge fees when you take out a new mortgage, and you may also have to pay a penalty for getting out of your old one. To determine whether refinancing makes financial sense for you, consider these issues:
1. How long you plan to be in your home. If you expect to move in a year or two, you may never realize the potential savings youd get from refinancing. As a rule of thumb, the longer you plan to stay in your current home, the more sense it makes to refinance.
2. The prepayment penalty on your current mortgage. Many mortgages carry a penalty if you pay them off early. The amount varies, but it is usually a small percentage of the outstanding balance, or several months worth of interest payments.
3. The costs of the new mortgage. When you take out a new loan, your lender may charge a number of fees including application, appraisal, origination and insurance fees, plus title search, insurance and legal costs that can add up to thousands of pounds. Lenders may also charge discount points, which are paid upfront to secure a lower interest rate. As a guideline, expect fees to eat up any potential savings unless your new interest rate is at least a half a percentage point lower than your current one.
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Mortgage
A mortgage is a practice by which the ownership of the property is passed from the mortgagor, to the mortgagee, in return for the loan of the money, the mortgagee is the lender and the mortgagor is the borrower. The mortgagee has limited rights on the property until the loan is paid off. Most probably the mortgage loan is taken for home improvements, or financing college education. The interest rate for mortgage loan varies depending on the type of the loan
Mortgage banks and Mortgage brokers are the best options for reviewing of mortgage loan applications.
For Mortgage banks, the staff of the bank will process the loan application, as most of the banks are controlled by the government agencies, the borrower can be assured that the mortgage loan will be approved and granted by reliable sources and there will be no discontinuation in the loan. The bank will provide a range of mortgage service providers for a particular loan application, and the borrower should select the best available option from them. The borrower should deal with the service providers, compare each of the interest rates and select the best option. The loan application will be processed much faster by bank staff.
Mortgage brokers will present the best available option for a particular loan; the brokers will provide the best option for a loan application that meets the borrowers’ needs. If the loan product is selected, then the borrower should deal directly with the service provider to finish the formalities. Most of the information on loan products of mortgage service providers will be available with the mortgage brokers.
The borrower before using the services of the brokers should verify whether the mortgage broker is registered with any reliable company or service.
Mortgage loan types
There are many types of mortgage loans available in the mortgage industry, but the two most common types of loans are Fixed Rate Mortgage (FRM) and Adjustable Rate Mortgage (ARM).
For fixed rate mortgage, the interest rates are fixed and are high, the rates will not change during the life of the loan, the repayment time ranges from 10 to 20 years.
For adjustable rate mortgage, the interest rate fluctuates with respect to a standard market index, it will increase or decrease with respect to the index, the borrower cannot predict the interest rate for the next interest period before hand, if the interest rate increases, the borrower has to pay the extra cost, to avoid this, some lenders offer interest lock, using this, the borrower will repay the debt on a fixed interest rate for a particular period, the lender will charge extra money for this service. The repayment time ranges from 5-10 years.
The borrowers who borrow fixed rate mortgage loans are more financially secure than who borrows adjustable rate mortgage loans. The proceeds from adjustable rate mortgage negates any risk and most of the borrowers’ uses this loan as repayment mode.
Presently the mortgage markets in Asia are growing mush fast than the developed countries. In Asia, India has the second highest interest rate of 7%.In UK, interest rate for a 15-year fixed rate mortgage loan (FRM) is 12% and for 30-year adjustable rate mortgage is 15%.For a 1-year adjustable rate mortgage loan (ARM) is 4.05%.