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So, if you’re viewing this page you will more than likely fit into one of two categories, a) you are looking to find a mortgage to purchase a home or b) you are looking to refinance your existing mortgage on your current home. Whichever category you fit into, "When your equity matters" this page contains all the information and education you should need to be able to ask the right questions to make sure you get the mortgage product you want.

So that I’m able to cover all the bases on this topic I will break the information up into a couple of different topics, starting with the most basic information and getting more complicated the further down the page we go, Feel free to skip ahead if you would like to review some of the more advanced topics near the bottom.

The Residential Mortgage

In the most very basic of terms a residential mortgage is a loan taken out by an individual (or business) on a home. The home can be any size large or small, and can be a duplex, triplex, a multi-family home, or a single family detached property. For simplicity’s sake we will focus on the single family detached property. Mortgages come with a wide variety of options, of course we don’t have room to go over all of them on this page but we will touch on the most popular loan types and rate types. Keep in mind that the mortgage market is an ever changing arena of financial products. Financial minds at some of the largest institutions in the world are always thinking up new ways for you to mortgage your home. Most of them fade away without any popularity, others may soak up the lime light for a time until something new comes along that seems better, and of course we have our book of favorites that people know and trust, and it is those products that make up the bulk of our current mortgage market. For the most part, mortgages fit into three different rate types, the fixed rate, the adjustable rate, and the interest only rate.

Let's discuss the rates types in terms of the loans which feature them.

The fixed rate loan

This type of loan is by far the most popular. The way this loan product is structured, is that the interest rate and monthly payment will be constant or "fixed" over the life of the loan, and will have a definitive start and end date. The life of the loan, may be anywhere from five to fifty years,and is usually available in 5 year increments (in other parts of the world such as Japan 100 year loans are available) with the 30 year fixed rate loan being the most popular by far. When you make a single payment on a fixed rate loan the payment will be broken down into two parts. One of the parts goes to pay down the principal or the balance of the loan, and the other goes toward paying the accumulated interest on the loan. As you make more and more payments the balance of your loan will go down, which in turn will lower the amount of interest that you accumulate each month. Since your interest rate and payment are fixed over the life of the loan, the lower amount of interest accumulated will allow an increasingly larger portion of the payment go toward paying down the balance. An amortization schedule which you can view a sample of by clicking here shows a typical 30 year mortgage and illustrates how at first your payment goes mostly toward interest and only a small amount of it goes towards the balance, but as you move closer to the end of the life of the loan, the amount going toward interest will become smaller and smaller until finally in the last few months of the loan almost the entire payment is put toward the balance with only a small fraction going to interest. The best thing about this loan product and the reason why it is the most popular loan product, is that you will always know what your monthly mortgage payment will be so long as your insurance and taxes don't go up. You can skip to the bottom of this page for some great ways to save money and lower the life of your loan.

The adjustable rate loan

This type of rate has a few similarities to a fixed rate loan in that it has a definitive start and end date, for the most part is available in five year increments from five to fifty years and the payment is made up of the same two principal and interest parts. The difference is that this loan product features rate that will adjust after a certain number of years and every so often after that. The rate will be based on an index of some type, and could be the London inter bank offered rate (LIBOR), the Constant Maturity Treasury (CMT), or any number of other indexes. There are three important things you must fully understand to be able to compare adjustable rate mortgages. The first is the adjustment period, which can initially range from one to ten years and then every six months to a year after the initial adjustment. This can make a difference in comparison shopping, so you need to make sure you always ask how long the initial rate will be set for and how often the adjustments will occur. The second is the margin. The margin is how much will be added to the index to come up with your specific interest rate and can be different from loan to loan and lender to lender. The third and possibly most important thing to know about an adjustable rate mortgage is what the caps are. There are two types of caps, one of them deals with how much your interest rate can go up or down per each adjustment period, and the other deals with the maximum amount the rate can change over the life of the loan. A good example might be a rate that is fixed for 3 years initially and then adjusts annually with a 1 percent annual cap and a 3 percent cap over the life of the loan.

The interest only loan

This loan can actually fit under both of the first types of loans depending on the terms. Sometimes the terms say that the loan will not have to be repaid so long as you still own the home and the interest charged will be based on an index and usually adjust at the first of every month. This is usually called a home equity line of credit (HELOC). Other times the loan will fixed payments for the life of the loan and have a due date sometime in the future where by the loan must be paid in full. This is usually called a balloon payment loan. These loans can be great tools, if used effectively. But they can also be very bad as over the life of the loan the balance stays the same. Make sure you fully understand the terms of an interest only loan before you sign any paperwork.

Now lets move on to some of the different categories of loans, the three main types of loans are VA, FHA, and conventional loans Each has it's own requirements and each has it's own advantages and disadvantages. Let's start with the VA loan, as the name suggests it is offered with a guarantee by the Veteran Administration and is available only for active service men and women or retired Veterans. This type of loan has great advantages with the main one being that it requires no down payment, no mortgage insurance, and the rates are competitive with other other loan types. One of the other benefits of a VA loan is that a VA loan will allow the seller to pay up to 4% of the purchaser price towards the buyer's closing costs (there will be a section on closing costs later)

The second type of loan, and the most popular at the time of this writing, are FHA loans which are sponsored by the federal housing administration. One of the advantages of this loan type is a smaller down payment than what is required for a conventional loan, (3.5% for FHA vs 5% for conventional loans) and which is why this type of loan is the choice for most first time buyers. Another reason for the popularity of the loan is that primary mortgage insurance (PMI), which will be explained later, is lower for an FHA loan than a conventional loan although the FHA does charge an upfront fee as a percentage of the purchase price. The lower monthly payment will also allow for a larger purchase based on your debt to income ratio (DTI) which will also be explained later. The final benefit of this type of loan is that the lender will allow the seller to pay up to 6% of the purchase price towards the buyer's closing costs. This will usually allow for the buyer to purchase the house with the down payment portion of the closing costs being the only out of pocket expense. The only downside for this type of loan is that it only offers one interest rate and so if you qualify, you qualify for the best rate, and do not get more favorable terms if you have a larger down payment, or if your credit score is very high.

The third type of loan is a conventional loan which, has it's benefits as well. The minimum down payment required to purchase a home with this type of loan is larger (5% at the time of this writing), but more favorable terms can be negotiated for any number of reasons. Those reasons include, but are not limited to, higher down payment, lower DTI, better credit scores, or more reserve funds. Rreserve funds could be a cash value life insurance policy, a 401 K, a pension, savings, CD's or any other asset really. Anything that would show you to be less of a default risk to the lender will help. So in this case more is better. This loan type is the loan type of choice for people that are looking to move from one home to the next, as there is usually (especially if you follow my rules to ensure your equity matters) some equity that can be used as a down payment for the next home.

Now of course, as I have said before the mortgage market is ever changing, with new ways to structure the residential mortgage coming out all the time. There are hundreds of hybrids of each of the different rate types I've mentioned above, and the ways the loan can be designed are limited only by the creativity of the agent, broker, and buyer or seller. A couple of the popular hybrids are the 80/10 loan, the 80/15 loan. The two hybrids requires two separate loans in each case, and can either be fixed, adjustable, interest only or any combination of the three. These hybrid loans may sometimes have a slightly higher interest rate, but if structured in the right way, they can lower monthly payments, allowing you to purchase a more expensive home for the same monthly payment. Another reason for the combination of the two loans is that on all loans with a loan to value ratio (LTV) higher than 80% PMI is required.

So let's talk about PMI for a minute. PMI is insurance that the lender takes out in case of default by the buyer. Default, of course, will ultimately lead to the lender having to foreclose and take possession of the property. Now since the lender is not in the business of selling homes, only collecting the interest on the loan, taking out PMI on a home will allow the lender to recoup a portion of the balance and allow them to hopefully sell the home at a lower price than current market price and more quickly than other homes on the market. Sometimes the lender pays for it and charges a higher interest rate, sometimes it is something that will be escrowed and paid monthly, by you, with your payment. Until recently PMI was not an itemized tax deduction, but through lobbying done by the National Association of Realtors, it now is. It has been for a couple of years now and will be up for renewal in congress this year. Also tax deductable is all the interest you will pay on your mortgage, which in the first few years of the loan as we discussed above is a majority of your payment, and which can lesson your tax liability every year that you own your home.

Closing costs and other definitions and explanations

Closing costs are different for every home, and for every buyer, and can not really be compared in an apples and oranges way. The price of the home will be a factor, the size of the loan, the local taxes, the insurance agency, and which closing attorney you use will all be factors, among others. All of these different factors at play is what makes each loan for each buyer different. These fees will be disclosed to you on a "good faith estimate" which is takes into account reasonable assumptions about you and the property and tries to accurately predict what your closing costs will be, although decifering precisely what they will be can only be done a few days before closing once all the different factors are known. Since we can not be sure what loan product you will ultimately decide to use, we will just talk about some of the closing costs in general.

The state of TN (and the county and the city in which the house is located) will require the buyer to pay some taxes on the property up front similar to a sales tax and is many times called a tax "stamp". There will also be a recording fee to record your title at the county courthouse. The title is a public document, visible to everyone that wants to look it up, and is the one thing that states that you own the house, and that you have all the rights of ownership. There will also be a closing or settlement fee, an attorney's fee, and sometimes a Title search fee. These fees are associated with the closing attorney and can vary from attorney to attorney. The cost of the title search (or abstract as it is sometimes called) may actually be included in the attorney's fees, and is conducted to ensure that the seller has "good, marketable title" which will state, from the original purchase of the land, how the property has changed hands over the years. This search ensures that each time the property was sold, the seller actually had the right to sell the property to the next owner. Many times, especially in older areas of the country, a property may be passed to down to a group of children or siblings of a deceased former owner, and unless stated in a will, will be divided equally among them. Sometimes the group sells the property and splits the profits, but sometimes one or more of the group actually take possession of the property without the right paperwork in place. If this happens, years later someone with a claim to the property may surface and try to say the the property is rightfully theirs. This is where title insurance comes in, it is a one time fee paid at closing, which will leave the insurance company responsible for any damages should that situation arise. Some of the other fees may include what is called a discount point which is simply interest paid up front at the time of closing that goes toward lowering the interest rate your receive on your loan, or a loan origination point which is similar to the discount point in that it goes toward reducing your rate but instead of pre-paid interest it is actually pre-paid "profit" and goes to the broker you are working with. (It is a business after all, and the profit has to come from somewhere) One "point" is equal to 1% of the loan amount and depending on the size of the loan will on average net you a 1/8% reduction in your interest rate. I'll touch on discount points a little later. You may also have fees such as a courier fee, a tax servicing fee which allows the lender to verify the tax information that you provided, a processing fee or underwriting fee, a flood certification fee which will go toward checking to see if the property is in a flood plain, and possibly a credit report fee which goes toward the cost of pulling your credit from the three credit reporting agencies.

Now that we have explained most of the "fees" that are associated with purchasing a home, let's talk about some of the cost that you will pay up front but will use moving forward as you own the property. Most lenders require that you pay one full year of home owners insurance up front, and also an amount that equals your portion of the current years taxes. Your portion, of course, will be prorated is from the day of closing until the due date. The rest will be transferred from the seller's escrow account at closing so that once they are due the lender can pay them in full. There will also many times deposits to set up escrow accounts which should be somewhere from 3 to six months of taxes and insurance and are accounts that are set up by the lender on your behalf where each month you deposit 1/12 of the yearly property taxes and 1/12 of the cost of your yearly home insurance so that you don't have to pay it in one lump sum when they are due. These accounts are not mandatory on all loans but many times the lender may charge a fee or a higher interest rate for a buyer who decides they will pay their taxes and insurance themselves, which exposes the lender to the risk of you not doing so. In most cases buyers choose to allow the lender to set up the accounts so that they don't have to worry about it. The last portion of the closing costs will be your down payment and of course will go toward the purchase price of the home.

If you are considering a refinance, some of the fees you see here may not apply such as a title search fee or a flood certification fee among others. You may decide to do a cash out refinance where you receive cash back at closing and can allow you to access some of the equity from your home, or you may decide that you just want to refinance the current balance at a lower rate to save some of the interest you would pay should you stay in your current loan. A good rule of thumb is that the lower the interest rate the better but there may be certain closing costs due and you may have to pay to set up new escrow accounts which may cause your balance to be higher if you finance them into your loan. Depending on the amount of time you expect to stay in the home, and the amount of interest a lower rate may save you it may actually cost you more to refinance than to keep everything as is. You can always contact me at (901) 490-3542 to find out if a refinance is right for you.

Locking your rate

At some point after you have filled out a full application for a loan, found a home and negotiated a contract, had an appraisal performed, and lifted any contingencies, or reasons not to buy the home, but before the loan goes into underwriting you will have to sign a rate lock agreement, which simply put is your agreement to accept the loan with a certain stated interest rate. Up until this page is signed the rate your may receive is "floating" and may not be the same rate you were quoted when you either began looking for a home, or when you filled out the loan application. (although at the time I am sure it was probably the best rate available) Most people assume that the interest rate they are quoted is just a provided rate from a lender that is a constant based on their credit, but in all actuality it is much more complicated than that. The capital market system here in the U.S. can be very complex and can make the rate lock decision a very difficult decision to make as interest rates can fluctuate from day to day and even from hour to hour. Many interest rates are provided from different lenders each day and they can change quickly and suddenly. The capital markets are open 24 hours a day 7 days a week independent of the business hours of the lender. And are similar to stocks and bonds in that they move dependently, upon a large number of factors and can not be predicted. Available rates in the morning might be significantly higher than they were the evening before, may head lower through lunch, change course in the afternoon and head back up, and then revers again and eventually finish the day lower. I have seen rates stay the same for days and I have seen them move faster than the bank can update their website. I have seen people get very lucky, and get the absolute best rate of a given day week or month, and I have seen people float their rate for days or weeks thinking rates will move lower and then lock it in only to see it fall for days after they locked it. Some of the things that factor into the rate lenders give are the federal funds rate which is the rate at which banks or financial institutions may borrow funds (usually overnight) from one another, the discount rate which is the rate at which qualified institution borrow directly from the central bank, and the inflation rate or at least what the inflation rate is expected to be in the future. There are many other factors as well but are very complicated and on which entire books have been written. If you are looking to monitor which way mortgage prices are moving than the closest way is through the ten year United States treasury bond. It is not a point for point comparison, but if the rate of the ten year treasury bond goes up ¼ of a percent you can bet on residential mortgage rates going up about the same amount. The best reason that I can give for this is that the average homeowner moves about every ten years and so 30 year mortgages are, on average, paid off in ten years. Of course this is due to a new loan from a new buyer going to pay off the existing loan. It is impossible to say where rates will be tomorrow, but over periods of time rates fluctuate up and down usually in a range and the direction in the near term can somewhat be estimated. If for example, rates have been moving over the last 5 or 6 weeks in a range between 5% and 5.75% and current rate is 5% it would be more likely that rates will go up than it is that they will go lower. Does that mean that they will not go lower? Of course not, but it is more probable that rates will go higher. And conversely the opposite is true, if given the same range of 5% to 5.75%, and the current rate is 5.75% it is more probable that rates may head lower rather than higher. On this topic let me give you a piece of advice, if you are happy with the rate, and the monthly payment it will give you, go ahead and lock it. You will be much happier with yourself in the long run, if you lock in a rate that was not the absolute best than you will be with yourself if you risk it and leave it floating and then rates go up as time runs out before closing and you have to lock in a higher rate in order to close the loan on time. But that is just my advice, you can take it or leave it.

Debt to income ratio

The debt to income ratio is the percentage of your monthly income that is accounted for based on your accumulated debt and your proposed new mortgage. This ratio is derived from information found on your credit report. Lenders will often times allow you to go as high as 50% DTI including the new mortgage payment. Using the maximum DTI allowed for a given loan product, you can figure out the maximum price you can pay to purchase a home. This is often times called the pre-approval amount. One thing to understand about a pre-approval amount issued by a lender is that it is only based on the minimum required monthly debt payments, and does not account for things like food, gas, insurance, or utilities for your home. Which may change from month to month depending on your lifestyle. I find that many of my clients already have a certain monthly payment or range of payments in mind that they feel they can afford before they fill out any paperwork or we even meet for the first time. I usually take the monthly payment that they would like, and show them houses that would be within those limits. Remember only you know how much you can really afford, and designing a budget can be a great way to figure out in what price range you should be looking.

Reasons to get an adjustable rate loan

An adjustable rate loan is considered to be more risky for a buyer than a fixed rate loan but definitely has some rewards tied to that risk. Usually the initial rate is much lower than that of a fixed rate loan, and can be a good choice for someone who does not expect to live in a home for more than a couple of years. Other reasons to get an adjustable rate are that you expect your income to go up in the near future to accommodate the possibility of a higher monthly payment, or you expect that interest rates will be lower when the initial adjustment period is over and your payment will go down. Be careful though of loans that have a low initial rate but a high annual cap, as a large upward revision to your monthly payment may cause "mortgage shock" and may put you in a tight cash flow position or worse.

Reasons to get a fixed rate loan

Fixed rate loans are considered to be the least risky of all mortgage types. With a fixed rate it is much easier to budget yourself into the coming months or years or even farther as your monthly payment will only change if your taxes or insurance change. Neither of those two things will happen as often as an adjustment will, nor will the change be as drastic. Since the beginning of the century we have had historically low interest rates, that are significantly lower than the interest rates even ten or twenty years ago, and may not be a phenomenon that continues into the years ahead. Some of the reasons to get a fixed rate may include the expectation of decreased income in the future possibly due to retirement, or the expectation that interest rates will be higher in the future.

Reasons to get an interest only loan

Interest only loans are considered to be riskier than either fixed rate loans or adjustable rate loans as the balance of an interest only loan may stay constant if extra payments are not made during the life of the loan. But this doesn't necessarily mean they are always a bad choice, sometimes with the right rate, and the right terms, plus the right amount of personal discipline to make larger payment than what is required, this loan product can be a great tool. Some of the reasons this might be the right loan type for you could include, the ability to purchase a home with a considerably lower monthly payment than what is offered by other types of loans, or the expectations that property values in a certain area will rise quickly enough for you to be able to sell the home at a higher price when you decide to move, or the ability to completely deduct from your taxes your entire mortgage expense for the year.

Of course each situation is completely different, and what may be the best option for one buyer may not be the best option for another buyer, and only you can decide for yourself what level of risk that your comfortable with. You can follow any or all of the links on this page for more information about any of the topics we have discussed. There are of course of plethora of loan products out there, and I would be glad to help you find the one that is right for you. (901) 490-3542 is the number to call, "When your equity matters" and you would like more information on any of the loans we have discussed here or if you would like to explore some of the more creative ways you can finance your home. If you prefer you can e-mail me at josborn@visioninvestmentproperty.com, with your questions and I'll get back to you with answers as fast as I can.

Money saving tips

As we discussed above, there is an interest portion of your payment on both fixed rate loans and adjustable rate loans. This interest is usually calculated an a daily basis and then added to the balance, meaning that each day between your payments will have a larger amount of interest added to your balance than the day before. This is called interest on interest and is the reason that if you actually keep a thirty year mortgage for thirty years, making no extra payments. you'll end up paying almost twice as much in interest as you will for the actual home itself. This is why making extra payments to the principal can dramatically reduce the total amount of interest you'll pay and also the life of the loan. Your mortgage company can set up for you, if you request it, a biweekly payment plan which will cut your payment in half and take your payments every other week as opposed to once a month. This option can often times allow for better budgeting as many companies pay their employees biweekly, but the biggest benefit to a bi weekly payment program is that it allows you make one extra payment every year. Do the math real quick 52 weeks in a year, half payment every two weeks that's 26 half payments which is 13 full payments. This option will allow you to almost cut the total interest you'll pay in half, and take an estimated 6 an ½ years off of the life of the loan. Another option that will save you even more in interest costs and take even more life off of the loan, is taking that extra payment and splitting it evenly among all twelve months. The reason this is slightly better is that most mortgage companies will only allow full payments to be made, and not partial payments. The biweekly plan actually only allows you to make one extra half payment every six months instead of one half payment every other week. Only in the months where the weeks line up so that you make three half payments will you actually reduce the balance of the loan an extra amount. Taking the same basic premise and using the same funds, one extra payment per year, but splitting it up and applying it evenly over the 12 month period causes the amount of interest on interest to be lower than it would be with the biweekly option causing this option of prepayment to be slightly more effective using the same amount of funds.