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Loans can have a fixed interest rate
or a variable interest rate. Fixed rate loans have the same principal and
interest payments during the loan term. Variable rate loans can have any
one of a number of "indexes" and "margins" which
determine how and when the rate and payment amount change. If you apply
for a variable rate loan, also known as an adjustable rate mortgage (ARM),
a disclosure and booklet required by the Truth in Lending Act will further
describe the ARM. Most loans can be repaid over a term of 30 years or
less. Most loans have equal monthly payments. The amounts can change from
time to time on an ARM depending on changes in the interest rate. Some
loans have short terms and a large final payment called a
"balloon." You should shop for the type of home mortgage loan
terms that best suit your needs.
Interest Rate,"Points"
& Other Fees. Often the price of a home mortgage loan is stated in
terms of an interest rate, points, and other fees. A "point" is
a fee that equals 1 percent of the loan amount.
Points are usually paid to the
lender, mortgage broker, or both, at the settlement or upon the completion
of the escrow. Often, you can pay fewer points in exchange for a higher
interest rate or more points for a lower rate. Ask your lender or mortgage
broker about points and other fees.
A document called the Truth in
Lending Disclosure Statement will show you the "Annual Percentage
Rate" (APR) and other payment information for the loan you have
applied for. The APR takes into account not only the interest rate, but
also the points, mortgage broker fees and certain other fees that you have
to pay. Ask for the APR before you apply to help you shop for the loan
that is best for you. Also ask if your loan will have a charge or a fee
for paying all or part of the loan before payment is due ("prepayment
penalty"). You may be able to negotiate the terms of the prepayment
penalty.
Lender-Required Settlement Costs. Your
Huntsville Alabama lender may require you to obtain certain settlement services,
such as a new survey, mortgage insurance or title insurance. It may also
order and charge you for other settlement-related services, such as the
appraisal or credit report. A lender may also charge other fees, such as
fees for loan processing, document preparation, underwriting, flood
certification or an application fee. You may wish to ask for an estimate
of fees and settlement costs before choosing a lender. Some lenders offer
no cost” or "no point" loans but normally cover these fees or
costs by charging a higher interest rate.
Comparing Loan Costs. Comparing
APRs may be an effective way to shop for a loan. However, you must compare
similar loan products for the same loan amount. For example, compare two
30-year fixed rate loans for $100,000. Loan A with an APR of 8.35% is less
costly than Loan B with an APR of 8.65% over the loan term. However,
before you decide on a loan, you should consider the up-front cash
you will be required to pay for each of the two loans as well.
Another effective shopping technique
is to compare identical loans with different up-front points and other
fees. For example, if you are offered two 30-year fixed rate loans for
$100,000 and at 8%, the monthly payments are the same, but the up-front
costs are different:
Loan A - 2 points ($2,000) and lender
required costs of $1800 = $3800 in costs. Loan B - 2 1/4 points ($2250)
and lender required costs of $1200 = $3450 in costs.
A comparison of the up-front costs shows Loan B requires $350 less in
up-front cash than Loan A. However, your individual situation (how long
you plan to stay in your house) and your tax situation (points can usually
be deducted for the tax year that you purchase a house) may affect your
choice of loans.
Lock-ins. "Locking
in" your rate or points at the time of application or during the
processing of your loan will keep the rate and/or points from changing
until settlement or closing of the escrow process. Ask your Huntsville Alabama
lender if there is a fee to lock-in the rate and whether the fee reduces
the amount you have to pay for points. Find out how long the lock-in is
good, what happens if it expires, and whether the lock-in fee is
refundable if your application is rejected.
Tax and Insurance Payments.
Your monthly mortgage payment will be used to repay the money you borrowed
plus interest. Part of your monthly payment may be deposited into an
"escrow account" (also known as a "reserve" or
"impound" account) so your Huntsville Alabama lender or servicer can
pay your real estate taxes, property insurance, mortgage insurance and/or
flood insurance. Ask your Huntsville Alabama lender or mortgage broker if you
will be required to set up an escrow or impound account for taxes and
insurance payments.
Transfer of Your Loan. While
you may start the loan process with a Huntsville Alabama lender or mortgage
broker, you could find that after settlement another company may be
collecting the payments on your loan. Collecting loan payments is often
known as "servicing" the loan. Your lender or broker will
disclose whether it expects to service your loan or to transfer the
servicing to someone else.
Mortgage Insurance. Private
mortgage insurance and government mortgage insurance protect the lender
against default and enable the lender to make a loan which the lender
considers a higher risk. Lenders often require mortgage insurance for
loans where the down payment is less than 20% of the sales price. You may
be billed monthly, annually, by an initial lump sum, or some combination
of these practices for your mortgage insurance premium. Ask your lender if
mortgage insurance is required and how much it will cost. Mortgage
insurance should not be confused with mortgage life, credit life or
disability insurance, which are designed to pay off a mortgage in the
event of the borrower's death or disability.
You may also be offered "lender
paid" mortgage insurance (LPMI). Under LPMI plans, the lender
purchases the mortgage insurance and pays the premiums to the insurer. The
lender will increase your interest rate to pay for the premiums -- but
LPMI may reduce your settlement costs. You cannot cancel LPMI or
government mortgage insurance during the life of your loan. However, it
may be possible to cancel private mortgage insurance at some point, such
as when your loan balance is reduced to a certain amount. Before you
commit to paying for mortgage insurance, find out the specific
requirements for cancellation.
Flood Hazard Areas. Most
lenders will not lend you money to buy a home in a flood hazard area
unless you pay for flood insurance. Some government loan programs will not
allow you to purchase a home that is located in a flood hazard area. Your
lender may charge you a fee to check for flood hazards. You should be
notified if flood insurance is required. If a change in flood insurance
maps brings your home within a flood hazard area after your loan is made,
your lender or servicer may require you to buy flood insurance at that
time.
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