Mortgage Fundamentals

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Purchase

For majority of borrowers, the main aim for taking the loan is to buy a property.

Prepurchase

Customer is approved for a mortgage before they sign a sales contract with a seller for a specific property.

Refinance

This is taken to payoff of an old mortgage with a new mortgage. Normally home refinancing is done when you have a mortgage on your home and apply for a second loan to pay off the first one.

Rate and Term

Customer refinances their old mortgage in order to obtain a lower interest rate or a different term.

Cash out

Customer refinances their old mortgage and borrows more than the outstanding balance in order to walk away with extra money.

Example; payoff other debts or to do home improvements.

Occupancy Types

Primary Residence

This is where the owner physically lives.

Second Home

It is the vacation home that the customer has in addition to their primary residence.

Investment Home

This is the property that the customer will not live in. This is bought only for an investment purpose.

Mortgage terms

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Sales Contract

It is the written agreement between buyer and seller stating terms and conditions of the sale of a property. This contract will include the agreed upon price which is also called the ‘Sales Price’.

Appraised Value

An opinion or estimate of worth of a property based on how much similar homes in the area have sold for. The appraised value is determined by a licensed Real Estate Appraiser.

LTV or Loan to Value

The ratio of the amount borrowed compared to the lower of the appraised value or sales price of real property expressed as a percentage. The LTV is used to determine the level of risk a lender is taking when lending funding for the home. The percentage of the sales price that the customer is borrowing.

Formula

Loan to Value = Mortgage Amount or loan amount

Sales price of Appraise Value (whichever is lower)

Ex;

Mortgage amount : 72,500

Sales price : 88,000

Appraised value : 90,000

72,500 x 100 = 82.38 % LTV

88,000

PMI or Private Mortgage Insurance

PMI protects mortgage lenders against loss in the event of default by the customer.This allows lenders to make loans with lower down payments without taking too much of a risk. PMI is required in conventional loans with less than a 20 % down payment or when the LTV is over 80 %

Mortgage lending

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A mortgage is a method of using property (real or personal) as security for the payment of a debt. Arranging a mortgage is seen as the typical method by which individuals or businesses can purchase residential or commercial real estate without the need to pay the full value immediately.

This lender prepared document states that if the customer does not pay as agreed, the owners give the lender the right to take the property (foreclosure). Every owner of the property must sign this document. A person can be an owner by being on the Deed, or via state law.

Main Participants in a Mortgage

Creditor or Mortgagee or Lender

They are Banks, Insurers or other financial institutions that make loans available for the purpose of real estate purchase.

Debtor or Mortgagor or Borrower or Obliger

The individual home-owners, landlords or businesses who are purchasing their property by way of a loan.

The debt is sometimes referred to as the ‘hypothecation’

The debtor may approach a Mortgage Broker or Financial Adviser to help them source an appropriate creditor typically by finding the most competitive loan. There are many established players in the internet providing such assistance.

Equity: The percentage of your ownership in the property or the initial payment made to acquire the loan on the property

Interest Rate: The percentage a borrower pays for the use of the mortgage money.

Points: Mortgage loan discount points are a one-time charge assessed at closing by the lender to bring down the customer’s interest rate. Each point is equal to one percent of the loan amount.

Term: The period of time between beginning date and ending date of the mortgage.

1. 30 years = 360 months

2. 25 years = 300 months

3. 20 years = 240 months

4. 15 years = 180 months

5. 7 years = 84 months

6. 5 years = 60 months