Make Your Move 6
Content
KASL WESTON COUNTY EXTENSION REPORT BILL TAYLOR 3/1/11
MAKE YOUR MOVE (Part 6)
Last time we started on the subject of home loans. So what are the parts of a loan?
The term of the loan is the length of time you have to pay the loan back. Mortgage loans are usually offered for periods of 10, 15, 20, 25, or 30 years. The longer the term on your loan the smaller your payment will be, but you will pay more interest over the life of the loan. You can usually obtain a lower interest rate for shorter term loans. For example a 15 year loan at 6.75% on $100,000 would result in a monthly payment of $885 and total interest of $59,284 paid. A 30 year loan at 7% on the same amount would result in a payment of $665 per month and a total of $139,509 in interest paid.
The interest rate is the amount the lender charges to let you use their money. Interest rates vary day to day and even hour to hour, depending on the economy, the stock market and national and international events. You may be able to pay discount points to buy a lower interest rate. A discount point is one percent of the loan amount and how much a discount point will lower the interest rate depends on the lender. Your interest rate is not guaranteed until you have an accepted Purchase Agreement on a property. A rate lock is an agreement between you and the bank that the interest rate will be guaranteed for a specific number of
days. If you have a Purchase Agreement to close in 45 days, you will want to lock your loan for at least 45 days and maybe 60, in case there is a delay.
Every property has a maximum loan-to-value (LTV), which is a certain percentage of the value of the property and the maximum amount the lender will loan on that property. An LTV of 95% means the lender will only loan you 95% of the value of the property or the sales price, whichever is less.
Most loans have a down payment requirement, application fees, and closing costs. Assistance programs from state housing authorities, non-profit housing partnerships, banks, and employers may be able to help cover some or all of these costs. Sometimes you can finance these costs by adding them to the amount of the loan. Of course, this will add to your payment and total interest paid over the loan.
A fixed rate loan means the interest rate will stay the same throughout the life of the loan. These are a good choice when rates are low, if you have a fixed or limited income, don t receive regular raises, or are not comfortable with your loan payment fluctuating.
Step rate loans usually start at a rate below the current market rate and will step up by a certain amount each year for several years. Once it reaches the highest rate, it then becomes fixed.
A buydown loan is when a fee is paid up front to buy down the interest rate a percentage point or two. This type of loan will step up a point each year until it reaches the fixed rate agreed upon.
Adjustable Rate Mortgage Loans (ARMs) are loans for which the rate will change based on a market index. There are many types of adjustable rate loans some change every 6 months, some once a year, some are fixed for a certain number of years and then change every year after. Adjustable rate loans may be a good choice when you only intend to be in the house for a few years, your income will be increasing, you will have additional income sources, or when fixed rates are high, since the adjustable loans usually start out lower than fixed rate. However, you need to ask yourself Am I in a position financially to absorb the increases in my payment if rates should climb to the maximum? It was this type of loan that caused the recent crash in the housing market as interest rates increased dramatically and homeowners suddenly found themselves required to pay double or triple their original monthly payment.
Bill Taylor Weston County Extension Office The University of Wyoming is an equal opportunity/affirmative action institution.
MAKE YOUR MOVE (Part 6)
Last time we started on the subject of home loans. So what are the parts of a loan?
The term of the loan is the length of time you have to pay the loan back. Mortgage loans are usually offered for periods of 10, 15, 20, 25, or 30 years. The longer the term on your loan the smaller your payment will be, but you will pay more interest over the life of the loan. You can usually obtain a lower interest rate for shorter term loans. For example a 15 year loan at 6.75% on $100,000 would result in a monthly payment of $885 and total interest of $59,284 paid. A 30 year loan at 7% on the same amount would result in a payment of $665 per month and a total of $139,509 in interest paid.
The interest rate is the amount the lender charges to let you use their money. Interest rates vary day to day and even hour to hour, depending on the economy, the stock market and national and international events. You may be able to pay discount points to buy a lower interest rate. A discount point is one percent of the loan amount and how much a discount point will lower the interest rate depends on the lender. Your interest rate is not guaranteed until you have an accepted Purchase Agreement on a property. A rate lock is an agreement between you and the bank that the interest rate will be guaranteed for a specific number of
days. If you have a Purchase Agreement to close in 45 days, you will want to lock your loan for at least 45 days and maybe 60, in case there is a delay.
Every property has a maximum loan-to-value (LTV), which is a certain percentage of the value of the property and the maximum amount the lender will loan on that property. An LTV of 95% means the lender will only loan you 95% of the value of the property or the sales price, whichever is less.
Most loans have a down payment requirement, application fees, and closing costs. Assistance programs from state housing authorities, non-profit housing partnerships, banks, and employers may be able to help cover some or all of these costs. Sometimes you can finance these costs by adding them to the amount of the loan. Of course, this will add to your payment and total interest paid over the loan.
A fixed rate loan means the interest rate will stay the same throughout the life of the loan. These are a good choice when rates are low, if you have a fixed or limited income, don t receive regular raises, or are not comfortable with your loan payment fluctuating.
Step rate loans usually start at a rate below the current market rate and will step up by a certain amount each year for several years. Once it reaches the highest rate, it then becomes fixed.
A buydown loan is when a fee is paid up front to buy down the interest rate a percentage point or two. This type of loan will step up a point each year until it reaches the fixed rate agreed upon.
Adjustable Rate Mortgage Loans (ARMs) are loans for which the rate will change based on a market index. There are many types of adjustable rate loans some change every 6 months, some once a year, some are fixed for a certain number of years and then change every year after. Adjustable rate loans may be a good choice when you only intend to be in the house for a few years, your income will be increasing, you will have additional income sources, or when fixed rates are high, since the adjustable loans usually start out lower than fixed rate. However, you need to ask yourself Am I in a position financially to absorb the increases in my payment if rates should climb to the maximum? It was this type of loan that caused the recent crash in the housing market as interest rates increased dramatically and homeowners suddenly found themselves required to pay double or triple their original monthly payment.
Bill Taylor Weston County Extension Office The University of Wyoming is an equal opportunity/affirmative action institution.
