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Interest Rate
The interest rate is the percentage paid for the use of money and determines your annual cost of borrowing the money for your home (it is also the part of your payment which is typically deductible on your personal income taxes– ask your tax advisor). The higher the interest rate, the higher the annual cost of loan. But simply comparing interest rates may confuse the true cost of your mortgage and your monthly payment – you must also consider "your closing costs" and your "term." There are two different types of interest rate plans:
- Fixed Rate, which, just as it sounds, sets a fixed interest rate for the term of your loan so that your monthly payment (exclusive of real estate taxes or insurance that may be included in your monthly payment) will remain the same;
- ARM (Adjustable Rate Mortgage) allows the lender to adjust the interest rate in accordance with a specified index periodically and as agreed to at the inception. Because of that the interest rate may fluctuate (typically after the first year) and your payment may fluctuate. There are many different ARM programs – some offer "caps" which limit the amount your rate can change up or down, some allow you to switch to a fixed rate during your loan, and the time and conditions in which your rate is adjusted differs greatly between different programs. Typically, an ARM offers a lower initial interest rate resulting in a lower monthly payment and may also qualify you for a higher loan amount because your monthly payment is lower. If you expect that you will stay in your house for a shorter period of time or that your annual earnings will increase, this may be a smart choice. It is very important that you fully understand the terms of this type of loan because your monthly payment can go up and may affect your ability to make your monthly payment.
Your Closing Costs
Simply, these are the costs that you must pay (some of your closing costs may be included in the amount you borrow) when you are completing the purchase of your home and the mortgage is made. They include the money paid for the house; costs for title insurance, surveys, appraisals, city/county/state "doc" stamps, notaries and attorneys, underwriting, credit or application fees; and costs (typically considered for tax purposes as deductible prepaid finance charges – ask your tax advisor) paid to your mortgage company in the form of an "origination fee" and "points" (also called "discount points").
- Origination Fees are charges included in most mortgages to cover a lender's administrative expenses (for example, 1% of the home loan amount). When you compare which loan is best for you, make sure you also include a comparison of origination fees.
- Points are fees charged by a lender on the money borrowed. Each "point" is equal to 1% of the loan amount and typically, the more points paid, the lower the rate of interest you pay resulting in lower monthly payments. To compare rates that are based in part on your paid points, compare the APR (Annual Percentage Rate) as required to be furnished you in a lender’s Truth in Lending Disclosure Statement.
Your Term
Term is the number of years over which you are financing your home. Typically, terms range up to 30 years and the longer the term, the lower your monthly payment, but the higher the actual cost of your mortgage (because you are paying interest for a longer period of time). Some loans allow you to "amortize" (amortization is the method to compute equal payments to pay off your debt in a fixed period) your loan for up to 30 years allowing you lower monthly payments, but with a shorter term. This type of loan requires a "balloon payment" (or refinance) at the end of the term.
Down Payment
Your Down Payment is the cash portion (the part you don’t finance in the mortgage) paid by you from your own funds toward your purchase. The down payment percentage is calculated by dividing the amount you plan on putting down into the purchase price of your new home. Down Payment requirements vary widely (as little as 0-3% and some programs required as much as 20% or with private mortgage insurance) among loan programs and should be discussed with your Unity Mortgage Banker.
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