If you're thinking of purchasing a home and you want to know how much you can afford -- and whether to choose a 15- or 30-year mortgage -- Alexandra Lebenthal designed three charts that will help you with your financial plan: net worth: assets and liabilities, your budget: month to year, and mortgage compensation.
Mortgage Terms and Vocabulary
An interest rate on a mortgage that changes over time based on various indexes and changes in interest rates since the mortgage was first taken out. Often referred to as A.R.M.
The repayment over time of interest and principal over the life of a mortgage. In the first years of the loan, more interest is being paid since the principal is still large. In later years the principal is the larger part of what is being paid.
Appraising a property takes place so that the bank can verify the true value of the home before they loan the money for the mortgage. A professional appraiser determines the value based on similar properties in the area.
Any fees paid by the buyers (borrowers) or sellers during the closing of the mortgage loan. This normally includes an origination fee, discount points, attorney's fees, appraisal fees, title insurance, survey, and any items that must be prepaid, such as taxes and insurance escrow payments.
The difference between the purchase price and the total amount of the home (the balance is what the mortgage is financing). Most lenders require the down payment to be paid from the buyer's own funds. Ten percent is a typical down payment, although in some cases, such as co-ops, the down payment can be significantly higher.
The difference between the fair market value (appraised value) of your home and your outstanding mortgage balance.
An interest rate that is fixed for the term of the loan. Payments are also fixed at one amount.
Home Equity Loan
A fixed- or adjustable-rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax-deductible. Although it can be used for many purposes, it can especially be helpful in repaying higher interest (and nondeductible) consumer loans such as auto or boat loans, credit-card debt, medical debt, and education loans.
Mortgage loans over $203,150. There may be different terms than loans of a lesser amount.
The minimum amount that you must pay, usually monthly, on a home equity loan or line of credit. In some plans, the minimum payment may be "interest only" (simple interest). In other plans, the minimum payment may include principal and interest (amortized).
Originates mortgage loans, loaning you their funds and closing the loan in their name.
A broker takes all the paperwork and applications buts do not fund the loan with their own money. Instead they find the best rate and structure available from mortgage bankers.
The amount paid either to maintain or lower the interest rate charged. Each point is equal to 1 percent of the loan amount (i.e., two points on a $100,000 mortgage would equal $2,000).
A fee paid to the lending institution for paying a loan prior to the scheduled maturity date. Some loans may not have a prepayment penalty.
The written evidence that proves the right of ownership of a specific piece of property. When a house is bought and sold the title will be searched to ensure that the rightful owner is selling the house and that there are not outstanding liens on a property.
The process of verifying data and approving a loan.
An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly. Similar to an adjustable rate loan.
Five Things to Consider Regarding Your Mortgage
1. Can you afford the interest and principal payments?
2. If you have a home equity loan, will you make sure it doesn't eat into the current value of the house?
3. Is the principal $1 million or less? Anything more does not give you a tax deduction.
4. If you have an adjustable mortgage, when does it reset -- and is it likely to be up or down?
5. How much principal and interest are you paying each year? How much equity are you building up?
Special thanks to Alexandra Lebenthal from Lebenthal & Co. for sharing this very helpful information.