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Mortgage Explained
Helping people make accurate, educated, and intelligent mortgage choices

Mortgage Confused? You are not alone.

US Federal Reserve

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The goal of MortgageTranslator.Com is to explain mortgage and the mortgage process in a straight forward easy to understand manner. Mortgage is complex. Adjustable Rate Mortgages, Fixed Rate Mortgages, Reverse Mortgages and many other mortgage types all have differing criteria, qualification requirements, and sets of rules that often times appear to be a great deal more complicated than should be required to understand them. Very few people who apply for a mortgage have the schooling (finance, real estate, etc) to truly understand what all the terms associated with a mortgage mean or know what questions should be asked regarding mortgage costs, many of which are not required to be disclosed prior to mortgage closing. The Federal Truth in Lending Act creates a framework that lenders must follow in the way they disclose their fees and charges but many costs "slip through the cracks". This is not to say that lenders are trying to be dishonest, it’s just that items that are not required to be included simply aren’t.

MortgageTranslator.Com will help to reveal where many of these hidden fees can be found, and present information that should be considered when choosing between the different types of mortgages that are available. We will arm our visitors with the proper terms to ask the right questions and provide the names of document titles that should be requested in order to make an educated mortgage decision. We also will explain, in detail, many of the most common mortgage loan types and lots of the options that are available with them. This collection of "mortgage ammunition" just mentioned, along with links to many other items and tools pertaining to the mortgage process can be found in the navigation bar to the left.

The mortgage process does not have to be difficult, nor should it be confusing. When armed with the information found on this site, the average person will have the tools, resources, and answers to make accurate, educated, and intelligent choices when it comes to mortgage and mortgage refinance decisions.



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Interest Rates

First things first, lets have a little discussion regarding interest rates since this is the basis for which lending institutions lend money.

"Who is the Fed Chairman?" and "what does he have to do with my home?" you may ask. The answer is both plenty and not a lot. To explain, here's a greatly oversimplified description of how the Federal Reserve Chairman influences your interest rates: The Federal Reserve Board, of which the Federal Reserve Chairman is the speaker, meets 8 times a year (or more as warranted) to discuss inflation, U.S. market conditions, and other economic data. Depending on the outcome of this discussion, they will typically raise, lower, or hold even two key interest rates: the Discount Interest Rate which is the rate of interest the Federal Reserve charges to banks to whom the Federal Reserve itself loans money, and the Federal Funds Rate which is the rate of interest that the Federal Reserve “suggests” should be charged when one bank loans money to another*. Neither of these two interest rates have a direct link with mortgage rates, however they do have an impact on the Mortgage Bond Market, which does impact mortgage rates (along with market demand, market stability, market solvency - the overall ability of people to pay their debt as viewed from a market perspective, and overall financial market conditions). The Prime Interest Rate, what banks charge their best mortgage customers (not typically what the majority of us qualify for), is based upon Mortgage Bond Market Yields adjusted for the conditions stated above, plus a margin added by the lending institution. The interest rate offered by banks to their average customers will be this Prime Interest Rate plus ...

For the majority of consumers, there truly are only two different types of mortgage; The Fixed Rate Mortgage and The Adjustable Rate Mortgage, the remaining items are mainly just toppings added to the mortgage flavors adjusting how the mortgage is repaid.



Fixed Rate Mortgage

Advantages:

  • Fixed payment for the entire length of the loan if Taxes & Insurance are not included in your monthly payments. See our Taxes & Insurance section for reasons you might or might not want to include these items in your monthly mortgage payments.

  • 15-year fixed rate mortgages, 20-year fixed rate mortgages, 30-year fixed rate mortgages, and 40-year fixed rate mortgages among some obscure others are now currently available. Differing term lengths create a greater number of payment options for the consumer. As you would expect: the longer the term, the smaller the payment, however that does not mean that the payments for a 15-year mortgage will be double that of a 30-year mortgage. This misconception is caused by the way interest is calculated and charged for these shorter term loans.
  • Straightforward and easy to understand for budgeting purposes: you will owe X amount of dollars for Y amount of years without any change.

Disadvantages:

  • Because the interest rate is fixed in a fixed rate mortgage; you will need...

Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage has an interest rate that is based upon a published index; and will adjust strictly according to that index regardless of the wishes of the lender, borrower, or any third party. Much like the stock market, exact prediction of the future position of an interest rate is impossible, however, the overall trend of any given index for which an adjustable rate mortgage is based upon can and should be observed prior to any decision or agreement. All adjustable rate mortgages are based upon a rate that can and should be investigated to avoid any future “surprises” regardless of whom the adjustable rate mortgage is offered by. Our Common ARM Indexes page lists many of the typical indexes that Adjustable Rate Mortgages are based upon.

Are ARM rates tied to the discount interest rate? (The discount interest rate is set by the Federal Reserve and is always discussed by news stations when it is adjusted. See our Interest Rates section for a more in-depth explanation) Yes, somewhat. All American interest indexes are indirectly tied to the discount interest rate; however...

Reverse Mortgage

This type of mortgage allows a senior 62 years or older to draw upon the accrued equity of their home. A Reverse Mortgage is not repaid until the owners leave the home upon which the loan is drawn upon and will typically be funded in one of the three following manners: a credit line up to a fixed amount, distributed as monthly payments, or paid as a lump sum. A Reverse Mortgage is “tailor made” to the individual(s) and can often become very complicated depending on, but not limited to; the age of the borrower(s), the equity available in the home, current interest rates...

Refi & Mortgage Refinancing

The most important thing that folks should consider when refinancing their home, but often don’t, is what the total cost of the new mortgage loan will be as compared to the old mortgage loan. Sure the monthly payments may be lower, but what about the total cost. Many lenders and mortgage brokers will often glamorize the lower interest rate and fail to mention there will be an increase in the total mortgage cost. Sure, the total cost of the loan can be found on the settlement documents, but at the time of signing, do you think you’ll have a copy of your old loan documentation to use for comparison? The point here is to be sure you compare your old apples to the new apples – compare the total costs of the loans. Most of us want a lower interest rate at no additional cost; do not be blinded by the better interest rate alone.

Getting cash out of your refi will often bump up the interest rate on the new mortgage because...

Home Equity Loan & Home Equity Line of Credit (HELOC)

The amount of home equity allowed to borrow against will typically be determined by subtracting the current amount due on the primary mortgage from the product of 80% (80% is a percentage often used by lenders, however, some Home Equity Loan and Home Equity Line of Credit providers offer percentages both above and below this figure) of the current appraised value of the home. For example, a home valued at $100,000 with a $50,000 mortgage will be eligible for a $30,000 Home Equity Loan or Home Equity Line of Credit.

HELOC Value Sketch

Advantages:

  • Home Equity Line of Credit – Lending institution fees are typically low when compared...

Mortgage Qualifying Requirements

The most important item a lender will look for when considering an individual for a mortgage loan is that individual’s ability to repay the loan. Many lenders arrive at this determination based on how an individual’s monthly income compares to his monthly debt. This figure, called the debt-to-income ratio, often is required to fall within a certain percentage range in order to be eligible for a particular mortgage. Also taken into consideration in the loan approval process is the applicants credit score, credit history, and employment stability.

Pre-Qualified & Pre-Approved – What’s the difference? Pre-Qualification is...

Locking the Loan

In the past, when Locking a Loan, it was common practice for lenders and brokers to request a commitment in writing or a cash deposit by the potential mortgage loan purchaser as a way to protect the lender or broker from the chance of a loan applicant shopping and/or purchasing a loan elsewhere, at a better deal. It became apparent to these lenders and mortgage brokers that this practice of asking for this commitment often would push individuals toward other institutions that did not require a commitment, and therefore, this practice has mostly been dropped. Now, by saying they’ll "lock the loan", lenders and mortgage brokers are assuming the risk of covering any additional increase in the mortgage interest rate that may come about over the lock period. To offset this potential loss...

Down Payment

The old standard required for a Down Payment by most lenders used to be 20% of the purchase price. Now with the help of Private Mortgage Insurance (Insurance which guarantees the lender loan repayment if the mortgage is defaulted upon), individuals are able to qualify for a mortgage with as little as nothing down. It goes without saying that the more cash that is put down for a Down Payment the lower the monthly mortgage payments will be, however, unless mortgage interest rates are high, individuals fortunate enough to have more than 20% available in cash for a Down Payment should consider...

Closing Statement

Before You Sign – What to watch out for:

  • Ask your lender, Mortgage broker, or Title officer for a copy of your Balance Sheet, Closing Statement, or Settlement Cost Sheet. (This document is called many different things by different institutions; use any of these terms and your lender, broker, or title officer should understand what you’re looking for.) By law, a borrower is entitled to review the settlement cost sheet one business day before closing on the loan – You absolutely must exercise this right and ask questions if you find something you don’t understand!
  • Check introductory rates and periods on Home Equity Lines of Credit (HELOC) and Adjustable Rate Mortgages. Ask your lender to map the loan out precisely in a fashion you understand.
  • Check for and ask about...

Annual Percentage Rate – APR

Through the Federal Truth in Lending Act, a mortgage lender is required to provide a consumer with the Annual Percentage Rate (APR) of a mortgage loan within three days after the consumer’s loan application has been received. As a general rule this Annual Percentage Rate is the cost of any lender or broker fees, including interest paid on those fees through the term of the mortgage loan, expressed as percentage and added to the effective interest rate (the offered interest rate). Unfortunately, not all lender or broker fees are required to be included in this adjustment, therefore creating a slightly misleading figure (I assume this is because many lenders and mortgage brokers have "creative" ways to charge exorbitant additional costs for trivial items which have not been required to be included... yet.). Also, third party fees such as those generated by title companies, appraisers...

Common Indexes that Interest Rates are based upon

  • Certificate Of Deposit Index (CODI) - Calculated on or near the first Monday of each month, the Certificate Of Deposit Index is the running 12-month average of the three-month certificate of deposit.
  • Cost of Savings Index (COSI) - Calculated monthly on the last business day of each month, the Cost of Savings Index is based on the weighted average of all the interest rates paid on certificates of deposit to Wachovia customers.
  • 11th District Cost of Funds Index (COFI) - From the website of the Federal Home Loan Bank of San Francisco...

  • Private Mortgage Insurance - PMI

    Private Mortgage Insurance was created to allow individuals who may not have enough cash for a down payment the opportunity to purchase a home. The monthly premium due for a Private Mortgage Insurance policy is determined by the type of loan, the actual dollar amount of the loan, and may be added to the mortgage as a lump sum...

    Tax’s & Insurance

    For those individuals that would prefer not to have the additional responsibility involved with the saving for and the payment of additional bills for their property tax’s and home insurance, the option of including these costs into a monthly mortgage payment is available. The bank or lender will break these expenses down into monthly installments, and disperse them to the proper agencies at the appropriate time. Those individuals, who would rather collect the interest on this money themselves, should consider placing this money into a zero-cost, interest bearing account such as...

    Title Insurance

    Created primarily to protect a lender from title fraud and any lien that may have been missed during the title check process of a property purchase, Title Insurance also protects the mortgage borrowers investment as well if a similar issue turns up in the future. Although the payment responsibility for Title insurance is typically paid by the borrower at closing, in cash, this is not always the case and may be paid by the seller as a guarantee toward the new owner of a clean title. Costs for title insurance vary from location to location due to each individual area having different requirements as to what duties are covered under the Title Insurance policy. As an example...

    Freddie Mac

    Freddie Mac is a private corporation created by congress as a monopoly buster for Fannie Mae. Similar to Fannie Mae, Freddie Mac makes money for its investors by charging a guarantee fee on mortgages that it secures into mortgage-backed security bonds The maximum loan amount that Freddie Mac will guarantee is established in partnership with Fannie Mae and is called a "conforming loan". As with Fannie Mae: Freddie Mac receives no direct government funding or backing.

    Updated September 2008 – So what has changed with Fannie and Freddie as a result of the Treasury bailout? Not much, actually. Business will be performed as usual; the purchasing of mortgages from banks by Fannie Mae and Freddie Mac will...

    Fannie Mae

    Founded by Franklin Delano Roosevelt in 1938 to help keep cash flowing in the mortgage market, the Federal National Mortgage Association (Fannie Mae) became the foremost purchaser of mortgages from lenders. In 1968, Fannie Mae was converted into a private corporation to help balance the federal budget. Today Fannie Mae is a publicly traded company with an assumed value of $2.8 trillion dollars. Fannie Mae makes money for its investors by charging a guarantee fee on mortgages that it secures into mortgage-backed security bonds. The maximum loan amount that Fannie Mae will guarantee is established in partnership with Freddie Mac and is called a "conforming loan". As stated above: Fannie Mae receives no direct government funding or backing.

    Updated September 2008 – So what has changed with Fannie and Freddie as a result of the Treasury bailout? Not much, actually. Business will be performed as usual; the purchasing of mortgages from banks by Fannie Mae and Freddie Mac will...

    What is Escrow, and why do I need it?

    The purpose of using an escrow account for real estate transactions is to involve a neutral, non-emotionally linked third party entity (escrow officer) to insure that the requirements and conditions of both the lender and borrower are properly satisfied before the closing of the sale. It is the escrow officer’s responsibility to see that all of the required loan and title documents and other requirements are all properly signed and processed according to the time table mapped out between the buyer, seller, and lender.





We are not mortgage professionals nor do we claim to be. All information on this site is provided for informational purposes only. Individuals should always consult a real estate attorney prior to making any real estate commitments which they may not understand.