Mortgage is a contract between two parties where the mortgager promises to pay a fixed installment periodically towards the loan extended by the lender or the mortgagee. Mortgage can be taken either to purchase a new property or obtain cash against an existing property. There are two main types of mortgages namely fixed-rate mortgage and adjustable rate mortgages or ARMs. Fixed rate loans imply that the borrowers pay the same interest rate throughout the term of the loan. Typically, fixed rate mortgage loans are for thirty years, though it is possible to choose a term of fifteen or twenty years.
There are mortgages also available for other terms such as ten or twenty year fixed rate mortgages, but they not as popular as the thirty year ones. The major advantage of opting for a fixed mortgage payment is that the borrowers know for sure the amount of all future monthly payments. This is possible because the interest rate is fixed, and therefore the installments do not vary as per the current economic conditions.
A fixed rate mortgage, typically offers a higher installment plan as compared with other mortgage loans. This higher interest is a result of the price borrowers have to pay for the security that such loans offer. Mortgage lenders, too, do not know how the interest rates will behave over the next fifteen to thirty years, and are therefore not able to deduce whether they will benefit from locking the rates or not.
Fixed rate mortgages are beneficial for borrowers who need to plan their budgets and therefore, need to be certain of their monthly mortgage payments. Also, people who have to stay in the same house for a long number of years also favor the fixed rate mortgage. By discussing their situations with the lenders, borrowers can find out if the interest rates are low enough to lock in or should they wait for some time, take another mortgage plan, and probably later convert it to fixed rate mortgage.
To finance a home loan, borrowers are usually required to put in a percentage of the loan amount as down payment while lenders provide 80 or 90 percent loan. However, keeping in mind the consistently increasing price of homes in California, lenders now allow prospective buyers with an option of no money down home loans.
The usual down payment for a home used to be approximately twenty percent. Many homebuyers found it difficult to arrange for such high amounts, even if they had a good credit score. No money down home loan, or zero down home loan as it is popularly known, allows qualified prospective homebuyers to get finance for the entire loan amount. It is especially beneficial for first time homebuyers as they may require a larger time-span to accumulate such a hefty down payment. Opting for no money down home loan allows them to secure the home before it appreciates in value.
However, the major disadvantage of a ‘no money down mortgage loan’ is that many lenders require private mortgage insurance. This is done to reduce the risk on the part of the lender towards the borrower. Purchasing private mortgage insurance can increase the amount of home loan that the borrower has applied considerably. The lender is required to cancel the private mortgage insurance when a homeowner establishes a certain percentage of equity in the home.
If borrowers do not qualify for a ’no money down home loan’ without getting private mortgage insurance, they can enquire about piggyback loans. A piggyback loan permits a buyer to apply for two separate loans to cover the total value of the loan. The first loan is generally approved for eighty percent of the value of the home and the second loan covers the remaining twenty percent. This is the reason that these loans are also referred to as 80/20 loans.
No money down mortgage loans attracts more customers as the average amount of personal debt is continuously increasing. Borrowers also get tax benefits on the interest paid on a no-money down home loan.
California is one of the most diverse and culturally rich states in the United States. Therefore, laws are specifically designed to suit the values and lifestyle of the people of California who live and buy homes there.
Financing a California home loan can prove to be a daunting task if the borrower is ignorant of the laws of the land and the basic terms and practices used in the process. Getting a home loan or mortgage is one of the biggest purchases a person would make therefore it is a good idea to understand important terms such as points, interest rates and closing costs.
Interest is a percentage that the borrower pays to the lender for the service of lending money. This is how the lenders make profits on the money they lend out for buying homes. The interest is mostly front-loaded, which means that the initial payments are used towards paying for interest on the loan and not for the principal.
To reduce the interest rate on their mortgage, a borrower pays an amount that is generally equal to 1 percent of the loan amount, which is known as point. To get a lower interest rate on say, a $100,000 mortgage, a borrower may have to pay up to three points, which translates into three thousand dollars.
Borrowers have the option of locking-in or floating the interest rates while applying for the home loan. A lock-in rate ensures that a loan is closed at a particular rate over a period of sixty days. If borrowers choose the floating option, then they can keep track of the rates and lock it at a desired value.
It is up to the lender to approve or disapprove the application of a loan. Borrowers applying for a loan must thoroughly go through their credit reports. It is necessary to understand all the documents requirements and eligibility thoroughly. It helps make the application procedure easier and eliminates any chances of complications or disapproval of the loan.