What Factors Affect Mortgage Payments?

 

Looking to buy property in the Fort Myers or Cape Coral areas? Curious about what factors can impact your mortgage payments on that property?

Well, as this story shows, the amount of the down payment, the size of the mortgage loan, the interest rate, the length of the repayment term and payment schedule will all affect the size of your mortgage payment.

Below is a breakdown in bullets:

  • down payment
  • loan size
  • interest rate – fixed or adjustable
  • repayment term – how long
  • payment schedule – how often

all affect the size of your payment.

At Title Junction we believe an informed client is a happy client. Want more explanation on mortgage payments? Give us a call at 239.415.6574.

In case you missed it, check out our last Title Junction post to see if the TRID rules apply to your real estate transaction.

What Is Equity?

 

Have you heard the term “Equity” before and wandered what it actually means? In short, Equity is the value YOU own in property such as a house. It’s the difference between what’s OWED and what the property is WORTH in the current market.

In the example this video shows – if you have a house in Fort Myers or Cape Coral worth $300,000 today and you owe the bank $200,000.  Your equity would be $100,000.

If the house is valued at $500,000 in five years, and you still owe $150,000 your equity will be $350,000.

Equity grows if the property value goes up or if the amount owed goes down.  The key thing to remember, simple as it sounds, is that you “own” increases in value. The bank’s loan doesn’t go up if the home’s value goes up.

Equity in a home can be used as collateral for loans but a house is not a piggy bank. Home equity can become a key financial asset over time; treat it wisely.

More questions about understanding Equity in Fort Myers, Cape Coral and other surrounding areas? Give Title Junction a call at 239.415.6574.

In case you missed it, check out our last Title Junction post for finding information on Schools and Community Resources in the Fort Myers and Cape Coral areas.

What Is The Debt-To-Income Ratio (DTI)?

 

Measuring your existing debts against your existing income is one part of a lender’s required assessment of your ability to repay a loan.

Like the video says:  debts are existing financial commitments; a car payment is a debt a grocery bill is not.

To calculate your debt-to-income ratio add up your monthly debt payments and divide them by your GROSS monthly income. (Gross income is generally the amount of money you earn BEFORE taxes and other deductions.) The Federally-established debt-to-income target is a maximum of 43% for Qualified Mortgages.

If your ratio is higher there may be other loans available  – however, there may also be additional questions to establish your ability to repay, and the rates may be different than those available for Qualified Mortgages.

Studies suggest that a high debt-to-income ratio puts a homeowner at greater risk of challenges making monthly payments. So consider your situation and risks carefully before exceeding that suggested ratio.

What Is A Qualified Mortgage?

 

As this video explains,  Federal laws put into effect in 2014 and  supervised by the Consumer Financial Protection Bureau define lending practices and loan terms for a new category called “Qualified Mortgages.”

They provide stable loan features for consumers and improve legal protection for lenders who follow the guidelines.

These guidelines require lenders to assess each borrower’s ability to repay their mortgage loan.

As of 2014, guidelines require that a borrower’s monthly DEBT – including mortgage – be no higher than 43% of their monthly gross INCOME

The laws also define unacceptable loan terms:

  • interest-only loans
  • terms over 30 years
  • negative-amortization loans that increase principal over time
  • most balloon loans

do not meet the Qualified Mortgage guidelines.

The laws aim to provide consumers with objective guidance  about reasonable debt from the CFPB and in return, to grant lenders who follow that guidance with higher levels of protection from lawsuits.

Ask your lender about Qualified Mortgage options for your home purchase.

 

What Does Ability To Repay Mean?

 

What are the “Ability to repay” rules about?

In a nutshell, as this video shows, new laws require lenders to make a good-faith assessment of a borrower’s capacity to pay back their loan over time.

It’s a longer-term view that goes beyond immediate income, debt and credit rating.

These new Federal laws- supervised by the CFPB – require lenders to ask more questions –

about income, assets, employment, credit history, and monthly expenses –

as they relate to the proposed loan.

For example, a lender offering a mortgage with a low initial rate must try to assess how a borrower will handle the later, higher rate as well.

If you’re applying to borrow ask whether the program you’re considering is a Qualified Mortgage

Ability-to-repay rules are built in to loans that meet Qualified Mortgage guidelines.

 

What Is “Prime”?

 

The Prime Lending Rate – sometimes just called “Prime”  – is the interest rate that banks charge each other for overnight loans. Some consumer rates – like ARMs – are set in relation to Prime.

In the US, Prime is affected by the Federal Reserve lending rate to banks; historically, Prime is about 3 percent above the Fed rate.

The video shows  an example.

  • The Federal Reserve loans to Bank A at 1%
  • Bank A loans to Bank B at 4%
  • Both banks – A & B – will recalculate variable-rate loans like ARMs on that 4% Prime figure.

ARM rates are frequently defined as “% above Prime” – that gap is usually called the “margin” or “spread.” Just remember those 3 layers in Prime: Federal Reserve Bank A Bank B And finally, YOUR rate.

What Are Discount Points?

 

Discount points allow you to lower your interest rate. While this video simplifies things to help you remember, “points” are essentially prepaid interest with each point equaling 1% of the total loan amount.

Generally, for each point paid on a 30-year mortgage the interest rate is reduced by 1/8 (or.125) of a percentage point.

When shopping for loans, ask lenders for an interest rate with 0 points and then see how much the rate decreases with each point paid.

Discount points are smart if you plan to stay in a home for some time since they can lower the monthly loan payment.

Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay for some of them.

What Is Loan To Value (LTV) And How Does It Affect The Size Of My Loan?

 

While this video simplifies things to help you remember, the loan to value ratio is the amount of money you borrow compared with the price or appraised value of the home you are purchasing.

Each loan has a specific LTV limit. For example: With a 75% LTV loan on a home priced at $100,000 you could borrow up to $75,000 (75% of $100,000) and would have to pay $25000 as a down payment.

The LTV ratio reflects the amount of equity borrowers have in their homes. The higher the LTV the less cash homebuyers are required to pay out of their own funds.

So, to protect lenders against potential loss in case of default, higher LTV loans (80% or more) usually require mortgage insurance policies.

What Is Included In A Monthly Mortgage Payment?

 

The monthly mortgage payment mainly pays off principal and interest. But most lenders also include local real estate taxes homeowner’s insurance, and mortgage insurance, if applicable.
If you are refinancing compare what is and isn’t included in your financing options. Watch this video and it’ll make sense.

What Types Of Mortgage Loans Are Available?

 

This video tells you about the most common types: Fixed Rate, ARM, Balloon and 2-Step.

First, Fixed Rate Mortgages: Payments remain the same for the life of the loan generally 15 years or 30 years. Interest rates remain the same, so payments are predictable.

A second common type is an Adjustable Rate Mortgage, or ARM. ARM Payments increase or decrease on a regular schedule with changes in interest rates increases are typically subject to limits.

Third, Balloon Mortgage: These offers very low rates for an Initial period of time usually 5, 7, or 10 years when time has elapsed, the balance is due or refinanced though not automatically.

Finally, a Two-Step Mortgage- Interest rates adjusts only once and remains the same for the life of the loan.

Many other types are available, including government-insured mortgages and VA loans for veterans. Talk to lenders and real estate professionals to assess your situation.