What is a Mortgage Loan?
Applying for a Mortgage on a Kansas City Real Estate
A mortgage requires you to pledge your Kansas City home as the lender’s security for repayment of your loan. The lender agrees to hold the title or deed to your property (or in some states, to hold a lien on your title or deed) until you have paid back your loan plus interest.
Mortgage Amount and Term
The mortgage amount is the amount of money you borrow from a lender to pay for your Kansas City real estate. The term is the number of years over which you can pay back the amount you borrow.
The length of your mortgage repayment period will directly affect your monthly mortgage payments. For the same mortgage principal amount, you will find that the shorter your repayment period is, the higher your monthly payments will be, but the total interest you pay over the life of the loan will be less. On the other hand, the longer your repayment period is, the lower your monthly payments will be, but the total interest you pay over the life of the loan will be more.
The most popular mortgage term is 30 years. By extending payment over 30 years, you keep your monthly housing costs low. If you can afford higher monthly payments, you can select a shorter mortgage term: there are 20-year, 15-year, and even 10-year fixed-rate mortgages available from most mortgage lenders.
Over time, you will repay your mortgage through regular monthly payments of principal and interest. During the first few years, most of your payments will be applied toward the interest you owe. During the final years of your loan, your payment amounts will be applied primarily to the remaining principal. This type of repayment method is called amortization.
Fixed Interest Rate
You can choose a mortgage with an interest rate that is fixed for the entire term of the loan. A fixed-rate loan gives you the security of knowing your interest rate will never change during the entire term of the loan.
Adjustable Interest Rate
An adjustable-rate mortgage (called an ARM) has an interest rate that will vary during the life of the loan, with the possibility of both increases and decreases to the interest rate and consequently to your mortgage payments.
The down payment is the part of the purchase price the buyer pays in cash and does not finance with a mortgage. Your down payment will reduce the amount you’ll need to borrow. So, the more cash you put down, the smaller the size of your loan, and the smaller the amount of your mortgage payments.
Lenders often view mortgages with larger down payments as more secure because you have more of your own money invested in the property. However, you may have as little as 3 percent to 5 percent of the purchase price for a down payment. Lower down payments help many people afford homes of their own sooner.
The closing (or, in some parts of the country, settlement) is the final step, during which ownership of the home is transferred to you. The purpose of the closing is to make sure the property is ready and able to be transferred to you from the seller. Items to be paid at closing vary from state to state and may include transfer taxes and recordation taxes. Other closing costs are title insurance, the site survey fee, attorney fees, loan discount points, and document preparation fees. Usually, closing costs are expressed as a percentage of the sales price or loan amount. Typically, costs range from 3 percent to 6 percent of the sales price of your home. Sometimes, you can negotiate to have the seller of a property pay some of your closing costs.
In the special vocabulary of mortgage lending, “points” are often used to describe a type of fee lenders charge. (The full term to describe this fee is “discount points.”) Simply put, a point is a unit of measure that means 1 percent of the loan amount. So, if you take out a $200,000 loan, one point equals $2,000. If you take out a $150,000 loan, one point equals $1,500. Discount points represent additional money you can pay to the lender at closing. In return, the lender will provide you with a lower interest rate on your loan. Usually, for each point you pay for a 30-year loan, your interest rate is reduced by about 1/8th (or .125) of a percentage point. So, if the current interest rate on a 30-year mortgage is 5.5 percent, paying 1 point means you could get that mortgage for an interest rate of 5.375 percent. Find out more about discount points.
For example, you are shopping for a 30-year mortgage loan. A lender quotes you an interest rate for a 30-year, $50,000 mortgage at 6.5 percent with no discount points. If you like that rate, you can choose not to pay any discount points at closing and pay 6.5 percent interest. If you want to pay less interest, ask the lender to quote you interest rates with your paying 1, 2, or 3 discount points. Usually, the longer you plan to stay in your Kansas City home, the more sense it makes to pay discount points, which in effect, buys down your long term interest rate.
Conforming and Nonconforming Loans
The term “conforming”, as opposed to “non-conforming”, is sometimes used to explain loans which offer terms and conditions following the guidelines set forth by Fannie Mae and Freddie Mac. Fannie Mae is a government-sponsored enterprise (GSE) chartered by Congress with a mission to provide liquidity, stability and affordability to the U.S. housing and mortgage markets.
Freddie Mac also conducts business in the secondary mortgage market working with a national network of mortgage lending customers, thereby ensuring that mortgage funds are available at all times in all locations around the country.
The most important difference between a loan that conforms to Fannie Mae/Freddie Mac guidelines and one that doesn’t is its loan limit. Fannie Mae and Freddie Mac will purchase loans only up to a certain loan limit (currently $417,000).
So, if your loan amount will be for more than the conforming loan limit of $417,000, you may be asked to pay a higher interest rate on your mortgage. Your mortgage loan may also follow slightly different underwriting requirements, particularly in regard to your required down payment amount. Check with your lender about this if you are taking out a large loan amount. Non-conforming loans are sometimes called jumbo loans.
Ask T. J. Lamb, T.J. Lamb Real Estate, about applying for a mortgage on a house in Kansas City.