What is Negative Amortization?
A negative amortization loan is an adjustable rate mortgage that allows the consumer to tap into home “equity” by offering several monthly payment options. Up to an additional 25% of the original loan amount is available to the borrower. This flexibility works well for consumers who have seasonal income or want more control over their cash flow.However, the borrower must have some degree of financial discipline. Each month, the borrower will choose to make a fully amortized payment, an interest-only payment, or a low introductory rate payment. A fully amortized payment is larger, and...
Read MoreWhat Is a Prepayment Penalty?
A prepayment penalty is a fee charged to borrowers that make full payment on their mortgage, or pay off a substantial portion (generally anything exceeding 20% of the total loan amount), ahead of schedule. This is a clause written into some contracts to protect the lender’s book of business in exchange for providing a lower interest rate, or for providing financing to a high-risk borrower. Prepayment penalties vary with different lenders, but generally apply to a one-, two-, three-, or five-year period oftime. This fee can be expressed as either a specific number of months’...
Read MoreVarious Ways to Hold Title to Real Property
Title is the legal documentation that bestows ownership of real property. This is to be indicated in Part II of the 1003 Uniform Residential Loan Application as “manner in which title will be held.” The decision of how the title will be held should not be put off until the last minute since it has a great impact on future tax planning, the financial future of the borrower(s) and their respective heirs, and the choice of the lender. It is most important for the mortgage consultant to work hand-in-hand with the borrower’s financial planner or taxconsultant to assist their...
Read MoreWhat Is Title Insurance?
Title insurance is a policy that is usually issued by a title company to protect the lender against something that might have happened in the past, rather than something that might occur in the future. In essence, an extensive search of public records is conducted by the title company to validate who has held title to the property in the past. The lender wants to know if there are any liens, judgments or easements on the property that they should be aware of. But title insurance also guards against hidden risks or unknown factors that might cause an encumbrance at some point in the future,...
Read MoreWhat Constitutes Closing Costs?
Closing costs are expenses that cover fees associated with the transfer of property ownership, fees paid to state and local governments, and the costs of obtaining a mortgage loan. Some of these fees are negotiable, and could be paid by either the buyer or the seller. Some costs are one-time fees (non-recurring closing costs, such as title search, termite inspection, appraisal, etc.); while other fees such as homeowner’s insurance or property taxes are things you will expect to continue to pay on a regular basis as a homeowner. As part of the loan selection process, your mortgage...
Read MoreWhat Are Points and When Should You Pay Them?
Points are up-front fees paid to obtain a better interest rate on a loan. One point equals one percent of the loan amount. A lower interest rate may result in a lower monthly payment, but it is important to consider how long you intend to be in the loan, and to compare current rates to historical market trends. If you take out a $300,000 mortgage and decide to pay one point, this translates into an up-front closing cost of $3,000. Paying a point up front saves $100 a month but it will take 30 months to recuperate the cost of that point. If you decide to refinance or sell the home before the...
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