Bernard Chambers asked:

Choosing the Right Mortgage – Mortgage Basics

There is an astounding range of commercially available mortgage products, which makes choosing the right mortgage increasingly difficult without a firm grasp of mortgage basics. Here we try to give the consumer struggling to understand the basics of what a mortgage is, how it operates, and what features are right for him or her, the basic terms and distinctions that will allow the consumer facing an all-important mortgage decision – perhaps for the first time – to begin to choose the right mortgage home loan from the thousands of mortgage products available on the market. But a word of caution – there is an incredible range of mortgage products commercially available. Before making a final decision on which mortgage is right for you, it would only be prudent to consult with an experienced and knowledgeable mortgage broker.

What Is a Mortgage?

A mortgage is a loan – but a loan that is secured, in this instance, against a home and/or piece of land. The person who borrows the money to buy a house is the mortgagor and the person, company or bank etc. who lends the money is the mortgagee. In most instances, the person buying the house will be required to pay some amount, perhaps as little as 5 per cent, as a down payment on the house or property. A mortgage from a commercial or private lender is secured to pay the balance of the purchase price. The mortgagee/lender provides the balance of the money to buy the house on the ‘closing date’ (i.e., the day the deal for the house is completed and the property ownership changes) and the mortgagor/purchaser pays back the money borrowed to purchase the house over time, usually over a number of years.

Key Mortgage Terms & Concepts

Amortization Period – A mortgage is written based on an understanding that the mortgagor/borrower will pay back the money borrowed over a number of years, rather than months. When purchasing a home that is typically worth several times what the purchaser earns in a year, it is understood that a the number of years will be needed to fully pay off the mortgage. The ‘amortization period” is the number of years that it will take to pay off the mortgage in full under the terms of the mortgage that is agreed to. The usual amortization period is 25 years, although shorter and longer amortization periods are available.

The amortization period sets out how long it will take to pay off the mortgage in monthly payments. Monthly payments consist of two parts – one part goes towards paying the ‘principal’ (the amount of money borrowed) and other part goes towards paying the ‘interest’ (the fee charged for borrowing the money.) The longer it takes to pay back the principal – i.e., the longer the amortization period – the greater the amount of interest that will be paid over the life of the mortgage.

Term – A mortgage agreement will not typically be for the full length of the amortization period. It is too difficult for either party – mortgagor and mortgagee – to foresee all the changes in financial circumstances over such an extended period. Accordingly, the parties – mortgagor/borrower and mortgagee/lender – will agree to a mortgage covering a specific number of years of the mortgage – e.g., 5 years. When the term of the mortgage expires the mortgagee is paid in full for the money that was borrowed to purchase the home. Typically, since it is anticipated that the mortgage will be paid off over the length of the amortization period, at the end of the term the mortgagor will have to negotiate a new mortgage – either with the initial mortgagee/lender or a new mortgagee. This process of ‘refinancing’ is normal, yet is an excellent way for prudent borrowers to re-examine their financial circumstances – for example, to see if their circumstances have changed so that they can shorten the amortization period and pay their mortgage off more quickly, thereby cutting down on the total interest they will pay in purchasing their home.

Fixed-Rate vs. Variable-Rate Mortgages – In a fixed-rate mortgage, the same interest rate is charged throughout the entire mortgage term. In a variable-rate mortgage the interest rate will change based on changes in interest rates that are being charged in the market.

Since interest rates do change based on the financial markets, risk is being assigned and the mortgage rates for both fixed-rate and variable-rate mortgages will reflect who is taking the risks – the mortgagor/borrower or the mortgagee/lender. When mortgage rates are relatively high it is the borrower who takes the risk that interest rates will not fall lower than the rate he or she agrees to for a fixed-rate mortgage. So when mortgage rates are relatively high, mortgagee/lenders will usually be willing to offer fixed-rate mortgages for a lower interest rate than the current interest rate for a variable-rate mortgage. The opposite is, of course, true. When mortgage rates are relatively low – as they are now – the mortgage/lender assumes the risk that interest rates will not go up. Since there is always the risk that rates will go up, a fixed-rate mortgage will have a slightly higher interest rate than a variable-rate mortgage when interest rates are relatively low. (The advantage of a fixed-rate mortgage is, of course, that the mortgagee will always know the cost of his or her mortgage payments over the term of the mortgage.)

Open Mortgages vs. Closed Mortgage – With an open mortgage some or all of the balance of the mortgage can be repaid during the term of the mortgage without a financial penalty. This is particularly advantageous, if the home purchaser has to move for employment or other reasons and if one’s financial circumstances change. Under a closed mortgage, no extra payments or changes in the mortgage can be made before the end of the mortgage term without a penalty being charged. Such penalties can be onerous for the homeowner who is forced by circumstances, such as a change of job, to relocate before the term of the mortgage expires.

Open mortgages can also prove to be very advantageous for the prudent homeowner who is able to make periodic payments directly to the principal owing under the mortgage. Each mortgage payment is split between interest costs and money that goes towards paying off the principal of the loan. If the borrower makes periodic payments over and above the regular mortgage payments that are required (the amounts and timing of which are usually set out in the mortgage itself), these payments directly reduce the amount owing under the mortgage. Doing so effectively reduces the amortization period of the mortgage, since in every subsequent mortgage payment more money will be going to pay off the principal of the mortgage and less money will be going towards the interest costs.

The Importance of Mortgage Advice

While this covers some of the mortgage basics that the consumer will need to choose the right mortgage product, it is important to note that there are quite literally thousands of mortgage products to choose from – each with its own intricacies and detailed terms. Accordingly, the prudent mortgage shopper should consult with someone with advanced expertise in the products and range of choices that are available on the market, given the borrower’s circumstances. An accredited mortgage broker will have the expertise and knowledge to assist the borrower in choosing the right mortgage for his or her situation. Moreover, since an accredited mortgage broker typically receives his or her fee from the lender, a mortgage broker with expertise and knowledge of the thousands of mortgages that are commercially available can assist the borrower in understanding and choosing the right mortgage from the thousands that are available at no cost to the borrower.

1st American Mortgage asked:


Comparing Colorado Jumbo and Conforming Mortgages

There are differences between a jumbo Colorado mortgage and a conforming Colorado mortgage and learning what those are will inform you about which Denver mortgage is the best for you. Information about your mortgage will help you as a customer, so you will be able to work out a fair deal with a lender when you are in the market for a Denver mortgage.

Jumbo & Conforming Colorado Mortgages Defined

There are two companies, named Fannie Mae and Freddie Mac that are empowered by the government to buy mortgages. Because of how they were created, Freddie Mac and Fannie Mae make the standards for the mortgage business. So they have decided what makes a conforming loan and what makes a jumbo loan.

The difference between a conforming loan and a jumbo loan is the size of the loan you are looking for. A conforming loan is the smaller of the two. The most expensive loans are called jumbo mortgages.

The boundary between the two different kinds of loans moves from year to year and stems from the mortgage and housing market. The line now for a Denver mortgage and Colorado mortgage to be considered a conforming loan is a price of less than $417,000 for a single family house with a first mortgage and an amount of $208,500 for a second mortgage. Multi-family properties will have higher limits. Any amount above this is officially a jumbo Colorado mortgage. The limit will be different in states outside of Colorado, but these amounts cover all of the state. There will be a change to the limits to Denver and Colorado mortgages because of the stimulus package.

All About Colorado Jumbo Loans

The amount of the loan is the key factor in determining if a Denver mortgages is a jumbo loan. The jumbo mortgage products in Colorado are otherwise just the same as a conforming loan. The loan terms can be changed in many different ways, including fixed rates, adjustable rates, and interest-only programs. All of it will depend on which program you sign up for when getting a Colorado jumbo mortgage loan from a lender

Don’t forget that since the market is so small for jumbo mortgages there will be a tighter rein on the qualifications. This is true of Colorado mortgages as well. Since the borrower is taking out such a large sum, they will have to meet such strict standards such as a higher credit score and lower loan to value ratios.

When you look at the price and the loan amount of the house you are interested in, you will be able to see whether or not you need a jumbo Denver mortgage or a conforming Colorado mortgage. When you know what type of loan you need, you then find a mortgage lender in Colorado who can work with you. As always, it’s best to work with a Denver mortgage lender who has experience making customers happy with their loan selections. The lender will work with you on finding the right home loan option, whether it is a conforming mortgage or a jumbo Colorado mortgage. In the end, you will be connected with the best product for you.

This article is written by J.B. of 1st American Mortgage and Loan, LLC, a Colorado mortgage lender who offers access to information on obtaining a Colorado mortgage loan as well as other information on loans inColorado online mortgage quotes, and rates through his website TrueMortgageQuote.com http://www.truemortgagequote.com).