Banking Law

Home Loans and Mortgages

Financing Options

There are typically three types of home loans available from commercial banks, mortgage companies, thrift institutions and credit unions:

  • Refinance, where one loan is paid off with the proceeds of a new loan secured by the same property
  • Home equity loans, which allow a borrower to get cash out of home equity
  • Home mortgage loans, where the property is pledged with a lender as collateral for a loan

A preliminary assessment of the borrower's loan eligibility by the lender, without commitment to an amount, forms a pre-qualification letter. Upon application for a mortgage loan and after review and verification of the applicant's credit history, income, and assets, the lender issues a pre-approval letter indicating that the borrower qualifies for a mortgage loan of a specific amount. An origination fee must be paid to the lender to cover the administrative costs for processing the loan application.

The cost of a loan as an annual rate (annual percentage rate or APR), the term of the loan, private mortgage insurance requirements (generally required when a down payment is less than 20 percent of the purchase price), and taxes when paid through escrow are critical factors of a mortgage. Closing costs, broker commissions, the down payment, attorney fees, appraisal costs, inspection fees, etc. also have to be considered.

The Federal Truth in Lending Act requires meaningful disclosures of credit terms by lenders. The Real Estate Settlement Procedures Act requires disclosure of information to borrowers throughout the mortgage process. The HUD-1 Statement shows the actual closing costs of the loan transaction.

Home Mortgage Loans

A conventional mortgage is where interest and amortization of a loan amount is spread over a period of time in the form of monthly payments for "X" number of years (most commonly 15 or 30 years).

Under owner carry mortgage, a seller carries back the mortgage with a first or subordinate lien on the property when a buyer fails to qualify for a loan to save on realtor and closing costs or when the seller prefers monthly cash flows.

An assumable mortgage is created by the assumption of a seller's existing mortgage by a buyer in the absence of a "due on sale" clause in the mortgage. However, the seller continues to be liable under the mortgage unless released by the lender and the lender may charge a fee on the buyer who assumes the mortgage.

A reverse mortgage enables older home owners (62+) to convert the equity in their homes to a payment option. Instead of making monthly payments to a lender, the lender makes payments to the home owner.

Mortgage Payment

A fixed rate mortgage (FRM) loan payment has a fixed interest rate over ,the life of the loan and the loan balance is amortized by fixed payments throughout its life. This option provides certainty to the borrower but could tie to high rates in a falling market.

An adjustable rate mortgage (ARM) has an adjustable interest rate at a fixed rate for the first "X" years, which is adjusted thereafter every "Y" years at market determined rates. This option is more suitable to purchasers who are likely move out of their homes in a short period and is a gamble with interest rates.

A hybrid loan is a mix of FRM and ARM and gives borrowers the benefits of both. Payments can take the form of either interest only mortgage payments where interest alone is payable for a specified number of years after which interest and principal become payable or payment option ARM, which allows a borrower to choose among several payment options each month.

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