Terms of a mortgage are all the factors of the loan that a borrower agrees to before the lender is willing to issue the loan. There are five main terms of a mortgage: the loan amount, the interest rate charged, the fees charged, the length of time before the mortgage is due, and the payment schedule. One of the ways they profit from lending to you is through the interest they charge against the amount you borrow.
Interest Rate: An interest rate is a percentage charged to the balance of your loan. Lenders are willing to lend you money because, by doing so, they make a profit.
Index: An index is a moving, economic indicator that an interest rate is tied to. Most indexes are tied to U.S. Treasury securities. If the index goes up, so does the interest rate.
Margin: A margin is a premium that lenders usually add to the index to determine the interest rate for your loan.
Rate cap: A rate cap limits the amount the interest rate can increase. Most ARMs have two types of rate caps: periodic and aggregate. A periodic rate cap limits the amount the rate can increase at any one time. An aggregate rate cap limits the amount the rate can increase over the entire life of the loan.
Payment cap: A payment cap protects the borrower from unaffordable individual payments. The payment cap sets a maximum amount for payments. If the rate increases but the payment cap prevents the borrower's payment from increasing accordingly, the rate could result in negative amortization.
Adjustment period: An adjustment period establishes how often the rate may be changed. For example, the adjustment period may be monthly, quarterly or annually.
Conversion option: A conversion option permits the borrower to convert from an adjustable-rate mortgage to a fixed-rate loan at certain intervals during the life of the loan.
An interest rate for an adjustable rate mortgage typically starts off significantly lower than a fixed rate mortgage. Because of this, an ARM can be a great way to finance a short-hold property.
Adjustable rates and fixed rates can be combined when obtaining a mortgage. You can take out a mortgage that is fixed for part of the loan term and adjustable for the rest. The shorter the loan term is at a fixed interest rate, the lower the interest rate is to begin with.
There are other factors that may increase the interest rate a loan officer quotes you from the par rate. The par rate is the going rate that all lenders are offering for a specific type of loan. If one loan officer quotes you a higher rate than another for the same loan, then he has increased your rate in order to make a larger commission. The interest rate that your loan officer quotes you is negotiable down to the par rate. Be sure to find out what the par rate is so you have a point of reference. This one point could potentially save you thousands by reducing your interest rate. However, there are increases to the interest rate that are required by the lender if the borrower is going on stated income, the property is non-owner occupied, the property has more than one unit or if the borrower's credit posed a greater risk to the lender. Your loan officer is unable to negotiate these increases down.
Most mortgage and deed-of-trust loans are amortized loans. That is, they are paid off slowly, over time, in equal payments. Regular periodic payments are made over a term of years and are referred to as a payment schedule.
An amortized loan payment partially pays off both principal and interest. Each payment is applied first to the interest owed; the balance of the payment is then applied to the principal amount. At the end of the loan term, if payments were made as scheduled, the entire loan balance and interest will have been paid in full unless a negative amortization was used. An amortization chart can tell you what your monthly payments would be for a certain loan amount, with a certain interest rate, for a certain length of term. You don't want to call your lender to find out what the mortgage payment would be for every property you are analyzing. Get familiar with how to use an amortization table. You should purchase a small pocket book amortization table, available at most book stores, so that you will have it accessible at all times. We have also provided a mortgage calculator located in the My Tools section above. This calculator is a quick and easy way to calculate amortized mortgaged payments.
A negative amortization occurs when the payment requirement is not large enough to cover all of the interest that has accrued. Instead of the loan balance decreasing, it increases. These loans are not highly recommended by our investors. They are usually used when a borrower is unable to qualify for the mortgage payments of a typical amortized mortgage. The lender will use a negative amortization loan to decrease the borrower's payments and get them qualified.
A straight loan or term loan, more commonly referred to as an interest-only loan, essentially divides the loan into two amounts to be paid off separately. The borrower makes periodic payments, usually monthly, of only interest followed by the payment of the principal in full at the end of the term. If you are not knocking down any of the principal and you end up having to pay one lump sum — the amount you started with at the end of the term — then how could this form of loan payment benefit anyone? Interest-only loans can greatly benefit the right person and the right investment. You can usually get a significantly lower interest rate with this type of loan. Due to the lower rate and the payments reduced to only the interest, your monthly payments are significantly less than an amortized loan or other payment plans. This can greatly increase an investor's cash flow on a property. True, you are not gaining equity by knocking off principal each month, but you may still be gaining equity due to appreciation. As for the enormous balance due at the end of the term, you don't need to have that ready in your bank account; you can pay it off with a new loan by refinancing your property.
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