Real estate Mortgage in USA

To buy a house usually involves a loan (mortgage) problems, here I introduce you a number of terms and basic knowledge of mortgage.

Popular speaking, Real estate Mortgage means that you borrow money from a bank to buy a house, and then you returned interest-bearing monthly to the bank. We give a simple example, suppose you want to buy a USD500,000 house, you have USD10,000, short of 40,000, you have to borrow money from banks. After you get the house with the money you borrowed from the bank, you have to pay back the money to the bank every month. As for how you should pay back every month, it depends on what kind of real estate mortgage you are using.

There are 2 Mortgage, one is a fixed payment, another is ARM (Adjustable Rate Mortgage)

> Fixed payment, the name suggests that the monthly payment is fixed. Commonly 30 years or 15 years, also 20 and 40 years, but rare. Again the example, assume that the man who loans $400,000 using a 30-year Fixed real estate mortgage, interest rate is 6.25%, then his monthly mortgage payment is $ 2,462.87, he have to pay this amount each month until paid, If he had just paid $ 2,462.87 every month, then his mortgage will be repaid in 30 years. In general, the 15-year’s interest rate is slightly lower than the 30-year’s (probably 0.25% -0.5% lower or so), but due to short cycle, so monthly payment will be higher. Therefore, the weathy are more likely to use 15-year real estate Mortgage, still that example, if the other constant, and replaced with 15-year, monthly payment would be $ 3375.43, so that the mortage will be full paid in 15 years.

ARM, this type of mortgage, the monthly payment is not fixed, it will plus or minus with some kind of benchmark rate (usually LIBOR rate). Hybrid ARM is the most common ARM, the rate of this ARM is fixed in the first period of time, after that period, it is a floating rate. In order to promote ARM, banks tend to offer a initial fixed-rate lower than the 30 or even 15-year’s fixed rate, commonly known as teaser rate. The period of this initial fixed-rate is generally 3 years or 5 years (there are also 1 year, 7 years or 10 years). After this period, the rate usually adjusts once a year, it is generally abbreviated as 3/1 ARM, 5/1 ARM, etc. To give an example to explain it, assuming the teaser rate of a 3/1 ARM is 5.75% in the first three years, in the future is LIBOR +200 bps, according to this term, in the first three years, you pay $ 2334.29 per month. After that three years, your interest rate becomes floating, LIBOR rate + 2%. If the LIBOR rate is 5% in that year, you have to pay monthly payment at 7% interest rate in the coming year, will be much higher than $ 2334.29. Of course, if the LIBOR rate is 3%, you only need to pay in accordance with 5% on it. Rate will adjust once a year in accordance with the LIBOR rate of that time, until the mortgage is fully paid. We can see that ARM will be more risks, monthly payment may fluctuate greatly.

It’s necessary to emphasize that the calculation method of mortgage principal and interest is different from debit, it is necessary to elaborate on. To figure out this problem, we need to introduce two concepts: Prepayment and Curtailment. Generally speaking, you borrow money from banks to buy a house, as the borrower of the real estate mortgage, you will have an option, this option gives the right to pay more and even fully paid the mortgage at any time. If you paid in full before the deadline, that is prepayment, if you just pay more month by month, then called curtailment (also known as partial prepayment). It is worth mentioning that in some mortgage agreements, there may be prepayment penalty, If it’s prepaid in 3 years or 5 years, then there will be penalty, beware of this detail when applying for a mortgage.
Mortgage Amortization. Now we use an example to illustrate this Mortgage Amortization.
Suppose a 30-year mortgage, amount $400,000, interest rate is 6%, According to the formula, monthly payment is $ 2398.20. The $ 2398.20 is composed of two parts, one part is principal pay down (the principal), the second part is interest. Let us first look at the first month, beginning balance is $ 400,000, so the monthly interest is $ 400,000 * (0.06/12) = $ 2000. So, among the money you pay, the $ 2000 is interest and the $ 398.20 is the principal. Next months, the beginning balance becomes ($ 400,000 – $ 398.2) = $ 399,601.80. Of course, if you say I have a little spare cash this month, I would like to pay more (curtailment), so you pay a $ 250 more, then next month’s beginning balance would be ($ 399,601.80 – $ 250) = $ 399,351.80. Then, the scheduled payment of the second month is still $ 2398.20, but you interest becomes $ 399,351.80 × (0.06/12) = $ 1996.76. The principal becomes ($ 2398.20-$ 1996.76) = $ 401.44. Of course, in fact, everyone is most interest in Mortgage Rate, we all want to get a lower Mortgage Rate. Let’s take a look at what factors will affect the Mortgage Rate.

1. Mortgage Type: In general, the 15-year’s interest rate is lower than the 30-year’s, Teaser rate of ARM is lower than the Fixed Payment.

2. LTV Ratio (Loan-To-Value Ratio), is to take your Loan Amount divided by the value of your house. Less than 80% of (in other words, down payment is more than 20%), rate will be lower. More than 80%, in addition to the higher interest rate, generally you will be required to pay an additional Mortgage Insurance.

3. Income Ratio: means the monthly mortgage payment divided by monthly income, income may be before tax (front ratio), or after tax (back ratio). The ratio should better lower than 28% (before taxor), or 36% ( after tax).

4. Loan Amount: The U.S. government provides for a conforming balance, the current value is set at $ 417,000. If the Mortgage amount is higher than this value, the interest rates will be higher, otherwise will be lower. In general, this value will be adjusted once in 2 or 3 years.

5. Credit Score: the widely used is FICO score, in general, if the FICO is above 660 will be OK, mabove 720 will be better credit. Less than 600 is so-called subprime mortgage, the interest rate will be much higher than the than that of 720.

6. Documentation: This refers to the provision you can provide, such as bank letter, proof of income, etc., if you can provide all the documents, your interest rate is lower. On the contrary, if you are self employed, you can not provide proof of steady income, your interest rate will be higher. Of course, interest rate is related to many other factors, such as the type of house you bought, you buy the house for investment or to live, and so on, but those are not the dominant factor, I will no longer describe them here.

7.The next problem is what will happen if you do not pay or can not pay. That which involves a lot of legal issues.