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Q&A: An Introduction to Mortgage Terms

The world of mortgages can seem overwhelming and daunting. Fortunately, My Hard Money Lenders highlights key mortgage questions and answers to help demystify the current loan industry.

  • How often can a borrower refinance? Borrowers can refinances as often as they would like, but it’s important they make sure that the traditional costs associated with a refinance not only lower the monthly premiums, but also allows them to recoup any out-of-pocket expenses while they live in the home. For example, if a refinance costs $2,000 out-of-pocket and lowers the monthly payment $500 a month, it would only take four months to recoup these fees.
  • How long does a buyer have to wait to purchase a home after a previous foreclosure? While most time frames can be reduced if extenuating circumstances apply, the general rule of thumb is as follows: The VA requires two-year waiting periods, FHA three years and Fannie May and Freddie Mac seven years.
  • What are loan points? Loan points average around 1-percent of the entire mortgage balance. These points are typically purchased in exchange for a lower rate – often around an eight to one-quarter percent. Borrowers need to be careful when purchasing points, as they need to base their decisions on how long they intend on living in the home. If the out-of-pocket costs associated with purchasing points exceed the intended loan duration (for example, if someone plans on moving or refinancing within five years), purchasing points is not advisable.
  • Should borrowers take out adjustable rate mortgages? These types of mortgages are also known as an ARM and involve 3/1 or 5/1 terms. While ARMs feature lower monthly payments, they are typically only recommended for people that plan on living in a home for a couple years. Once the terms of the ARM expire, the interest rate skyrockets, increasing an average of 2-percent. ARMs are extremely risky for any long-term investment and were particularly damaging to homeowners that couldn’t afford to make higher interest rate payments when the real estate bubble burst in 2006.
  • If a borrower takes out a 30-year, fixed-rate mortgage, locked in at 3.5-percent, when will the payments start being applied to the principle loan amount instead of the interest? With a rate of 3.5-percent, 35 cents of every $1 goes towards the loan’s balance. This amount increases as the loan matures; however, it’s not until the 123rd mortgage payment that half or more of the mortgage amount is applied to the loan’s principal. The higher the rate, the longer it will take a borrower to have the payments be applied to the balance instead of the interest.

My Hard Money Lenders specializes in real estate financing for investors. They offer fast loan funding, including bridge loans, apartment building loans and commercial building loans.

 

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