Essentials You Must Know about your Mortgage Loan
If there is one lesson that has hopefully been learned from the housing crisis it is the
importance of making sure you understand the terms of your mortgage loan. Even so, there
are still many people who fail to consider the ins and outs of their home loan because they
feel it is too complex. Perhaps even more disturbing is the fact that most buyers spend only
a small amount of time researching the options that are available to them when it comes to
mortgage loans. Considering the fact that your home is usually the single largest purchase you
are going to make in your lifetime, it certainly makes sense that you should spend some time
understanding the type of loan you have and the terms of your mortgage loan. It is also crucial
to spend an ample amount of time shopping around and comparing the types of mortgages and rates
that are available to you. Below you will find a guide to essential elements about your home
mortgage you must be aware of.
Is your Mortgage Fixed-Rate or Adjustable?
It is always important to be sure you are certain about whether your mortgage loan has an
adjustable rate or a fixed-rate. The quickest and easiest way to determine what type of mortgage
you have is to take a look at your mortgage papers and locate the document that is titled Note.
This document should tell you whether it is an adjustable rate note or whether it is a fixed rate
note. Understanding the type of mortgage you have can be quite crucial over the life of your mortgage
loan. Many times, adjustable rate mortgages offer lower rates during the early years of the loan and
then reset to higher rates later on. When the loan resets to a higher rate your monthly mortgage rate
increases. Fixed rate mortgages, on the other hand, remain constant throughout the life of the loan;
meaning your monthly mortgage payments also remain constant.
What are the Terms if you have an Adjustable Rate Mortgage?
There are actually many different types of adjustable rate mortgages, so it is always important to
make sure you know which terms apply to your mortgage. For instance, you need to know precisely
when the interest rate will adjust. You also need to know how far up and how far down your rate
can adjust. You can locate this information by reviewing your note. One of the most common adjustment
schedules for an adjustable rate mortgage is a 2/2/5. This means that your interest rate will adjust
two years after receiving your loan and that your rate can be adjusted up or down 2% per year. The
loan cannot go any higher than 5% of your initial interest rate.
Does Mortgage Insurance Apply to your Loan?
In the event you purchased your home loan with a down payment that was less than 20%, it is likely that
you have what is known as private mortgage insurance. This is different from homeowner's insurance.
It is used to protect the lender in the event you default on the mortgage. When you have less than
an 80% stake in your mortgage loan many lenders feel you may be at an increased risk for defaulting,
thus requiring mortgage insurance. Generally, mortgage insurance will increase your monthly mortgage
payment by up to $100 per month. Once you have paid enough toward the principal of your loan so that
you have at least 20% equity you can usually have the mortgage insurance dropped. Be aware that the
lender may require an appraisal first.
Is there a Prepayment Penalty on your Mortgage Loan?
Finally, you need to understand whether there is a prepayment penalty that applies to your mortgage
loan in the event you pay it off early. In most cases the penalty will only apply if you refinance
or sell the home during the early years of the mortgage loan. There is never a prepayment penalty on
VA, FHA and USDA loans. If you haven't taken out a mortgage loan yet, but you are considering one
with a prepayment penalty because the interest rate is lower be sure to find out how long the penalty
will apply to the loan.
Understanding the basics of your mortgage does not have to be complex or confusing, but it is important
that you take the time. Not having a solid understanding of all of the terms of your loan can ultimately
cost you in the end.