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When we say basic we really mean basic.... |
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 Mortgage loans are used to pay the difference between the purchase price and the cash available for a down payment. |
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| A person with $15,000 in cash |
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$15,000 |
| needs a $85,000 mortgage loan |
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+ 85,000 |
| to buy a hundred thousand dollar home |
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$100,000 |
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- Mortgage lenders charge a fee for the use of their money. The biggest fee is the interest, expressed as an annual percent of the loan and typically falls in a range between a low of 5% and a high of 12%.
- Lenders and brokers also charge application fees, credit report fees, appraisal fees and the mysterious points. These are sometimes lumped together as an origination fee.
- The annual percentage rate (APR) combines the base interest rate with points and other fees to provide a figure to compare different loans.
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Fixed or Adjustable ?
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Most of us are familiar with Fixed Rate Mortgage Loans, loans where the interest rate and the monthly payment are fixed for the life of the mortgage (usually 30, 20 or 15 years). |
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Adjustable Rate Mortgage Loans (ARMs) have lower initial interest rates but these rates may change as often as every six months. |
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At an interest rate of 7.5% The 30 year, fixed rate mortgage is paid back in 360 (30x12) monthly payments of $594 each. |
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The 15 year mortgage is paid back in 180 payments of $787, |
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or almost $200 per month more than the 30 year mortgage (which is why few people choose 15 year mortgages). |
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When we look at total payments for the same $85,000 mortgage we see that total interest on a 30 year mortgage is almost twice the total interest on a 15 year mortgage:
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Mortgage
Term |
Total
Payments |
Total
Interest |
| 15 year |
$141,660 |
$56,660 |
| 20 year |
$164,160 |
$79,160 |
| 30 year |
$213,840 |
$128,840 |
With a 30 year mortgage, the borrower pays $594 per month for 360 months for a total of $213,840: ($85,000 to repay the principal plus $128,840 in interest ! ) |
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- A 15 year mortgage loan is usually the least expensive way to to go, but only for those who can afford the larger monthly payments.
- If you plan to keep the house for ten or more years, look at our calculation of monthly housing cost and consider a 15 year mortgage loan.
- Most people will move in eight or less years. For these folks the lower monthly payments of a 30 year mortgage loan might be a better choice. An adjustable rate mortgage loan might even be cheaper. Look at our calculation of monthly housing cost.
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Mortgage: a definition
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Most people use the word mortgage (improperly) to refer to a mortgage loan. |
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| The mortgage is actually a piece of paper, like an IOU. It is the document you sign and hand over to the lender in exchange for a mortgage loan. |
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| The document called a mortgage, gives the lender the right to take possession of your property if you default on repayment of the mortgage loan. |
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| The borrower is called the mortgagor, because it is the borrower who gives the mortgage to the mortgage lender. |
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Basic Mortgage Interest
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| Interest rates rise and fall like the stock market and are just as unpredictable.
One popular index of short term interest is the rate banks offer for six-month certificates of deposit (CDs); another is the interest on Treasury Bills (T-Bills). |
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| Mortgage lenders make a living by charging about 2.5% above the publicly quoted interest rate. Example: if six month CDs are at 5% most lenders are charging 7.5% (5% + 2.5%). |
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Short term rates tend to be lower than long term rates because lenders believe they take a greater risk when lending money for a long time.
- 15 year fixed rate mortgages typically have interest rates .5% lower than 30 year fixed rate mortgages.
- Adjustable Rate Mortgages (ARMs) quote rates only for the first two or three years of the mortgage term. Interest rates for those first years can be significantly lower than equivalent fixed rate loans, but can increase substantially in subsequent years.
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| 30 year fixed rate mortgages have higher rates but offer stability: the borrower knows the amount of his monthly payment for the entire 30 years. |
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Mortgage Application and Processing Fees
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| Most mortgage lenders charge $200 to $400 as an application fee. |
- Partly, this is to discourage applications from people who just want to find out how much they can borrow.
- Mainly, it is to cover the lender's costs and keep them from losing money on applications that don't become loans.
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| A few lenders will return the application fee to people who take out a loan. |
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Credit Report Fees
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| Expect to pay between $25 and $75 for the lender to obtain copies of your credit report |
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Have you paid your bills on time ?
Your mortgage loan will not be approved if you have a poor payment history.
Get a copy of your credit report and correct any errors before you apply for a mortgage. Equifax or CreditReporting.com will both provide a copy of your credit report for as low as $10 or as high as $40.
You are entitled to a free copy of your credit report from any lender who refused you credit based on information in the credit report. |
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Appraisal Fees
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| Home appraisal fees range from $200 to $500 depending on the size and value of the property. For this fee the appraiser inspects the property and the neighborhood and gives his professional estimate of the property's market value. |
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Why an appraisal ?
To confirm that the house you are buying is worth the purchase price you have agreed to pay.
The mortgage lender does not want to get stuck with a house worth less that what was loaned.
Try the Electronic Appraiser
 for instant appraisal results |
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Points charged for a mortgage loan
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| Quoted as a percent of the mortgage loan, points are a form of interest that must be paid up-front at the time that you complete the purchase of your house (at the closing). |
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| One point is equal to 1% of the loan amount. One point on a $85,000 mortgage loan would be (.01 x $85,000) or $850. Two points would be $1,700. |
- Higher points should mean a lower interest rate for the life of a fixed rate mortgage loan. If you have the cash to pay more points the lender should give you a lower on-going interest rate.
- Lower points usually mean a higher interest rate for the life of the loan. Beware of "no-point" loans. Zero points usually mean a higher overall interest rate.
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Annual Percentage Rate (APR)
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| Developed to compare different mortgage loans, the APR states the total annual cost of a mortgage as expressed by the actual rate of interest paid. |
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For example: to compare two 30 year mortgage loans for $85,000
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Base
Interest Rate |
Points |
Fees |
| Mortgage loan 1 |
7.5% |
1.0 |
$280 |
| Mortgage loan 2 |
7.3% |
1.6 |
$415 |
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| The APR combines the base interest rates (7.5% and 7.3%) with the points and all other loan fees to produce a single interest rate to compare the two mortgage loans. |
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| The APR is higher than the base interest rate for all loans that have points or fees. |
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