Some Important Home Mortgage Terms Explained

In the past, we have explained reverse mortgage terms. Today, we will explain some home mortgage terms:

Some Important Home Mortgage Terms Explained

Banks and other lenders offer mortgages to borrowers who want to buy homes and don’t have the required cash to make upfront payment for them. The lenders utilize the homes as collateral or security for their loans. If the borrower defaults on the contracted payments, then they can lose their homes to foreclosure. There are various forms of mortgage loans and various mortgage terms used in mortgage related discussions. You can also refer to a dictionary for home mortgage terms to have a better understanding. Following are some important mortgage terms that you would frequently come across in mortgage deals.

Adjustable Rate Mortgage

ARMs or adjustable rate mortgages usually have a fixed rate of interest at the beginning of the loan term and subsequently, they get reset to the market average. For instance, a 5/1 ARM would carry a fixed rate of interest for the initial five years and subsequently, it would get reset to the market rate every year. These loans are beneficial for those people who secure a mortgage when interest rates are escalating.

Fixed Rate Mortgage

Fixed rate mortgages come with a predetermined rate for the whole tenure of the loan. These loans are advantageous for locking in an affordable rate and for borrowers who need the security to understand that they would have a uniform monthly payment.

Annual Percentage Rate

APR or Annual Percentage Rate represents the real borrowing costs of a mortgage loan. Individuals with good credit scores typically qualify for lower APRs.

Down Payment

This is a portion of the home value that you have to pay at the beginning of the loan. A bigger down payment would lead to improved terms for the loan since it guarantees the lender that they would receive the payments.

Loan Term

The loan term is the length of time throughout which the loan has to be paid off. The higher the loan term, the less would be your monthly payments. However, if the tenure is extensive, then you would land up paying a huge amount of interest throughout the whole term of the loan.

Mortgage Points

Mortgage points or discount points are charges that you pay at the beginning of the loan. Every mortgage point is equal to 1% of the loan amount. Hence, if you are asked to pay 3 points on a $200,000 loan, you would pay $6,000. Lenders permit you to pay points or prepaid interest to lessen your interest rate.

Location is Everything in a Reverse Mortgage

This 2BR featured in the New York Times is on the market for $425,000.

Every week I read the New York Times “Property Values” column. The column features three properties throughout the country each week that are on the market for the price listed. “What You Get For… $250,000,” for example, vs. “What You Get For… $450,000.” But having watched homes of different prices and sizes be listed each week, I have come to one clear conclusion: location is everything.

During one recent week, I watched some 3-5 BR homes discussed for under $300,000, but this week, the homes listed were 4BR, 2BR, and 1BR… all for $450,000. Clearly location is at play. A 1BR in a high rise in Midtown Manhattan will almost certainly cost more than a 1BR in Lancaster, PA. A 3BR in Orange County, CA will likely go for more than one in Seattle, WA or Des Moines, IA.

When considering a reverse mortgage, location also comes into play because property values in some areas are higher than in others, as the above indicates. Some places have been hit dramatically by the burst of the housing bubble, while others have not seen their housing prices drop as steeply. Foreclosures and underwater mortgages are more common in California, Florida, Arizona, and Nevada than in most places in the Northeast.

It is a good idea to have a sense of how much your property is worth when using the reverse mortgage calculator and when evaluating your options. You may find that sales in your market are going strong and your home has not lost much of its value recently. However, you could also find that the reverse is true, is many are throughout the country.

Housing Prices Stabilize, Home Sales Increase- Is the Market Better?

The National Association of Realtors revealed today that home sales continued their increase in June, with the sale of previously occupied homes rising 3.6% from May. It was the highest number of sales since October of 2008 and beat analysts expectations by 50,000 homes. In perhaps more telling numbers, the median sales price was $181,800. While this is up from $174,700 in May, it is down from the $215,000 median sales price in June of last year.

Meanwhile, other reports are asking whether housing prices may have stabilized. The Federal Housing Finance Agency’s housing price index, based on repeat sales of the same houses, rose 0.9% in May from April. It is nearly unchanged since November (source: Wall Street Journal, front page, 7/23/09). However, the index seems to be deceiving. It does not include subprime or other unconventional mortgages, which are the source of many of the problems in the housing market and which appear to have driven down the prices throughout the country.

These signs seem to be positive for the housing industry. But jobless claims are still high, and foreclosures, new homes, and unsold properties do not seem to play a large role in these reports. While it is nice to see two indicators moving in such a positive direction, other downward indicators seem to mean that it might not be wise to get too optimistic just yet.

New Housing Starts See Unexpected Jump in June

More people are starting to build new homes again, or at least, that’s what the numbers from the unexpected rise in housing starts in June appear to show. The number of housing starts rose 3.6% (or about 20,000 seasonally adjusted starts) to 582,000 units. Even larger leaps were seen in the number of housing starts of single family homes (14.4%) and the number of permits to break ground (8.7%). Analysts had expected these values to remain unchanged from previous months.

While the number of housing starts and permits to break ground are still down around 50% from a year ago, the increase is still a sign of progress. It seems that few aspects of the real estate industry have defied analyst’s expectations recently, and the large unexpected jumps are a definite exception. Although one wonders slightly whether developers will be able to fill all their new properties, it is good to see people building homes again. Perhaps once the new properties are completed, the worst of the recession will be over.

Guest Contribution: Appraisals

Every day I talk to clients across the country confused on how appraisals work, and the ultimate value of their home. I am not an appraiser, just someone with experience reading hundreds of appraisals and understanding in broad terms how appraisers come to report the value of a home.

Today I spent twenty minutes on the phone with a pleasant woman, who is convinced that her home is worth at least $210,000. We spent much of the call going through every detail of her home, which sounds well-maintained and in great condition. I know the color of the carpets and walls in every room, the materials used in the updated kitchen, and the time that went into the landscaping.

This twenty minute tour of her home didn’t change the fact that two homes of similar square footage have sold on her street recently for under $150,000. The hard truth of the current market, full of foreclosures, and short-sales came crashing down on her Reverse Mortgage dreams. With so few retail sales recently, distress sales make up the bulk of the comparable sales and are exerting unprecedented influence on appraised values.

I am not writing this to tell horror stories about appraisals (although I have some that come to mind), only in the hope that we can all be a little more realistic about today’s real estate market. Appraisals can not take into consideration the beautifully decorated kitchen, except to perhaps slightly increase the value due to the homes great condition. Appraisers look at square footage, lot size, and overall condition of the property, number of bedrooms, number of bathrooms, and features, among many other factors. They look at comparable sales within the area within a certain time period. Unfortunately, that means that if a home down the street is the same model on the same lot as yours in similar condition it will reflect heavily on your value, even if they did not put the same amount of work into the landscaping or the interior of the home.

The appraiser’s job is not to assess the value of the upgrades made to the home, but only to compare your property’s overall condition to the overall condition of other sales in the area. Homes currently on the market have no bearing on the value until they have sold, providing a current comparable sale. Until then, the home on the market only increases property inventory which can actually reduce the value of your home.

Even experienced professionals in the real estate industry are often surprised lately by low appraisals. Please, heed my advice and research other sales in your area as well as similar properties that are pending sales to be sure you have an informed opinion of the value of your home to save much heartache and frustration, and in some cases money if the appraisal comes back lower than what is acceptable.

Bill Tennant is the Vice President of Access Reverse Mortgage in St. Petersburg, FL. He is a guest contributor to the site.

Homeowner Confidence Declines, But Most Optimistic About Future

Zillow’s quarterly Homeowner Confidence Report reveals all-time low levels of confidence in their homes, with 60% of homeowner believing that their homes have lost value in the last 12 months. However, they are still more optimistic than the reality: 80% of homes have lost value in the last year. The 60% level indicates the closest homeowners have come to predicting the reality of the market since the survey began at the beginning of 2008.

On a positive note, 74% of survey participants believed that value of their home would not decline any further, with 27% believing their home values will increase. In the Northeast, the most optimistic region, 77% of survey participants believed that the value of their home would not decrease, while 33% believe it will increase.

Therefore, although homeowners are aware of their declining property values, they seem to believe that the situation will improve. In a real estate market where so much is based on perception, this seems to be a positive sign.

States Hold Banks Accountable for Foreclosed Properties

The Wall Street Journal published a fun piece this morning about how a number of towns in CA, Indio, CA in particular, have made it a criminal misdemeanor for lenders not to keep up with foreclosed properties. The law goes after banks that have allowed properties to fall into disrepair, with concerns such as high weeds, algae in pools, and dead grass. Apparently, it has generally been effective. After at first only writing checks to pay the fines, it seems that lenders such as Countrywide, Washington Mutual, and Fannie Mae are coming into compliance.

Reverse mortgages are often a great way to potentially keep people in their homes and help avoid foreclosure, but when foreclosure is unavoidable, it is nice to see a community holding the lenders responsible for picking up the pieces.

At the same time, the Associated Press released an article on the increasingly high number of vacant homes in the Midwest, where vacancy rates in some areas are over 40% empty. Brian Bernardoni, Policy Director for Chicago’s Board of Realtors, was quoted today in the Associated Press as saying that vacant homes hurt a neighborhood’s “curb appeal,” making it that much harder for the neighborhood to recover. However, if lenders take care of vacant and foreclosed homes, preventing them from becoming refuges for squatters and keeping up the outer appearance of the buildings, the neighborhood may not suffer as much damage–in both the short and the long run.

The Great Housing Market Hope

Welcome good news: A BusinessWeek article last week announced that housing sales in some of the markets hardest hit by the financial crisis have rebounded to levels that have surpassed those reached during the housing boom. Cape Coral, FL, Las Vegas, NV and California’s Inland Empire all saw home sales in February reach rates that were 80% higher than those of a year earlier.

As mentioned yesterday, the vast majority of these sales are of foreclosed homes. The ability of first-time buyers to earn up to $8,000 in tax credits coupled with low mortgage rates and bargain prices have lured many into the market.

It’s great to see home sales increase and the number of vacant properties diminish. However, it is even greater to think of all the people who can finally own their home for the first time.