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3 types of mortgage loans for homebuyers
When it comes to getting a mortgage loan, homebuyers have fewer options than they did even a couple of years ago. In the days of the real estate boom, lenders were much more willing to float exotic loans based on risky terms, but recently they have returned to safe and sensible home financing.
Homebuyers hoping to jump into the mortgage market will find three basic types of loans, for the most part.
Fixed-interest mortgage
With a fixed-rate home loan, your interest rate remains the same for the life of the loan and the payment is split into equal monthly payments for the duration. In other words, it is amortized over the life of the loan.
The interest payments are front-loaded, however, so that during the first few years of the loan term, only a small portion of the payment pays off the principal.
Most commonly taken as a 30-year loan, fixed-rate mortgages can be shorter in duration or, more rarely, longer.
“Fixed-rate home loans can be 10 years, 15 years or 20, but most popular is the 30-year because that makes your payment the lowest,” says Floyd Walters, owner of BWA Mortgage in La Canada Flintridge, Calif.
During the height of the real estate bubble, news broke about even longer loan terms, with some mortgages being offered for a long as 50 years. Those may have been more of an urban myth than reality, says Walters.
“To be honest, I never saw a real offering for a 50-year mortgage. I did see just a few lenders offering a 40-year mortgage,” he says.
An extremely long mortgage term offers few advantages to consumers.
“On a fully amortized 30-year fixed-rate loan at 5.25 percent for $250,000, the payments would be $1,380 per month. Take that same loan out another 10 years to a 40-year note and the payments drop but only to $1,247 per month. You save $133 per month but it adds 10 years to your note with a net cost of an additional $100,000 or so,” Walters says.
Adjustable-rate mortgage
Unlike a fixed-rate home loan, which sports a static interest rate over the life of the loan, the interest rate on an adjustable-rate mortgage, or ARM, changes every year.
ARMs come in various permutations. For instance, a hybrid ARM features aspects of both adjustable and fixed-rate mortgages.
“Hybrid mortgages can be anything from a three-year, five-year, seven-year, or 10-year fixed interest rate period,” says Mark Klein, president of Pacific Coast Lending in Agoura Hills, Calif. After the fixed-rate period, the loan is amortized over the balance of the term with a rate that adjusts annually.
Conversely, a one-year ARM has no fixed-rate period. Though they are still available, they’re not widely offered, says Walters.
“It’s hard to believe there are very many people taking a one-year. I haven’t done one for years and years. It’s just not a product that feels right,” he says.
One circumstance when they might be appropriate would be in a high fixed-rate environment.
“If I could take a one-year ARM that was 1 or 2 percentage points below what I could get as a fixed-rate mortgage, and if I could get some interest rate caps built-in, I would analyze it. If we were in a high fixed-rate environment, it might appear more attractive,” Walters says.
Unlike a plain-vanilla fixed-rate mortgage, ARMs come with more jargon than most people would care to know. But it’s vital to understand the index on which the rates are based, the margin amount, and any interest rate caps (provisions in the contract that limit rate increases).
Index — An index is a published measure of the cost of money. Lenders price home loans based on the index to which the loan will be tied. There are several different indexes lenders use to calculate the rate on ARMs. Some commonly used indexes are the one-year Treasury Constant Maturity, the London Interbank Offered Rate, or Libor, or the 11th District Cost of Funds Index, or COFI.
After the initial fixed-interest period, the rate will adjust based on predetermined agreements in your note.
“The lender will say, ‘We will fix your interest rate at 4 percent for the next five years. At the end of five years, we will go out and find the value of one-year Treasury bills and add a margin to that and we will fix your interest rate on the loan for a year at a time based on that (index and margin),'” says Walters.
Margin — The margin is a set amount that will be added to the index to determine the interest rate.
Cap — The interest rate will adjust regularly, but there is a limit to the amount it can change. Typically, there will be a cap on the initial interest rate reset that is higher than all of the subsequent rate adjustments, and a cap on the amount the rate can change over the life of the loan.
“On the first adjustment with a lot of lenders, there is a 5 percent cap on the first reset and then it goes to 2 percent a year every year, with a lifetime cap of 5 percent over the starting interest rate,” says Walters.
Interest-only loan
For those buyers who need a rock-bottom payment for several years, the interest-only mortgage product, as its name implies, allows them the option of paying only the interest for the first few years of the loan.
“You can pay principal if you wish; interest-only is an option,” says Walters.
Interest-only loans are structured like an adjustable-rate mortgage.
“The most common one is the five-year fixed 30-year loan,” says Klein. “The payment and interest rate are fixed for five years and the payment could be based on only the interest payment, so you’re not paying down the principal. When it resets your payments can go up pretty significantly, even if the interest rate doesn’t change that much.”
An interest-only loan may be appropriate for homebuyers who believe their income will increase in the coming years — for instance, young families or a professional just starting out at the bottom of a potentially lucrative field such as law or medicine.
“Who they are not good for is someone who is stretching every dollar to get into a house and whose income is going to be relatively flat,” says Walters.
No matter what kind of loan gets you into a home, do your homework beforehand and make sure there are no details about the mortgage loan you don’t understand.
How Do I Choose a Title Company?
How Do I Choose A Title Company?
Most consum
ers don’t even realize what Title Insurance really is. Many consumers don’t know they even need a title company until they were told so by their bank or realtor. The fact you are actually conducting due diligence in your search for a title insurance company is an important step. First off you are on the right path to guarantee your transaction goes smoothly and you have the adequate 3rd party protection and security that you as a consumer deserve.
How Do I Choose A Title Company? Before exploring how to make such a choice lets first make sure you understand what a title company is or even does, let’s review.
So now, how do you choose the right title company? First off, you as the buyer or borrower have the right to choose your title insurance company. The decision is not up to the Seller, Realtor or Bank. Section 9 of the Real Estate Settlement and Procedures Act or RESPA “prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance.”
So there are most likely several title companies that come up as local agencies to your neighborhood. A lot to choose from right! But while most title insurance charges are state regulated and are the same across the board it’s important to know that not all title companies or individual title insurance offices are created the equal. Consider these key factors when deciding a title company to handle what is often the largest financial transaction in one’s life.
1) Company. There are many “in house” or “joint venture” title companies that possibly work exclusively with 1 real estate company, one lender or one home builder. While this obviously leads to higher efficiency within the parent company, it also creates the opportunity for price gauging. Often times a consumer will pay higher fees to such an entity and even more so get less in service.
2) Services. Closing in your home at a convenient time for you? E-Recording? The importance to these items is easy to explain. 1- Convenience to you; 2- Electronic Recording guarantees that your deed will be recorded right away as to avoid any potential discrepancies or potential fraud by past owners.
3) Fees. As mentioned previously, title insurance fees in most states are regulated by the States Department of Insurance. However, ancillary fees charged by title companies often times can create a significant difference from one company to the next. In addition to title and endorsement fees, there are recording, reconveyance, release tracking, courier, overnight delivery fees, wire fees, electronic document fees, mobile notary fees, document prep fees, etc. Additional work fees are also not uncommon. Shopping around can save you anywhere from 200-1,000 in ancillary fees depending on the County and State the transaction is in.
4) Experience: Has your escrow officer or title agent worked in the industry for 10 years or 10 days? Is the title agent an Attorney Title Company or a non-attorney title company? Some inexperienced title agents or non-attorney based firms may not be well versed in all forms of real estate transactions. Whether it’s a commercial deal, short sale, refinance, 1031 exchange, bank owned, REO, Seller Financed, Installment Sale, assumptions and wraps? Or do they have one specialty, more importantly; is it the specialty you are hiring them for?
5) Communication: Believe it or not, one of the biggest issues in the industry is lack of communication. In a business that requires communication many people are poor at communicating. How does your escrow officer or title agent communicate? Phone, email, face to face, text, fax, or all the above? It doesn’t really help to have an escrow officer that only communicates via phone if you prefer email or even text.
6) Financial Strength: Remember the title company is going to essentially place the transaction with an actual Insurer. The agent depending on the state your transaction is based in is probably just an “agent” for the Insurer. While many title companies have been around for over a hundred years, not all have. The purpose of a title company is to facilitate your escrow and provide title insurance for your most valuable asset. But will the underlying title insurer be around in a few years to pay a claim that an escrow officer with no experience and poor communication skills messed up? Ask the question, who is this being placed with? Then look up the companies rating http://www.demotech.com/01_pages/fsr/companies.aspx?t=1.
Choosing the right title insurance company is imperative to a successful closing. Many things can go wrong in a real estate transaction, it is vital that your title company be well versed in all aspects of the closing process. After all, the mark of a good company is how they respond when things go wrong.
Why You Need Title Insurance
Protecting Your Largest Investment
The single largest investment any person will ever make is usually that of a home or land. When you purchase a piece of property, you will purchase several types of insurance coverage to protect your home and personal property. Flood insurance protects against rising water and floods. Homeowner‘s insurance protects against loss from theft, fire or wind damage. And a title insurance policy protects against hidden title hazards that may threaten your financial investment in your home.
When purchasing a home or land, you are buying a piece of earth that has been owned by others before you. With over hundreds of types of “title defects”, you will want to make sure you have 100% ownership of the property you are buying and that the property is also free and clear from any potential claims that may arise after you purchase the property. This is unlike automobile, health, fire or life insurance which protect you from future events, title insurance will protect you from any events that have occurred in the past.
“How can a title failure occur?”
Ways the Chain of Title can be broken:
- Documents executed under false, revoked or expired powers of attorney;
- Deeds by minors;
- Prescriptive rights in another not appearing of record and not disclosed by survey;
- Improperly recorded legal documents;
- Undisclosed heirs;
- Defective acknowledgements due to improper or expired notarization;
- Corporate franchise taxes as liens on corporate real estate assets;
- Gaps in the chain of title;
- Deeds which appear absolute, but which are held to be equitable mortgages;
- Forged deeds, mortgages, wills, releases of mortgages and other instruments;
- False impersonations of the true property owner;
- Mistakes and omissions resulting in improper abstracting;
- Inadequate legal descriptions;
- Errors in tax records;
- And there are more…
Lenders Policy
The policy is used to insure estates or interests held by lenders as a pledge or security for the payment of a debt. (Mortgages, deeds in trust, and loan deeds are the most common types of such securities).
Most lenders insist upon title insurance with every loan because they want nothing to affect their security interest in your property. However, a lender’s title insurance policy does not protect the owner’s interest. In many instances, you must specifically request that owner’s title insurance be issued. If the lender considers title insurance to be vital to protect its interest in your property, shouldn’t you? Be sure to ask the closing officer if an owner’s title insurance policy is going to be issued to you.
A owner‘s policy lasts as long as you or your heirs have an interest in the insured property. This may even be after you have sold the property.
Depending on local practices and state law where the property is located, you may pay an additional premium for an owner‘s policy or you may pay a simultaneous issue charge – usually a smaller amount – for the separate lender coverage. You may even split settlement costs with the seller for the lender or owner‘s policy in certain states.
The title company that handles your closing will issue the title policies. Just like a life insurance policy requirement, in which you are required to take a medical physical, your property will undergo a thorough search of the public records at the county recorder’s office. Any title defects found will be disclosed to you and will require clearing before the closing date. Sometimes these title matters can be cleared easily by the title agent or an attorney may be required for legal process.
Owners Policy
Why would I need a Title Policy if my property has gone through a thorough search at the county recorder’s office and all matters, if any, have been cleared?
Quite simply, mistakes are made and things are missed. If a claim does arise, and you have an Owner’s Title Policy, your Title Agent and Underwriter will be ready to defend you in court, if necessary, at no cost to you.
Just as lenders want security with their loan policy, you should want to protect your investment with an owner‘s title policy. For a low, one-time premium you can receive an owner‘s title insurance policy to protect your property against “hidden risks” or undiscovered interests. Be sure to ask your title agent for an owner‘s policy.
Hidden Title Hazzards- Owners Policy the Last Defense
Although a title examination is conducted with great expertise and professional dedication, hidden hazards still materialize after closing, causing unforeseen and costly surprises. Examples of such hidden hazards consist of:
- A deed completed with a forged signature, which would mean no transfer of ownership to you;
- Unknown heir[s] of a previous owner who is claiming ownership of the property;
- Instruments executed under an expired or a fabricated power of attorney; or
- Mistakes in the public records
A Title insurance policy offers financial protection against these and other covered title hazards. The title insurer will pay for defending against an attack on title as insured, and will either perfect the title or pay valid claims.
Your home is your most important investment. Before you go to closing, ask about your title insurance protection, and be sure to protect your home with an owner‘s title insurance policy.