FAQ’s About Mortgages

The following are a list of questions an individual applying for a mortgage should think about. I have written what can be considered model answers to these questions:

Q. Will my monthly mortgage payments go up?

A. Mortgage payments will increase if the taxes on the house are included in the mortgage. Real estate taxes go up over time. Another factor that may cause mortgage payments to increase, even if it is a conventional 15 or 30 year mortgage has to do with the homeowners insurance on the house. If the homeowners insurance in being paid by the institution holding the mortgage, the homeowners insurance rates may increase over time.

Q. Will the interest rate change?

A. If the mortgage is a fixed conventional mortgage, whether it is 15 or 30 years, the interest rate will stay the same during the entire term of the mortgage. If the mortgage is an adjustable rate mortgage (ARM) the rates usually start low. The rates over time will change on scheduled adjustment dates. At the time of the adjustment date, the interest rate will be modified based on the terms of the mortgage.

Q. What does the mortgage payment cover?

A. In a conventional fixed rate mortgage, your mortgaged payment will cover payment of principle, interest, property taxes and homeowners insurance. (In some mortgages, the homeowner’s insurance and taxes aren’t paid by the institution. They are paid separately by the homeowner.) There are certain types of mortgages called interest only mortgages. In interest only mortgage situations the mortgage payment only covers the interest and the principle is not reduced by the mortgage payments.

Q. Do mortgage payments include escrowing funds for taxes?

A. In the event the financial institution is paying the taxes on the property, mortgage payments will include 1/12th of the taxes each month. Since the taxes are generally paid only once or twice a year on the property, a portion of the mortgage payments are escrowed by the bank to accumulate money to make the property tax payments when they become due.

Q. Is there a fee or penalty for prepaying the mortgage?

A. Generally speaking, there are usually no prepayment expenses and no penalties when a mortgage is prepaid. However, you need to be careful when taking out a mortgage because there are certain types or mortgage products that may carry prepayment costs.

Q. Is there an additional cost or penalty if the mortgage payments are paid late?

A. All mortgages have late payment penalties. Late fees usually are charged after a grace period. The length of the grace period to make the mortgage payment depends on each individual mortgage. You should look into how long a grace period you have before you will incur a penalty on your mortgage.

Q. What is the annual percentage rate (APR)?

A. The APR is usually higher than the actual interest rate quoted. The APR takes into consideration the cost of the mortgage, fees, closing costs, points and all other expenses related to obtaining the mortgage.

Q. Can you shop for interest rates?

A. The simple answer to this question is yes. However when you shop interest rates among various financial institutions you must be careful. Interest rates change from week to week and sometimes from day to day among financial institutions. There are different types of mortgages such as fixed rate mortgages, adjustable rate mortgages and interest only mortgages. Sometimes financial institutions quote you an introductory rate on a mortgage. These rates tend to rise shortly after closing!

Q.What is a fixed rate mortgage?

A. A fixed rate mortgage is a mortgage with an interest rate that stays the same over the entire length of the mortgage. The interest rate does not change in the event there are changes which take place in the financial market place.

Q.What is an adjustable rate mortgage (ARM)?

A. This is a mortgage that has an interest rate which is fixed for a specific period of time. The mortgage rate thereafter changes at scheduled dates related to market conditions. It should be noted the interest rate on an adjustable rate mortgage (ARM) usually starts out lower than that of a fixed mortgage rate. This makes the mortgage more attractive because it costs the homeowner less in the initial months when payments are made. The drawback of an ARM is if interest rates become very high, the mortgage rate can rise to a level that the homeowner can no longer afford to pay. When an ARM reaches the adjustment date, the rate adjusts based on the loan’s index. There are various indexes used to determine the new rate of interest. Among these indexes are the prime rate, US Treasuries or the Libor. In addition there is a margin (points above the index rate) stated in the ARM mortgage.

Q. What is an interest only mortgage?

A. This is a mortgage where the mortgage payment only pays the interest on the loan. You always owe the same amount on the mortgage no matter how long you make payments for.

Q. What does it mean when a mortgage rate is “locked in”?

A. When a mortgage rate is considered locked in, it means it is guaranteed for a specific period of time. Lock in periods run either 30, 60 or 90 days. Some banks charge a fee to lock in a mortgage. If the mortgage isn’t locked in you are floating with the mortgage rates as they exist in the marketplace.