Houston Mortgage First-Time Homebuyer – Frequently Asked Questions (FAQ) – Part 4

Part 4: Understanding the Basics of Mortgage Loan Financing

If you plan to purchase a Houston home and you do not have enough money in savings to make the entire purchase, you will likely need to take out a Houston mortgage loan to cover the cost of buying a home. Before you start comparing Houston mortgage loan offers, however, it is important to gain a solid understanding of Houston mortgage basics. Here are some of the most Frequently Asked Questions (FAQs) as they relate to Houston mortgages.

What is a Houston mortgage?

A Houston mortgage is a type of loan used to purchase real estate. The Houston mortgage lender has a lien, or legal claim, to the property until the full debt is repaid. The debt includes both the principal cost of the property, which is the amount that was borrowed, and the interest.

What is the Loan-to-Value, or LTV, ratio?

The LTV is the amount of money you are borrowing compared to the value of the home. Every loan has an LTV limit that determines how much you can borrow to purchase the property. For example, if the home has a 95 percent LTV, you could borrow up to $95,000 on a home that is valued at $100,000 and the rest would have to be paid out of your pocket as a down payment on the home. The higher the LTV, the less you will need to pay out of your own funds. To protect themselves, most lenders will require borrowers to take out a mortgage insurance policy if the LTV is 80 percent or higher.

What Types of Houston mortgage loans are available?

There are two primary types of mortgage loans to choose from: Fixed Rate Mortgages and Adjustable Rate Mortgages (ARMs). With Fixed Rate Mortgages, the interest rate and the payments remain the same throughout the life of the loan. Therefore, this is a good option for those who want their mortgage payment to be predictable and unaffected by rate changes. With ARMs, on the other hand, payments may increase or decrease according to changes in Houston interest rates.

Those who are interested in an ARM may select from several different types. Some of these include:

  • Balloon Mortgage – offers a very low rate for a period of time, after which time the balance is due or must be refinanced. This initial low-rate period typically lasts for 5, 7 or 10 years.
  • Two-Step Mortgage – the interest rate is adjusted just one time and then remains the same for the lifetime of the loan
  • Index- or Margin-linked ARMs – the interest rate changes on a periodic basis according to the current index or margin

Since the borrower is assuming a bit of a risk when taking out an Adjustable Rate Mortgage, this type of loan typically offers a lower initial interest rate than a Fixed Rate Mortgage. As such, the initial monthly payments are usually lower and the buyer may be able to qualify for a larger Houston mortgage loan. If you are confident your income will increase steadily over time or if you think you may be moving in the near future and are not concerned about possible rate increase, an ARM may be a good option for you to consider.

What should I do if I have a Fixed Rate Loan and the interest rates fall?

If interest rates fall significantly, you may want to consider refinancing your Houston area home. Most experts agree it is worthwhile to refinance a home if Houston mortgage rates fall at least 2 percent and you plan to remain in the home for at least another 18 months.

What are the advantages and disadvantages of 30- versus 15-year loans?

While some Houston mortgage lenders might offer an array of term lengths to select from, 30- and 15-year terms are the most common. If you take out a 30-year loan, your payments will go primarily toward paying off interest during the first 23 years of the loan. As such, you can expect to receive a larger tax deduction. 15-year loans, on the other hand, typically offer a lower interest rate. Furthermore, since early payments go toward paying off principal, you build equity far more quickly with a 15-year loan.

What factors will affect the cost of my monthly mortgage payment?

Your monthly Houston mortgage payment will be determined by several factors. These factors include:

  • The amount of your down payment
  • The total amount you borrowed
  • Your interest rate
  • The length of your repayment term
  • Your payment schedule

What costs are included in my monthly mortgage payment?

Your monthly mortgage payment will include payment toward your principal as well as your interest. Most Houston mortgage lenders also include homeowner’s insurance and real estate taxes as part of the monthly mortgage payment. If you are required to carry mortgage insurance, these premium payments will also be included in your mortgage payment.

Can I pay off my Houston mortgage loan before it is due?

Yes. If you pay extra each month or if you make an extra payment at the end of the year, you can pay your mortgage off faster. If you choose to send in extra money, however, be sure to specify that the extra money is to go toward paying down your principal. Some lenders will assess a prepayment penalty if you pay your loan off early, so be sure to ask for details before deciding if this is a good step for you to take.

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