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Note
This is the evidence of the debt. It shows the amount you borrowed, the term
of the loan, the interest rate, the monthly payment, and any other terms
applicable to the loan.
Deed of Trust
(Used in Washington) This
is the legal document that secures the loan and gives the lender a legal claim
against your home in the event you default on paying back the note. Your home is
the collateral for the loan.
Term
This expression is used to define the length of time you have to pay back
the loan. The term of the loan is called the amortization period. Most loans
generally run for 30 years, but can be as short as 10 years. Assuming equal
interest rates, a fully amortized 30-year loan will have lower monthly payments
than a fully amortized 10-year loan, but the total amount of interest you pay
will be greater for the 30-year loan than for the 10-year loan. In the initial
period of the loan, most of your payment will go towards paying interest, but as
the loan approaches the end of its term, most of the payment will go towards the
principal. Loans that do not fully amortize over the term of the loan are called
“balloon payment” loans. This means that whatever principal balance remains
on the loan at the end of its term is payable at that time. For example, if you
have a loan that amortizes over 30 years, but matures in seven years, whatever
principal remains on the loan is all due at that time. Balloon payment amounts
can be quite a shock, especially if you are unprepared to pay the amount due at
that time.
Fixed versus variable interest rate loans
Loans generally contain either a fixed interest rate or a variable interest
rate. In a fixed interest rate loan, the interest rate remains constant for the
full term of the loan, so your monthly payments will not change. In a variable
interest rate loan, the interest rate can change based upon the movement of the
index to which the interest rate is tied, so your payments can go up or down
depending upon which way the index moves. The 30-year fixed rate loan is the
most popular of all of the loans made by lenders, but when interest rates are
high, variable interest rate loans are sometimes the only means of qualifying a
borrower for a loan. There are many different hybrids of the fixed and variable
interest rate loans, but you generally won't see them very often.
“Conforming” vs “Jumbo” loans
Fannie Mae and Freddie Mac are two private mortgage companies that buy loans
from lenders. Fannie Mae and Freddie Mac will only purchase loans up to a
certain limit, called the “conforming” loan limit. Any loan greater than the
conforming loan amount is called a “jumbo” loan, and generally carries a
higher interest rate. Fannie Mae and Freddie Mac buy loans so that banks and
savings and loans continually have funds to lend.
Points
A point is equivalent to one percent of the loan amount. For example, if you
are getting a $500,000.00 loan and paying one point, that point will cost you
$5,000.00. Points are really just pre-paid interest, and lenders will generally
reduce a loan's interest rate by a certain amount based upon the amount of
points paid.
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When shopping around for a loan, it is
always best to talk to a number of different lenders. Each lender has different
programs designed to help you buy a home, depending upon whether you have a
small or large down payment, or small or large monthly income. Your Realtor can
help you find lenders that are active in the real estate market and have good,
competitive loan products.
The information presented here is for informational purposes
only and should not be interpreted as tax, legal, or investment advice.
Individual cases are all different, so this information should be used only in
conjunction with the appropriate professional advice.
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