Mortgages and Home Loans

How to buy a house that you can afford…

Key Terms

• Mortgage – home loan• PMI – Private mortgage insurance• Mortgage broker – a person who lends money

for home loans• APR – annual percentage rate (interest)• Term – length of loan repayment• Rate – same as APR• ARM – adjustable rate mortgage (aka variable

rate)• Fixed Rate – constant APR

Types of Home Loans

• Terms – most home loans vary from 15-30 years

• More recently, home loans have been made available for 50 years (stay away)

• Interest rates will be lower on shorter term loans

• Most first-time homebuyers will have a 30 year mortgage

Fixed vs. ARM• Fixed Rate Mortgage – same interest rate throughout

the entire duration of your home loan (6% at year 1, 6% at year 30)

• ARM – adjustable rate mortgage– The interest rate will adjust depending on the current

economy the Federal reserve interest rates– Most of the time, this rate will increase as time goes on– This allows people to buy homes and get lower monthly

payments for the first 1-5 years– CAUTION!!! Just because you can afford an ARM payment

in the beginning, doesn’t mean you can afford it if the rate goes up in 5 years

– Rarely would it benefit someone to get an adjustable rate mortgage

APR – Annual Percentage Rate

• Interest rates vary, but the standard interest rate is based off of the interest rate that the Federal Reserve sets

• This rate would usually be for someone with excellent credit

• Most introductory rates for home loans are between 6-7%

• As your credit gets better and you owe less on your house, you can REFINANCE with a new loan and interest rate

PMI

• Private Mortgage Insurance• Required for people who borrow more than 80%

of their home’s value• Example:

– Value of House: $300,000– Down Payment: $20,000– Loan Amount : $280,000– Percent borrowed: 93%– PMI must be paid until you have paid off 13% more of

your loan

PMI Calculation

• In the LTV column, you find the percentage that corresponds with your loan    (with 5% down, it is 95%)

• Follow this row across to the column for your type of mortgage. (this is a 30 yr fixed) • Locate your rate ( for this example it is .78)

Next, multiply your loan amount by the rate to get the annual PMI costLoan amount: $150,000Rate: .78

$150,000 x .78% or $150,000 x .0078 = $1170 per year

Finally, divide the annual rate by 12 to get your monthly paymentDivide $1170 by 12 (months) = $97.50 per month

Percentage Borrowed PMI Rate for 30-year mortgage

80-85% .32%

85.1-90% .52%

90.1-95% .78%

95.1-100% .90%

Homeowners Insurance

• Average Homeowners Insurance is based on the value of your home, the location, and items inside your home

• .6-.8% average• Premiums increase dramatically if you live in

hurricane prone areas, beaches, flood zones, or places where wild fires occur

• Calculate your annual homeowners cost and divide by 12 to find out how much you will pay per month

• $ value of home x .006-.008 / 12

Maryland Property Taxes

• Property taxes are assessed by local governments (like counties)

• Rates change by county

• Based on a percentage of your home’s total monetary value

• Average Rate - 1.014%

• Find out what that annual property tax will be for your home ($ value x .01014) / 12