1. Taking on New Mortgage Loans
Chapter 6
Taking on New Mortgage Loans

2. Types of Home Mortgage Loans
1. Purchase Money Loan- A lender gives you to purchase your home.
2. Refinance Loan- When you pay off one or more debts by taking out a new loan. Usually it is used to lower the homeowner’s interest rate, lower their monthly payment, consolidate debts, or take equity out of their home. The loan is used to pay off the existing mortgage and a new mortgage is obtained.

3. Types of Home Mortgage Loans
3. Home Equity Loan- Typically a second mortgage on your home. Unlike a refinance loan, you do not pay off your existing mortgage with a home equity loan. The equity in the home is used as collateral for the loan. They are often taken out to make property improvements, like adding a bedroom or bathroom. There are two different types of home equity loans.
1) 1st type: You receive your loan funds in a lump sum when you take out the loan. You then make monthly payments over the term of the loan (e.g., 5 to 12 years).
2) 2nd type: Home Equity Line of Credit (HELOC) is an open-end line of credit like a credit card secured by your house. Like a credit card, you will be required to make a minimum payment each month.

4. Types of Home Mortgage Loans
4. Reverse Mortgage- The lender gives the homeowner cash based on the value of the property without immediate repayment obligation. Instead of decreasing, the amount of debt increases over time. The loan is repaid when the last living borrower dies, sells the home, or moves away permanently.

5. Key Loan Terms- P I T I
Principal- The amount of money that you have borrowed.
Interest rate – The charge applied to the principal to determine the amount of interest due.
Taxes and Insurance – Home mortgage loans almost always require you to pay the property taxes on your home and to keep the property insured.
Loan length – The length of the loan. Common loan terms for home mortgages range from 15 to 30 years.

6. Key Loan Terms
Prepayment penalties – You will have to pay a fee if you pay off the loan early. Prepayment penalties usually are effective 2 to 5 years from the date you took out the loan. Many loans do not have prepayment penalties. Before you purchase your home you should know if your loan includes a prepayment penalty.
Default and Delinquency – Every note and mortgage describe the actions that the lender will take if the borrower becomes delinquent, or falls behind, in payments under the terms of the loan.

7. Key Loan Terms
Bank Loans vs. Finance Company Loans. In general, do not refinance a bank loan with a finance company loan. Finance companies tend to make loans at higher interest rates and may include unnecessary insurance, fees, and hidden charges.
Long-Term vs. Short-Term Credit. Always look at the length of a loan and whether there is a balloon payment (that is, a very large payment that is due as the last payment). Watch out if the monthly payments for the shorter loan are the same or lower than the longer-term loan. This almost always means the shorter-term loan has a larger balloon at the end.

8. Key Loan Terms
Variable vs. Fixed Rates. In a variable–rate, the interest rate you pay can go up or down during the life of the loan. The changes in the interest rate will cause your monthly payments to change. In contrast, the interest rate in a fixed-rate loan stays the same for the full term of your loan, as does your monthly payment.

9. Finding Affordable Loans
One main goal in shopping for a mortgage loan is to find a loan that monthly payments are affordable for your budget.
A general rule of thumb, your mortgage payment (Principal (P) + Interest (I) + Taxes (T) + Insurance (I), “PITI”) >= 30 to 32% of your monthly gross income.
If your monthly gross income is $6,000 per month, your monthly mortgage payment should not exceed $1,920 (32%).
Shop around for affordable loans.
The first step is to review your credit report and credit score. If your credit score is low (under 670), you should know that most lenders will consider you to be a riskier borrower, which will mean higher interest rates for you.

10. Finding Affordable Loans
Lenders are required to provide you with a “disclosure statement” explaining all the terms for the loan, including the APR, before you sign the loan papers. Here are some questions you should ask when looking at the disclosure statement:
What is the Annual Percentage Rate or “APR?”
It represents the cost of the credit to you as a yearly rate. This will give you an idea of the size of both the interest rate plus many of the costs and fees on the loan.
What is the “finance charge?”
The total cost of the credit over the life of the loan. This is how much you are paying the lender for the use of its money over the term of the loan.
How much is the “amount financed?”
This is supposed to be the money the lender is giving you. Sometimes, this money goes to pay various fees and charges. Request an “itemization of the amount financed” or a “good faith estimate.” These will explain where your money is going and why.
Can you permanently afford the “payment schedule” for the loan?
The payment schedule shows the amount of your first payment and describes the ways your monthly payments may change. Make sure all the payments on the loan are affordable.

11. Points, Fees, Insurance, and Other Extras
What are the points and fees?
When you take out a home mortgage loan, you often have to pay points (one point = 1% of the loan amount; e.g., 1% of $100,000 = $1000), closing costs, a broker’s fee, or other up front charges. Closing costs many include title services, the preparation of closing documents, obtaining credit reports and appraisals, property surveys, inspections, loan processing and other similar charges. All of these fees provide lenders with an opportunity to take advantage of unwary borrowers by including excessive, duplicative or unearned fees. The best way to protect yourself from abuse is to shop around.
What are insurance and other extras?
Consumer loans are frequently loaded up with a lot of extras. Lenders sell overpriced extras or tack on fees and charges to their loans in order to make money.

12. About Credit Discrimination
If you are denied by banks and credit unions, or offered credit only at high rates, it is possible that you are being illegally discriminated against.
Two main federal laws, the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA) cover most credit discrimination situation.
1. The ECOA prohibits a lender from discriminating based on these factors:
Race or color, Religion, National origin, Age, Sex, Public assistance status, and Marital status.
2. The FHA prohibits discrimination in residential real estate transactions. The law protects you from discrimination not only in the rental housing market but also in the home mortgage market.

13. 12 Refinancing Rules
When in doubt, do not refinance or consolidate debts.
Do not let debt collectors pressure you into refinancing.
Never refinance unsecured debt into secured debt.
Do not turn your car loan into a second mortgage unless you would rather lose your home than your car.
Do not refinance low-interest debts with higher interest loans.
Do not include your long-term mortgage in refinancing package.

14. 12 Refinancing Rules
7. Be careful about variable rates. 8. Do not refinance loans when you have valid legal reasons not to pay that debt. 9. Be wary of claims that you will get a tax advantage from a debt consolidation loan. 10. Avoid refinancing deals that are scams. 11. If your home is collateral in a refinancing deal, remember that you have 3 days to cancel. 12. If it sounds too good to be true, it is not true.

15. Refinancing Scam- 11 tips
Be wary of anyone who contacts you about refinancing or loan consolidation.
Definitely avoid anyone who solicits loans via a “door-to-door” visit of your home.
When in doubt, check out the lender.
Never sign documents without knowing what is in them.
Avoid any offer where you sell your home with an option to buy it back.
Be careful of advertised schemes to save homes from foreclosure or of personal solicitations to help you avoid foreclosure.

16. Refinancing Scam- 11 tips
If your regular banker or credit union cannot help you, odds are that lenders and brokers who advertise cannot get you a good deal either.
Beware of anyone who wants to consolidate all of your debts into one loan.
Do not send an “application” or “processing” fee to a lender who advertises “Bad Credit, No Problem” and then asks you to call an 800 or 900 number or solicits you over the internet.
Do not refinance repeatedly with the same lender.
Do not refinance to take advantage of offers of small cash amounts or to get a gift.

17. Reverse Mortgages
The rules of reverse mortgages are different from those of traditional mortgages. In a traditional mortgage, the lender gives cash to the borrower and, in return, takes a mortgage. As the borrower repays, the amount of the debt decreases.
In a reverse mortgage, the lender gives the homeowner cash based on the value of the property without an immediate repayment obligation. In contrast to a traditional mortgage, the amount of the debt in a reverse mortgage increases over time.
The lender will look at the age of homeowner (62 years old).

18. Potential Drawbacks to a Reverse Mortgage
The costs involved in getting a reverse mortgage can be very high. Some reverse mortgages include up-front fees as high as $5,000 or more.
Anyone seeking to get a reverse mortgage must also get reverse mortgage counseling from a HUD approved counselor. There is usually a fee for the counseling.
The amount of cash you get may not really meet your needs ($50,000 in home equity may get only $151 per month).
A reverse mortgage can negatively affect your eligibility to receive certain government benefits such as SSI and Medicaid.
Some shady lenders offer very unfair reverse mortgages or conventional mortgages that look like reverse mortgages.
A reverse mortgage makes it difficult to pass your home on to your heirs after your death.