however the buyer may agree to pay more points at closing in return for a lower long-term rate. The monthly recurring payments include both principal and interest. In addition, taxes and insurance must be paid on the house. The taxes and insurance can be paid separately by you or can be included in the monthly payment of principal and interest. When consolidated, the monthly payment is called PITI (principal, interest, taxes, insurance). If you make a PITI payment to the lender, the lender must send the required payment to the insurance company and the local taxing authority. Lenders like the PITI approach because they have free use of your money and they have assurance that the taxes and insurance are being paid on the house. The interest rate charged on mortgages varies depending upon market conditions. Historically, rates have ranged between 2% to 10% and recently have been on the low end. The rate may be either fixed or variable. With fixed rate mortgages the rate remains the same over the life of the loan — normally a 15 to 30 year period. Loans that have variable rates are called Adjustable Rate Mortgages (ARMs). ARMs start out with an initial rate which is subsequently adjusted up or down depending upon market conditions. The initial rate is normally good for a 6 month to two year period. The advantage of an ARM is that the initial rate is usually low which may enable you to qualify for a higher mortgage. However, problems can arise for you if the subsequent rate adjustments result in a monthly payment which is difficult to make. With fixed rate mortgages you know the amount of the monthly payment over the life of the mortgage. 11–4. EDUCATION LOANS. A variety of financial aid sources are available to help you pay for college or career school. Loans to support post-secondary education can be grouped into two categories — government and private. Loan programs sponsored by the federal government include both student and parent loans. Since these programs are sponsored by the government, they tend to have more favorable terms regarding interest rates, payback and/ or deferment provisions. Also, federal loans do not have a cosigner requirement. The U.S Department of Education’s federal student loan program is called the William D. Ford Federal Direct Loan (Direct Loan). There are four types of loans available: a. Direct Subsidized Loans are loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school.
repossessed asset does not fully pay off the loan. These conditions are designed to benefit and protect the lender — they do nothing for you and in fact could ultimately harm you. Consequently, you need to be aware of these clauses and, if possible, ensure that they are not included in the loan contract. 11–3. HOME MORTGAGES. Most people finance the purchase of a home through a mortgage. Mortgages generally involve three types of expenditures — a down payment, one-time closing costs, and recurring monthly payments. A down payment of up to 20% of the home’s value may be required by mortgage lenders at the time the mortgage is created. The down payment represents your initial investment in the house. It provides a measure of security for the lender because if you fail to make the monthly payments, you will lose both the house and any money you have already invested. Mortgages that are backed by the VA (called VA loans) generally do not have a down payment requirement because the government is backing the loan. You may reduce the down payment requirement by purchasing Private Mortgage Insurance (PMI). However, PMI can be costly — up to 2% of the loan value. Some lenders will assist buyers in avoiding the PMI issue by splitting the mortgage loan into two separate loans which are called 1st and 2nd trusts. Closing costs are one-time expenses incurred when the mortgage is initiated. These costs vary and generally range from 3 to 8 percent of the loan amount. Typical closing costs include: a. Loan Application Fee. A fee that covers the administrative costs of loan processing. b. Loan Origination Fee. Another lender charge for loan processing. c. Appraisal Fee. Covers the cost of obtaining a certified appraisal of the property being purchased. d. Title Search Fee. Ensures that the seller actually owns the property with a clear title. This provides the buyer with the assurance that the property is free of liens or other encumbrances. e. Points. These are additional interest charges made by the lender. One point equals one percent of the loan value. A $300,000 loan with two points translates into an additional $6,000 which is due at closing. Points can often be used as a negotiating tactic when arranging the mortgage. No points is clearly best for the buyer,
CHAPTER 11: PERSONAL CREDIT
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