This program is designed to allow sorority member, family, friends and the communities we serve to be trained on three phases of Home Ownership. Information is available on any one or all three phases

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Responsibilities that come with a mortgage

Buying a home is a big step and assuming a mortgage for that home is a big responsibility. Make sure you are ready for a financial commitment that could last several decades.

Ask yourself:

  • Are you currently in a financial position to comfortably make the monthly mortgage payment?

  • Do you have a financial cushion in case you have sudden financial difficulties (for example losing your job)?

  • Are you prepared to take on a long-term financial debt?

  • Do you know the risks if you cannot pay your mortgage in the future?

Owning a home has many benefits but it also has responsibilities. Be sure you are in a position to handle those responsibilities. If you don't think you are in the position to take on such a large financial debt, this may not be the time to buy a home. Instead, focus on getting your affairs in order and building a financial cushion so you can buy a home in the future. Taking the time before buying a home to make sure you are set up for success can alleviate much stress and many problems later.

Choosing the right mortgage

Once you decide on the mortgage you want, do your homework. Different lenders offer different rates, points, and fees. Ask around and compare. Understanding the benefits of different mortgage offerings can be a complex process. How do you figure it all out?

  1. Evaluate the pros and cons of a fixed-rate mortgage.

  2. Know all the parts of an adjustable-rate mortgage.

  3. Learn about balloon/reset mortgages.

  4. Understand how a reverse mortgage works.

Types of Mortgages

This content is not intended to provide all the information needed to make a mortgage decision. It is intended to provide a general description of types of mortgages as well as mortgage-related issues. We recommend talking to a mortgage professional or housing counselor for more details

Fixed-Rate Mortgages

Fixed-rate mortgages are the most common mortgage for first-time homebuyers because they're stable. Typically the monthly mortgage payment remains the same for the entire term of the loan – whether it's a 15-year, 20-year, 30-year, or 40-year mortgage – allowing for predictability in your monthly housing costs.

What are the benefits of a fixed-rate mortgage?

  • Inflation protection. If interest rates increase, your mortgage and your mortgage payment won't be affected. This is especially helpful if you plan to own your home for 5 or more years.

  • Long-term planning. You know what your monthly mortgage expense will be for the entire term of your mortgage. This can help you plan for other expenses and long-term goals.

  • Low risk. You always know what your mortgage payment will be, regardless of the current interest rate. This is why fixed-rate mortgages are so popular with first-time buyers.

There are additional considerations to be aware of with fixed-rate mortgages:

  • Your mortgage interest rate won't go down, even if interest rates drop, unless you refinance your mortgage.

  • Because the interest rate may be higher than other types of loans such as adjustable-rate mortgages, you may not be able to qualify for as large a loan with a fixed-rate mortgage.

  • While your actual mortgage payment will not change, your total monthly payment can occasionally increase based on changes to your taxes and insurance. In many cases you can choose to pay these costs as part of your monthly payment through an escrow account that your lender keeps for you.

Interest-Only, Fixed-Rate Mortgages

If you choose an interest-only option for a fixed-rate mortgage, the term of the loan is divided into two periods. During the first period, your monthly payment is lower because you pay only interest and no principal. In the second period, you pay both. For example, on a 30-year fixed rate mortgage, you might make interest-only payments for the first 10 years, and then pay both principal and interest for the remaining 20 years. The actual principal of the loan (the amount you borrowed) will be paid off in the second period.

While interest-only loans can free up cash for other purposes during the initial period of the loan, you should remember that during the interest-only portion you will not be reducing the principal amount you owe. When you begin paying both principal and interest in the second period of the mortgage your monthly payments will be significantly larger.

As with all interest-only mortgages, interest-only, fixed-rate mortgages are not for all borrowers, and should be offered appropriately only to borrowers who:

  • Clearly understand that their payments will significantly increase when principal and interest payments begin.

  • Qualify for this type of mortgage.

  • Are able to make payments at the fully amortized rate (the second period of the mortgage).

Other Fixed-Rate Mortgages

Biweekly mortgages are mortgages that set up the payment differently. Instead of paying your mortgage once a month, you pay half the monthly mortgage payment every two weeks – which equates to 26 payments a year. A biweekly mortgage allows you to pay off your mortgage faster because you are making the equivalent of one extra monthly payment every year of the loan.

Biweekly mortgages are not offered by every lender and are not for every borrower; and they do require discipline since an additional payment is made every month.

Note that after you begin paying on your loan, some lenders will offer you, for a fee, the option of changing to a biweekly mortgage or some other payment schedule advertising that it will ultimately save you money in interest payments. Be aware that most mortgages allow you to make additional payments of principal at any time (and save the same amount over the life of the mortgage) without having to pay a fee for the service of paying on a different schedule.

Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARMs) are popular because they usually start with a lower interest rate and a lower monthly payment. However, the interest rate can change during the life of the loan.

It's important to understand the specifics of an adjustable-rate mortgage:

  • Adjustment periods All ARMs have adjustment periods that determine when and how often the interest rate can change. There is an initial period during which the interest rate doesn't change – this period can range from as little as 6 months to as long as 10 years. After the initial period, most ARMs adjust the interest rate periodically.

  • Indexes and margins At the end of the initial period and at every adjustment period, the interest rate can change based on two factors: the index and the margin. Interest rate adjustments are based on a published index. There are many indexes but some commonly used for ARMs are the London Interbank Offered Rate (LIBOR) and the U.S. Constant Maturity Treasury (CMT). Indexes reflect current financial market conditions, which is why your ARM interest rate can change at each adjustment period. The margin is the percentage that can be added to the index. Based on these two factors, the interest rate on your mortgage can increase or decrease. This will cause changes in your monthly payments. Remember, if the interest rate on your mortgage increases, your monthly payment will also increase.

  • Caps, ceilings, and floors All ARMs have rate caps, also known as ceilings and floors. Caps decide how much the interest rate can increase or decrease at each adjustment period and over the life of your loan. For instance, a 10/1 ARM with a 5/2/5 cap structure means that for the first 10-years the rate is unchanged, but on the eleventh year (the date of first adjustment), your rate can increase by a maximum of 5 percent (the first "5") above the initial interest rate. Every year thereafter, your rate can adjust a maximum of 2% (as noted by the second number "2"). But, your interest rate can never increase more than 5 percent (the last number, "5") throughout the life of the loan.

  • "Hybrid" ARMs This type of ARM has a fixed interest rate for a certain period of time and then the interest rate adjusts for the remainder of the loan, like a conventional ARM. There are several types of hybrid ARMs, such as the 10/1, 7/1, 5/1, and 3/1. The first number (10 for example) is the length of the initial period, during which the interest rate doesn't change. The second number (1 for example) is how often the ARM is adjusted after the initial period. So, the interest rate on a 10/1 ARM won't change for the first 10 years, but can change in the eleventh year and be adjusted every year after that up to a maximum amount.

There are additional considerations to be aware of with adjustable-rate mortgages:

  • Because the initial interest rate is usually lower than a fixed-rate mortgage, you may qualify for a larger loan amount. If interest rates are high when you get your mortgage but drop during any adjustment period, your monthly payment may decrease. But a decrease is very unlikely, so don't base your choice of mortgage on this.

  • An ARM with a low initial interest rate and an initial adjustment period after 5 or 7 years can save you money.

  • ARMs can, and often do, have interest rate increases at adjustment periods. You may have an increase in your monthly mortgage expense after adjustment periods.

Balloon/Reset Mortgages

Balloon/reset mortgages have monthly mortgage payments based on a 30-year amortization schedule, but the entire mortgage balance is due at the end of the 5- or 7-year term, unless you choose to reset your mortgage at the current rates. So you have the advantage of a low monthly payment, like someone with a 30-year loan, but you must pay off the loan at the end of the specified term or exercise your reset option at the end of the term. Many borrowers think of balloon/reset mortgages as "two-step" mortgages.

Many balloon mortgages have a "reset" option. That means you can reset your mortgage interest rate at the market rate for the remainder of the amortization period. This option is typically only available if:

  1. • You're still the owner and occupant of the home.

  2. • You've paid your mortgage on time for at least a year prior to the balloon note maturity date.

  3. • You have no other liens against the property.

  4. • You've satisfied any other conditions of the reset.

You may also qualify to refinance your balloon/reset mortgage. There are additional considerations to be aware of with balloon/reset mortgages:

  1. • If you plan to sell your home before the maturity date of the balloon/reset mortgage, this type of mortgage may be a good option. But, keep in mind that if you end up staying in your house when the loan matures, you will need to reset or refinance the mortgage.

  2. • Balloon/reset mortgages usually come with a slightly lower initial rate than most other mortgage types. You may qualify for a larger loan amount with a balloon/reset mortgage than you would with an ARM or fixed-rate mortgage.

  3. • If interest rates increase during the term of the balloon loan, you may have a large increase in your monthly payments when you reset or refinance your mortgage

What the numbers mean.

There are two types of balloon/reset mortgages: 7/23 and 5/25. The two numbers together are the total number of years the payments will be based on (30). The first number (7 or 5) is the number of years before the balloon maturity date

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