Understanding your home financing options and mortgage features

Transcription

1 Understanding yur hme financing ptins and mrtgage features At, we understand the imprtant rle yur hme plays in yur life. That s why we are cmmitted t prviding yu infrmatin that will help yu make infrmed decisins abut yur hme financing. There s a lt f infrmatin t digest during the financing prcess, and we d like t simplify it fr yu. This guide will help break dwn sme f the cnfusing terminlgy and clearly explain the hme financing ptins that are available t yu, including the: Benefits f each mrtgage feature. Drawbacks f each mrtgage feature. Circumstances each feature is designed t meet. The infrmatin in this guide is fr hme financing prducts, unless therwise nted. We hpe this guide helps yu better understand yur hme financing ptins s yu can chse the mrtgage and features that meet yur needs tday, and in the future. Please cntact a cnsultant with any questins.

2 Table f cntents Page Intrductin Why mrtgage features matter 3 Imprtant questins t ask and answer abut yur mrtgage 5 Sectin 1: Interest rates What is an interest rate? 7 What is an annual percentage rate (APR)? 7 Hw is the interest rate determined? 7 What is a fixed-rate mrtgage (FRM)? 8 What is an adjustable-rate mrtgage (ARM)? 8 Hw d rates n an ARM adjust? 9 What is an interest rate r payment buydwn? 10 What des it mean t lck in a range f rates r flat a rate? 11 Sectin 2: Types f mrtgages What types f mrtgages are available? 12 What is a cnventinal prime mrtgage? 12 What is a gvernment mrtgage? 12 What is the Rural Hme Financing Prgram? 13 What is the Wells Farg Hme Opprtunities SM prgram? 13 What is a nnprime r subprime mrtgage? 14 What is an Optin ARM r Payment Optin ARM? 14 What is a piggy-back, cmbinatin r sim lan? 14 What is the Wells Farg Hme Asset Management SM accunt? 15 Sectin 3: The term f yur mrtgage What is a mrtgage term? 16 What is a shrter-term mrtgage? 16 What is a lnger-term mrtgage? 16 Sectin 4: Lan-t-value (LTV) What is a lan-t-value (LTV) rati? 17 What is a lw-ltv rati? 17 What is a high-ltv rati? 17 What is a cmbined-lan-t-value (CLTV) rati? 18 1

3 Table f cntents (cntinued) Page Sectin 5: Types f mrtgage payments Hw is the mnthly mrtgage payment amunt determined? 19 What are regular mnthly principal and interest payments? 19 What are interest-nly payments? 19 What are balln payments? 20 What are prepayments? 21 Sectin 6: Hw mrtgage features impact payments and equity Chart shwing different mrtgage features and their impact t payments and equity 22 Sectin 7: Hw yu make yur mrtgage payments What ther charges are included in my regular mnthly payment? 24 Are there different ways t make my mrtgage payments? 24 Hw can last-minute payments be made? 25 What if a payment r payments can t be made? 25 If I m late making a payment, is there a fee? 26 2

4 Intrductin Why mrtgage features matter The features f each mrtgage lan may have an impact n yur interest rate, the amunt f yur mnthly payment and its variability, and yur verall cst f brrwing. That s why yu shuld select mrtgage features that yu ll feel cmfrtable with ver the lng-term. Be sure yu lk beynd shrt-term benefits Sme custmers select mrtgages with features that wrk t their benefit in the shrt-term. They d this thinking that nce the shrt-term benefits end, they ll be able t refinance r sell their hme. Unfrtunately, in sme markets r fr sme hmewners, refinancing may nt be an ptin and selling the hme may be difficult. It s imprtant fr yu t knw that refinancing r selling may nt be an ptin if interest rates are higher verall, if yu cannt qualify because the market envirnment r yur persnal finances have changed, r if the value f yur hme has declined. Even if yu are able t refinance, there may be a significant cst t d s. Fr these reasns, be sure t lk beynd shrt-term benefits and carefully cnsider yur ability t manage yur mrtgage ver the lng-term. Imprtant pints t keep in mind As yu review this guide, it s imprtant t understand the many factrs t cnsider when deciding which hme financing ptin will wrk fr yu: Yur financial situatin tday and the level f certainty yu have abut yur financial future. Hw lng yu plan t wn the hme r keep the mrtgage. Yur cmfrt level in assuming the risk f ptential rate increases with certain types f mrtgages. Yur credit characteristics and yur current ability t manage yur debts and bligatins in a timely fashin. The amunt f funds yu have fr a dwn payment and clsing csts. The type f prperty yu want, its use, and its value. The kind f dcumentatin yu will need and can prvide t btain the mrtgage. Whether r nt this is yur primary residence, a secnd hme, r investment prperty. The amunt f mnthly incme remaining after paying all f yur bills. 3

5 Intrductin (cntinued) Befre yu decide n the mrtgage financing ptin that s right fr yu Be sure yu can answer all questins n pages 5 and 6 abut the mrtgage yu have chsen. Be sure yu understand yur mrtgage terms, including any fees/charges that apply. Seek any prfessinal help yu need t better understand yur mrtgage terms by speaking t yur Wells Farg Hme Mrtgage cnsultant, lawyer, accuntant, r translatr. The mrtgage features described in this guide are nt all necessarily available Wells Farg may chse t eliminate a mrtgage r feature frm its financing menu. Nt every feature will be available t every custmer. Yur cnsultant can prvide infrmatin t help yu determine what features are imprtant t yu. If yu are requesting a hme equity line f credit r lan in additin t yur mrtgage, please refer t the dcument entitled Features f Wells Farg s Hme Equity Lines f Credit and Lans fr details n the chices and features available t yu. 4

6 Imprtant questins t ask and answer abut yur mrtgage 1. Can my interest rate g up ver time? By hw much and hw ften? Adjustable-rate mrtgages (ARMs) have rates that may start lw then change ver time at prescheduled adjustments. If yur mrtgage falls int the ARM categry, be sure yu knw the adjustment schedule, plus the index and the margin n which the rate adjustment will be based. (see page 9) 2. Can my mnthly payment g up ver time? By hw much and hw ften? Payment increases can ccur n certain types f mrtgages and fr multiple reasns ther than an adjustment t yur rate. It s imprtant t knw if the mrtgage yu re cnsidering has the ptential fr payment increases because if yu can t affrd t make yur payments, yu culd lse yur hme. It s als imprtant t remember that even n mrtgages with principal and interest payments that dn t increase, yur payments fr items like prperty taxes and hmewners insurance may increase. (see pages 19-21) 3. Can my mrtgage balance g up, even if I make all payments in full and n time? There are lan prducts, called negative amrtizatin lans that allw the brrwer t make a minimum payment that may result in the mrtgage balance increasing. des nt prvide these types f mrtgages. If yu are shpping ther lenders, be aware that the lw-payment feature n a negative amrtizatin mrtgage permits yur balance t increase, even if yu make minimum payments. 4. Will any scheduled payment exceed the nrmal mnthly payment? Balln mrtgages, which are nt very cmmn, are mrtgages with a final payment that exceeds the nrmal mnthly payment, usually significantly. des nt prvide balln mrtgages. (see page 20) 5. Will my regular mnthly payment cver nly interest at any pint during the mrtgage term? Sme mrtgages allw yu t make mnthly payments that cver nly the interest accrued during the mnth fr an initial number f years. As a result, payments are lwer than traditinal payments that include principal, but they d nt reduce yur mrtgage balance and may increase substantially after the interest-nly perid ends. (see pages 19-20) 6. Will my mnthly payment include escrw payments (taxes, insurance, etc.)? If nt, will I pay a fee fr nt including escrw payments in my mnthly payment? Yes, yur mnthly payment may include an amunt t pay these additinal expenses. puts the funds yu pay mnthly int an escrw accunt t pay yur prperty taxes, insurance, r ther charges related t yur hme when they cme due. If yu want t pay these items yurself, yu might be able t btain a waiver f the escrw accunt requirement, but there may be a fee. (see page 24) 5

7 Imprtant questins t ask and answer abut yur mrtgage (cntinued) 7. Will I have t pay a fee if I pay ff the mrtgage in full ahead f schedule? Will I have t pay a fee if I pay mre than the required mnthly payment? Mst mrtgages have n prepayment fees whatsever. des nt currently prvide mrtgages that have penalty fees fr prepayment. Hwever, Wells Farg hme equity prducts may carry a prepayment fee. As yu shp fr hme financing, be sure yu fully understand whether there will be a prepayment fee, hw it will be calculated, and when it can be charged. Yu ll als need t understand if there is a prepayment fee nly when yu pay ff the full balance within a certain perid, r any time yu make a payment abve and beynd yur scheduled payment. If yu currently have a mrtgage and are abut t refinance r purchase a new hme, call yur mrtgage servicer t see if yu will have t pay a prepayment penalty r ther fees, and t determine the amunt. (see page 21) 8. Will I pay an additinal fee if my payments are late? Hw much? Late fees apply when yu d nt make a payment n time. Yur lender may, r may nt, give yu a grace perid, during which yu can pay late withut incurring a late fee. (see page 26) 9. What is my initial interest rate and what are my settlement charges? Be sure yu knw what yur interest rate is and the estimate f yur clsing csts (settlement charges), particularly when yu re shpping fr the best mrtgage package. A lwer interest rate may be presented in exchange fr higher settlement charges. In ther cases, lwer settlement charges may cme with a higher interest rate. (see pages 7-11) 6

8 Sectin 1: Interest rates Q: What is an interest rate? A: The annual rate yu pay n the funds yu brrw. Yu may have the ptin f chsing: A fixed-rate mrtgage (FRM) An adjustable-rate mrtgage (ARM) A temprary buydwn f the initial mnthly payment Q: What is an annual percentage rate (APR)? A: When yu chse yur mrtgage, yu are quted an interest rate, which may vary until it s lcked in, that establishes the initial amunt f yur mnthly principal and interest payments. Yu shuld see bth an interest rate and an annual percentage rate (APR) in varius dcuments. The APR, which is usually higher than the interest rate, expresses the cst f the mrtgage as an nging annual rate and includes certain fees, pints, clsing csts and ther expenses (even thugh they are paid at applicatin, r befre r at clsing). APRs can help yu cmpare types f mrtgages and the csts between mrtgages r lenders, but remember that the APR is different frm the actual interest rate n yur mrtgage. Q: Hw is the interest rate determined? A: Many factrs determine the interest rate n a particular mrtgage. Yur rate will reflect cnditins in the financial markets and yur mrtgage type, as well as an assessment f the risk f yur specific mrtgage prduct and yur credit. This is why a quick rate qute during a phne call t a lender r a rate pulled frm an nline r newspaper advertisement may nt prvide enugh infrmatin r reflect the interest rate yu will actually receive nce a lender has assessed yur specific circumstances. Mrtgages reflect cnditins in the financial markets. Cmplex variables affect the rise and fall f interest rates. It s mst imprtant t understand that there is n ne mrtgage rate. Rates can fluctuate daily, even hurly, with mvements in the financial markets, and by mrtgage type and mrtgage amunt. In additin, the interest rate n yur mrtgage depends n the risk yur mrtgage features represent. When lending mney t custmers t finance their hmes, lenders and their investrs take the risk that these custmers will nt pay back the mney laned t them. Lenders typically prvide lwer mrtgage rates n mrtgages that present less risk. Based n decades f lending, factrs that reduce r increase risk have been identified including dwn payment amunt, credit scre, and ther factrs. 7

9 Sectin 1: Interest rates (cntinued) Fr example: Because a custmer has mre mney invested in a mrtgage with a higher dwn payment, it is cnsidered less risky than a mrtgage with a lwer dwn payment. Custmers with higher credit scres histrically default less ften (s the lender anticipates less risk) than thse with lwer credit scres. Other factrs are similarly cnsidered: yur debt level in relatin t yur mrtgage amunt, whether yur hme is yur primary residence r an investment prperty, whether it s a single-family r multi-family hme, the mrtgage term yu need r want, the amunt f dcumentatin yu prvide, etc. Things t cnsider if yu decide t shp rates amng several lenders: A rate that s nt based n the full details f yur specific circumstances can nly be a guess. A guess yu btain tday frm ne lender versus a guess yu btained yesterday r a week ag frm anther lender prvides little basis fr an accurate cmparisn. Different mrtgage types (Sectin 2) and different mrtgage terms (Sectin 3) have different rates. Be sure t understand whether the rate yu are quted is an intrductry rate, smetimes called a teaser rate, that might rise dramatically a shrt time after clsing. Q: What is a fixed-rate mrtgage (FRM)? A: A mrtgage with an interest rate that remains the same ver the entire term f the mrtgage, regardless f hw interest rates change in the marketplace. Finance their hme when rates are relatively lw. Want the predictable principal and interest payments ver the lng-term. Seek prtectin frm rising rates and mnthly principal and interest payments. Generally, the interest rate is higher than the initial interest rate f an ARM. If the interest rates in the marketplace decrease, yur rate will nt adjust t a lwer rate unless yu refinance t a new mrtgage. Q. What is an adjustable-rate mrtgage (ARM)? A: A mrtgage with an interest rate that is fixed fr a specific perid f time then changes at scheduled dates t reflect market cnditins. The initial interest rate is usually lwer than n a fixed-rate mrtgage, making yur initial payments lwer t. The interest rate is based n a market index that is subject t change plus a margin that des nt change. 8

10 Sectin 1: Interest rates (cntinued) Market index: A published rate, such as the prime rate, LIBOR, T-Bill rate, r the 12th District COFI. Margin: The set percentage the lender adds t the index rate t determine the interest rate f an ARM. The initial interest rate is the ttal f these tw values plus r minus small adjustments made by the lender due t market cnditins. When the initial interest rate adjusts, and at each subsequent adjustment, the interest rate will be the ttal f the market index and the margin, subject t any increase r decrease limitatins, ften referred t as rate caps r flrs. After the initial interest rate perid, the interest rate can adjust up r dwn at regular intervals based n changes t the market index. Fllwing are descriptins f when the interest rate may adjust fr different ARM prducts: A six-mnth ARM adjusts up r dwn every six mnths. A 1/1 ARM adjusts up r dwn fr the first time after ne year then every year after that. A 3/1 ARM adjusts fr the first time after three years then every year after that. A 5/1 ARM adjusts fr the first time after five years then every year after that. Will mve and/r sell their hme befre the first interest rate adjustment. Want the ability t pay a lwer mnthly mrtgage payment during their first year(s) f hmewnership. Finance their hme when fixed rates are cmparatively high. Have sufficient incme t manage a ptentially increasing payment if refinancing r sale is nt an ptin. Are willing t take a chance that their interest rate will stay the same r decrease when it adjusts. If yur interest rate increases at adjustment, yu may experience payment shck if yur mnthly payments increase t an amunt yu may nt be able t maintain alng with yur ther mnthly bligatins. If refinancing r selling is nt an ptin, yu culd be at risk f lsing yur hme. Q: Hw d rates n an ARM adjust? A: When any type f ARM reaches an interest rate adjustment, the rate will adjust based n the lan s index, such as the Prime Rate, US Treasury r LIBOR, plus the margin stated in yur mrtgage dcuments. The amunt an interest rate can change at each adjustment is limited by caps that restrict the amunt the rate can increase r decrease. Fr example: Let s say yur current 5/1 ARM interest rate is 5.5%, with an index f 3.25% and a margin f 2.25%. At yur ARM s interest rate adjustment, let s say the published index is nw 3%. The 3% index rate plus the 2.25% margin wuld give yu a new, lwer 5.25% rate which wuld als lwer yur mnthly principal and interest payment. As anther example: Let s say the published index is at 5% when yur 5.5% 5/1 ARM adjusts. The index f 5% added t the margin f 2.25% wuld give yu a new rate f 7.25%. The higher rate means yur mnthly principal and interest payments will increase significantly. 9

11 Sectin 1: Interest rates (cntinued) Annual and lifetime limits (caps) at adjustment prvide sme prtectin frm extreme rate increases. Yur interest rate can never g higher than yur riginal rate plus the lifetime cap. Pay attentin t the caps because different mrtgages have different caps. Many ARMs have a cap f 2% per adjustment and a lifetime cap f 6%. Others can have a first adjustment cap f 5%, a 2% cap n subsequent adjustments, and a lifetime cap f 5%. Fr instance, the caps fr a 5/1 ARM are 5/2/5, s, the interest rate fr the 5/1 ARM that started at 5.5% can never exceed 10.5% because the lifetime cap is 5%. Yur actual margin may be higher r lwer than the examples prvided abve, based n the terms f yur mrtgage. After yu apply, yu will receive a disclsure called the Cnsumer Handbk n Adjustable-Rate Mrtgages, which will give yu mre in-depth infrmatin n ARMs. Make sure t cntact yur cnsultant if yu have questins. Q: What is an interest rate r payment buydwn? A: prvides tw ways t lwer the payment r rate n yur mrtgage: ne is permanent and ne temprary. Yu can: Permanently buy dwn the interest rate by prepaying yur interest in the frm f pints. Each pint (equal t ne percent f the mrtgage amunt) lwers yur rate by an amunt calculated by. Temprarily buy dwn yur payment fr a ne- t three-year perid. Yu can pay fr the buydwn yurself r use funds frm the builder, seller, r anther party. In the case f a permanent buydwn, have cash-n-hand t lwer all future mnthly payments, particularly if the custmer expects t stay in the hme fr mre than a few years. In the case f a temprary buydwn, are frtunate t receive mney-saving assistance frm a third party r wh have the extra funds t temprarily buy dwn the payment in the early years f their mrtgage. Seek the predictability f fixed-rate payments, but want lwer payments in the first year r lnger. Temprary and permanent buydwns must be paid fr and there may be limits t the buydwn amunt. Fr sme temprary buydwns, yu must be qualified at applicatin fr the higher fixed-rate payment after the buydwn ends. This is t ensure yu can make the higher payment when the buydwn ends. If yu sell r refinance befre the temprary buydwn ends, yu may nt recup its cst. 10

12 Sectin 1: Interest rates (cntinued) Q: What des it mean t lck in a range f rates r flat a rate? A: At, yu can lck in yur range f rates at applicatin r at a set time prir t clsing, when it will lck autmatically. The interest rate range n the day the rate is lcked will be the rate yu btain at clsing, assuming yu clse within the lck-in perid (nrmally 30 r 60 days). An unlcked rate can flat up r dwn until it s lcked int the market rate. Lck their rate knw that neither the rate nr the mrtgage will change, assuming the clsing takes place within the lck-in schedule and yur credit and the lan prgram d nt change. At lck-in, a ne-time flat-dwn ptin can be purchased in case rates fall. Flat the rate wuld have the pprtunity t btain a lwer interest rate shuld market rates decline. Flating puts yur rate at risk (shuld rates rise). If rates g higher yu may n lnger qualify fr the mrtgage amunt fr which yu ve been apprved. Lcked rates can t be lwered if market rates decline, unless a flat-dwn ptin has been purchased. 11

13 Sectin 2: Types f mrtgages Q: What types f mrtgages are available? A: Different mrtgages meet different needs. The type f mrtgage yu qualify fr impacts yur interest rate and mrtgage terms. The mrtgage types available include: Cnventinal (prime r A paper) Gvernment (FHA and VA) Rural Hme Financing Prgram Hme Opprtunities SM prgram (a prprietary prgram) Nnprime r subprime Cnventinal, gvernment, and Hme Opprtunities SM mrtgages have interest rates that are usually lwer than the interest rates with nnprime r subprime mrtgages. Q: What is a cnventinal prime mrtgage? A: The mst cmmn categry f mrtgages, smetimes referred t as A-Paper mrtgages in the industry. They cme in cnfrming mrtgage amunts (limits are set each year by the federal gvernment) and jumb mrtgage amunts (any amunt abve the cnfrming limit). They are nt insured r guaranteed by a gvernment agency, but may be the least expensive. Have gd credit histries. Want favrable rates and terms available and can satisfy cnventinal qualificatins. If yur dwn payment fr a purchase, r hme equity in the case f a refinance, is less than 20%, yu will have t pay fr private mrtgage insurance (PMI). Sme custmers may nt have the credit, incme, dwn payment, dcumentatin r prperty requirements t qualify. Sme custmers have financing needs that exceed the cnfrming mrtgage limits. Nncnfrming prime mrtgages usually have a higher interest rate. Q: What is a gvernment mrtgage? A: An FHA, VA, Farmers Hme Administratin r a state bnd prgram. The lans are generally made by private lenders, such as. The interest rates and terms are similar t cnventinal prime mrtgages. 12

14 Sectin 2: Types f mrtgages (cntinued) There may be mre flexibility in qualifying guidelines than with cnventinal mrtgages. Seek a mrtgage with a lwer dwn payment requirement. Need t use funds frm ther surces fr clsing csts. Fr a VA mrtgage, have served r are the spuse f smene wh has served in the armed frces. Nte: Yu must demnstrate yur VA eligibility, if applying fr a VA lan. The prgrams may have caps (limits) n the mrtgage amunt based n the cunty where the hme is lcated. Yu will need t pay fr the mrtgage insurance r guarantee fees. Q. What is the Rural Hme Financing Prgram? A: A prgram that prvides lw- and mderate-incme rural residents better access t mre affrdable lans. The prgram blends a 30-year fixed rate first mrtgage priced at market with a belw- market secnd mrtgage that is riginated and subsidized by the Rural Develpment Agency. Dn t have dwn payment funds. Can t prvide a cash reserve. Are lking fr mre manageable mnthly payments. Restricted t areas designated as rural. Incme limits are less than r equal t median incme fr the area. Q: What is the Wells Farg Hme Opprtunities SM prgram? A: A prgram that may accmmdate a custmer s cnstraints regarding dwn payment, incme and credit requirements, and the surce f funds required fr clsing. The interest rate is similar t cnventinal prime mrtgages, but may cst a little mre. Have lw-t-mderate incme. 13

15 Sectin 2: Types f mrtgages (cntinued) The prgram requires that yur incme fall within the limits set by area. Yu will have t pay private mrtgage insurance (PMI) if yur dwn payment r hme equity is less than 20%. Q: What are nnprime r subprime mrtgages? A: These types f mrtgages have typically accmmdated custmers with qualifying challenges by prviding an alternative t cnventinal mrtgages. des nt prvide any f these mrtgages. Interest rates are typically higher than cnventinal prime and gvernment mrtgages. T qualify, yu may need t cnsider accepting a prepayment penalty (see page 21). Q: What is an Optin ARM r Payment Optin ARM? A: des nt prvide ptin ARMs r payment ptin ARMs which generally begin with a lw teaser rate, resulting in extremely lw payments. Each mnth the hmewner has the ptin f making a principal and interest payment, an interest-nly payment, r a minimum payment that may nt cver the interest wed. If the hmewner cntinues t make nly the minimum payment each mnth, negative amrtizatin may result and the additinal interest wed is added t the principal balance. Eventually, a new payment schedule is calculated and the new mnthly payment may increase significantly. The hmewner may we mre than riginally brrwed and may n lnger be able t make the mrtgage payments. Q: What is a piggy-back, cmbinatin r sim lan? A: A first mrtgage cmbined with a hme equity lan r line f credit in secnd psitin. This is a cmmn type f financing fr a number f different reasns, depending n market cnditins. Depending n market cnditins, want t avid the ptentially higher rate n a jumb mrtgage by btaining a cnfrming mrtgage up t the permitted limit and cvering the balance f what they need t brrw with a hme equity lan/line. Have financing needs fr which the entire amunt is nt needed at nce, such as fr hme imprvements. 14

16 Sectin 2: Types f mrtgages (cntinued) Yu will need t qualify fr tw lans: the mrtgage and the hme equity lan r line f credit. Yu need t make tw payments, ne fr yur mrtgage and ne fr the hme equity lan r line f credit unless yu have a Wells Farg Hme Asset Management SM accunt, which prcesses the tw payments simultaneusly. If the cmbined lan amunt is high in relatin t yur hme s value and its value declines, yu may find yurself wing mre mney than the hme is wrth. (see high LTV and CLTV n pages 17-18) Q: What is the Wells Farg Hme Asset Management SM accunt? A: A first mrtgage clsed simultaneusly with a hme equity line f credit in secnd psitin. There's just ne applicatin and ne clsing fr the mrtgage and hme equity line f credit. The first mrtgage and hme equity line f credit accunts are cmbined n a single mnthly billing statement. Want the cnvenience f a cmbined billing statement, and ne-stp servicing fr bth the mrtgage and hme equity accunts. If the cmbined lan amunt is high in relatin t yur hme s value and its value declines, yu may find yurself wing mre mney than the hme is wrth. (see high LTV and CLTV n pages 17-18) If yu are getting a hme equity line f credit r lan in additin t yur mrtgage, yu will be sent a dcument entitled Features f Wells Farg s Hme Equity Lines f Credit and Lans explaining the hme equity chices and features available t yu. The Wells Farg Hme Asset Management SM accunt terms may vary by state and is nt available in Texas. 15

17 Sectin 3: The term f yur mrtgage Q: What is a mrtgage term? A: The term, which is established in yur mrtgage dcuments, is the number f years it will take t repay yur mrtgage if yu make n mre than the required principal and interest payments every mnth. Typically, mrtgage terms are 10, 15, 20, r 30 years, but any number f years in between might be available as lng as yu qualify fr the mnthly payment amunt. Generally, the shrter the term, the lwer the interest rate, but the higher the mnthly payment. Q: What is a shrter-term mrtgage? A: Generally speaking, mrtgages with terms f 20 years r less are viewed as shrter-term mrtgages. Wells Farg Hme Mrtgage will accmmdate any term length n its first mrtgages, such as 10 years, 11 years, 18 years, etc., but there is a minimum term fr a first mrtgage f 10 years. Less than that may be prvided by a different type f lan. Want t take advantage f a lwer interest rate n the shrter-term mrtgage, reducing the ttal interest paid ver the mrtgage term. Wuld like t pay ff their mrtgage and wn their hme utright sner. Althugh the interest rate is lwer n a shrter-term mrtgage, yur mnthly payments may be higher because the mrtgage amunt will be repaid in a shrter perid f time. Yu must be able t qualify fr the ptentially larger mnthly payments. Since yu pay less interest and yur mrtgage will be paid ff sner, yu may lse a tax deductin that may be beneficial t yur verall financial prfile (cnsult yur tax advisr). Q: What is a lnger-term mrtgage? A: Generally speaking, mrtgages with terms f 25 r 30 years are viewed as lnger-term mrtgages. Wells Farg Hme Mrtgage will accmmdate any term length between 20 and 30 years, such as 22 years, etc., n its mrtgages. Seek lwer mnthly payments than what might result frm a shrter-term mrtgage. The interest rate is typically higher than a shrter-term mrtgage, which means yu will pay mre interest because f the higher rate and lnger term f yur mrtgage. If yu nly make the scheduled payments, yu will repay yur mrtgage mre slwly than a shrter-term mrtgage. 16

18 Sectin 4: Lan-t-value Q: What is a lan-t-value (LTV) rati? A: The lan-t-value (LTV) rati is the mrtgage amunt expressed as a percent f the hme s value. The hme s value is either the purchase price r its appraised value, whichever is lwer. Fr example: If the appraised value f the hme is $200,000 and yur dwn payment r existing equity in the hme is $40,000 (20% f the value), yur lan amunt will be $160,000 r 80% f the value, making yur LTV 80%. Q: What is a lw-ltv rati? A: Generally speaking, a lw-ltv rati is ne that is equal t r less than 80% f the hme s value. Have a large dwn payment r a lt f equity in their hme typically qualify fr: The best rates and terms with lwer mnthly payments. N requirement t pay private mrtgage insurance (PMI). Experience a decline in hme values will have less cncern abut wing mre than the hme is wrth. With a lw-ltv rati, cnsiderable equity (persnal wealth) is lcked in yur hme. Unlcking the equity requires a cash-ut refinance, btaining a hme equity lan/line f credit, r selling the hme. Q: What is a high-ltv rati? A: Generally speaking, a high-ltv rati is ne that is higher than 80% f the hme s value. Are unable t make a large dwn payment, but may still be able t qualify fr a mrtgage. Prefer t use their savings fr hme imprvements, educatin, etc., instead f a dwn payment. Mnthly private mrtgage insurance (PMI) payments may be required. These payments are cllected in additin t yur mnthly principal and interest payments. Cnditins under which yu are n lnger required t pay private mrtgage insurance differ by yur type f financing. High-LTV financing may nt be available in certain market cnditins. 17

19 Sectin 4: Lan-t-value (cntinued) If yur LTV is high and hme values drp, yu culd have a mrtgage larger than the hme s value. This makes it mre difficult t refinance r sell yur hme withut lsing mney. As tax law stands tday, the interest n the prtin f the mrtgage that is greater than the appraised value may nt be tax deductible (cnsult yur tax advisr). If yur hme sells fr an amunt lwer than yur mrtgage, yu may we yur lender mney. Q: What is a cmbined-lan-t-value (CLTV) rati? A: Financing with a first mrtgage and a hme equity lan r line f credit has a cmbined-lan-t-value (CLTV) rati. Fr example: If yur first mrtgage is 70% f yur hme s value, and yur hme equity lan is 10% f yur hme s value, yur CLTV is 80%. A high-cltv rati has the same drawbacks as a high-ltv rati if hme values drp. (see abve) 18

20 Sectin 5: Types f mrtgage payments Q: Hw is the mnthly mrtgage payment amunt determined? A: The amunt f yur mnthly mrtgage payment ver the life f yur mrtgage is dictated by: Yur interest rate Yur mrtgage type: fixed-rate mrtgage r adjustable-rate mrtgage (ARM) Yur mrtgage term: 10 t 30 years The type f payments yu make: Regular principal and interest payments Interest-nly payments Balln payment Any vluntary prepayments yu chse t make in additin t the required payment If applicable, yu will als make escrw payments Q: What are regular mnthly principal and interest payments? A: Regular payments are thse made nce-a-mnth t cver the required principal and interest amunt that will pay ff the mrtgage ver a specified term, such as 15, 20, r 30 years. This prcess is called amrtizatin. Yur payments in the early years are cmprised f mstly interest and partly f principal. As the years g by, yur payment shifts t mre and mre principal and less and less interest. Yur hme mrtgage cnsultant can prvide an amrtizatin schedule fr any term. Want t steadily build equity thrughut the mrtgage term by making mnthly payments twards principal, s they ll wn their hme utright by the end f the term. Appreciate the tax deductin usually allwed n the interest paid n the mrtgage (cnsult a tax advisr). Paying nly the required principal and interest each mnth instead f making larger principal payments means yu ll be making mrtgage payments fr the full term f yur mrtgage. Yu will be paying the full amunt f interest ver the full term f yur mrtgage. Q: What are interest-nly payments? A: Payments that cver the interest prtin f yur mnthly bligatin fr an initial perid (typically abut 10 years), but d nt include any payment n principal. Yu are required t pay nly the interest, but als have the ptin f making additinal principal payments at any time. 19