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ADVANCED MORTGAGE

How are real estate secured loans amortized?

Definitions

First Priority = First lien holders
Secured Real Estate Loans = Mortgage
Mortgage = A loan secured for the purchase or refinancing of a home
Amortization = The schedule for repayment of the mortgage debt
Principal = Monthly amount owed for purchase price of home
Interest = The percentage sum agreed to and charged monthly on total purchase price of home

In traditional, first-priority real estate secured loans (mortgages), lenders structure the debt repayment schedule (amortization) so that a majority of the monthly payments are made toward paying down the interest owed first, and then as the loan ages, toward the principal. This means that for a 30-year mortgage, a homeowner won’t start paying equal interest and equal principal (or half and half) until around the fifteenth year. Shorter-term loans, such as a 15-year, can speed that process up, but monthly payments will be higher when compared to a 30-year loan.

For example, a 30-year, fixed-rate loan of $200,000 with a 4% interest rate has a principal and interest (P&I) payment of $954.83, with most of that monthly cost weighted toward paying off the interest. It takes about 180 payments or half of the 360 total in a 30-year loan before the borrower begins paying approximately equal amounts of principal and interest.

However, that same fixed-rate loan based on 15 years (or 180 months) has a monthly principal and interest payment of $1,479.38. While creating a higher monthly payment, this actually puts more of a borrower’s money toward his/her investment and saves tens of thousands of dollars in interest paid to the lender.

What is a refinanced mortgage loan?

Refinancing a mortgage can be done when a current property owner wishes to negotiate a new loan with either the existing lender or a new one, typically to reduce interest rates, lower payments and/or pay off any existing loans the property owner may have.

What is the real estate sales contract?

In a purchase/sale, the real estate sales contract outlines the terms and conditions of any loans securing the real estate. Loans that secure real estate used for primary residential purposes differ greatly from all other types of loans. The loan application in the case of a home purchase or a refinancing further defines the borrower and lender loan agreement.

Individual states govern the way real estate related loans are “secured.” In about half of the states, the instrument recorded at the courthouse in the county of the secured property is referred to as a mortgage document. It is a reflection of a defined interest in the secured real estate. The other states use what is referred to as a “Deed of Trust” wherein a disinterested third party is the mediator between the borrower who is in default and the lender wishing to foreclose.

However, Georgia is the only state to use the Deed to Secure Debt (or Security Deed) as the security instrument. The Deed to Secure Debt is an actual conveyance of current secured interest in the real property to the Lender.

What are the types of real estate loans?

There are many different types of real estate secured loans for primary residential purchases, and for the refinancing of existing residences. They include Federal Housing Authority (FHA), Veterans Administration (VA), Conventional (fixed or variable rate), Second Mortgage, Home Equity Line Of Credit, and Owner Financing.

  • FHA loans are useful to first-time home buyers. The FHA has many different loan programs to help qualified, potential homeowners purchase real property with lower down payment requirements. But the FHA requires private mortgage insurance (FHA MIP) to protect the FHA and the lender against a borrower default under certain circumstances. A buyer/borrower would need to consult with an FHA loan expert to determine if and how the FHA MIP could be removed as a requirement.
  • VA real estate secured loans for a primary residence purchase offer a no-down-payment opportunity for qualified veterans without the requirement of private insurance because these loans are backed by the Federal Government.
  • Conventional real estate secured loans for the purchase of primary residences varies by lender. And availability of current loan programs requires Private Mortgage Insurance (PMI) on loans where the buyer/borrower applies for a loan greater than an 80% loan-to-value ratio. The borrower must be able to pay from his/her own savings at least 20% of the purchase price plus pay any closing costs as negotiated in the purchase/sales contract.
  • Loan-to-value ratios are calculated by taking a percent of the current appraised value. If, for example, a buyer contracts to purchase a primary residence with a current appraised value of $200,000 and wishes to avoid PMI payments, the buyer/borrower’s loan amount cannot exceed 80% of the $200,000, or $160,000. This means the buyer/borrower must have $40,000.00 in savings, plus funds for closing costs. In order to avoid having the PMI requirement on a Conventional loan, the buyer/borrower must have at least 20% to invest in the primary residence based on current appraised value.
  • Second Mortgage loans for a borrower/owner’s primary residence are either in the form of Home Equity Line of Credit (see below), or a second priority loan (second to a first or mortgage primary loan). These vary with lenders and availability of current loan programs.
  • Home Equity Line of Credit loans (see below for more details) are similar to refinancing in that the loan amount is based on and secured by the equity (amount the borrower/owner has invested in the primary residence) of the current appraised market value, minus any outstanding loans balances.

What is a home equity line of credit loan?

Traditional lenders provide a variety of borrowing opportunities for consumers, including Home Equity Line of Credit loans. In this type of loan, the amount is based on and secured by the equity or the percentage of the unsecured amount of current appraised market value of the property, minus any outstanding loans balances.

Home Equity Line of Credit loans typically benefit property owners who either own their real estate outright (have no outstanding loan payments) or who have sizable amounts of equity built up. For example, a homeowner who owns property with a current appraised value of $200,000 with an outstanding first-priority mortgage loan of $100,000 means the owner has an equity value of $100,000. Suppose the same owner wants to use part of that $100,000 equity to make improvements. The owner can go to a mortgage lender and apply for a Home Equity Line of Credit loan. This would typically be a second-priority mortgage loan with a revolving line of credit, and a credit limit accessible through various methods (please see details below). Once the loan is secured, the borrower/owner has direct access to the money as needed. Or, the borrower/owner can get a fixed-rate, second-priority mortgage and receive a check for the full mortgaged amount at the closing.

The total credit limit may be of up to 80% of the current appraised value of borrower/homeowner’s primary residence, or up to 70% if the property is not the borrower/homeowner’s primary residence. The borrower/homeowner is charged a negotiated interest rate (fixed or variable based on the current prime rate plus one percent or more over prime). The monthly payment can be interest-only or interest-plus-principal and will vary by lender and loan programs available. Home Equity Line of Credit loans are typically accessed through checks, debit cards attached to the available line of credit, or via transfers through a checking account.

The benefit of these loans is that monies paid in excess of the monthly interest charge are applied directly to the principal balance, thereby reducing the amount owed. In contrast, additional payments on a thirty-year amortized mortgage loan won’t dramatically reduce the principal amount owed. Also, if interest is not paid on a typical Home Equity Line of Credit loan, it is rolled over into the gross loan amount. Non-payment of the full loan payment due would be considered a default, triggering foreclosure actions under a thirty-year fixed rate loan. If no additional payments are made on a thirty-year fixed rate loan, the principal is not remarkably reduced for as much as fifteen years.

What is foreclosure?

Foreclosure is the term used to describe the process in which a lender takes possession, and initiates the sale, of real estate used as collateral for a secured loan. This occurs when the borrower doesn’t pay as agreed, or has entered into default status. Foreclosure is the lender's remedy for a borrower's default on loan payments, as well as other specifically defined areas of default described in the Note and recorded Mortgage, Security Deed, or Deed of Trust, all of which protect the lender’s interest in the property.

A lender is not required to accept late payments from a tardy borrower unless the security instrument states this specifically. Transfer of the borrower’s interest in property secured by a Note, and recorded mortgage, without the lender’s prior written consent can result in foreclosure. Damage to the secured real estate, non-payment of real estate taxes, insurance and/or the removal of timber (among other defined infractions) can also be considered default triggers.

What are judicial proceedings?

Judicial proceedings are court-defined actions where the Borrower is provided the opportunity to plead their case.

In about half of the states, the instrument recorded at the courthouse in the county where the secured property is located, is referred to as a mortgage document. The mortgage is a reflection of a defined interest in the secured real estate. Other states use what is referred to as a “Deed of Trust” where disinterested third parties act as mediators between the defaulted borrower and foreclosing lender.

However, in Alabama mortgages can be foreclosed upon with either a “judicial” or “non-judicial” proceeding. The “non-judicial” foreclosure process is not court-related and involves notice by certified mail. It also entails publication of the foreclosure proceedings in newspapers designated for legal notifications in the county in which the secured real estate is located.

Georgia is the only state to use the Deed to Secure Debt (or Security Deed) as the security instrument. The Deed to Secure Debt is an actual conveyance of the current secured interest in the property to the lender. It allows the lender to simply notify the borrower of its intent to foreclose by certified mail and an advertisement in the newspaper designated for legal notifications in the county in which the secured real estate is located. The ad notifies the public that the property will be sold on the courthouse steps at public outcry to the highest bidder. The borrower does not have the opportunity to plead his/her case in court.

Why has my mortgage been sold to another company?

Most lenders combine real estate related loans into credit-worthy rated groupings for resale to secondary market investors such as “Fannie Mae” (FNMA) or “Freddie Mac” (FHLMC). Because many lenders can’t keep loans on their books for extended periods as was once the practice years ago, lenders sell the Notes and other related loan documents and records an assignment of that interest at the courthouse.

Secondary market holders like FNMA or FHLMC usually do not collect payments; they usually hire a Mortgage Servicer (see below) to collect the monthly payments and report any non-payment (delinquency) issues to them. When a delinquency takes place, the Note holder then takes over the loan and issues notice to the borrower of demands for payment, foreclosure, etc.

What is a mortgage servicer?

Monthly payments by the borrower to the lender can also include:

  • Payments into an escrow account (held by the lender or its agent)
  • Funds to pay annual hazard insurance premiums protecting the lender/Note holder’s interest; and
  • Real estate taxes.

If required by the lender, these funds are collected each month along with the principal and interest payments. The Mortgage Servicer collects the principal and interest, and the stipulated escrow funds, and pays the premiums for insurance and annual real estate taxes from the escrowed funds. Other items that can be collected as escrowed funds are Private Mortgage Insurance (PMI) on conventional loans, or FHA insurance premiums on FHA loans. This is for insurance protecting the lender/Note holder against borrowers with lower credit ratings, or those who have much smaller cash down payments.

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