This is a very frequently asked question but before answering how much mortgage can one afford, you need to first understand the mortgage terminology. In this process, you will come across various factors you need to consider while analyzing your mortgage and in turn, will be able to get your question answered. So let’s take up all the mortgage-related queries step by step. 

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What is a mortgage?

In simplest terms, a mortgage is a loan. There are two parties involved in a mortgage transaction, the mortgagor and the mortgagee. The mortgagor is the borrower and the mortgagee is the lender. 

To secure a loan, the mortgagor needs to provide an asset. This is a security to the mortgagee. If the mortgagor fails to make mortgage payments then the mortgagee can sell this asset to recover his money.

This asset is known as a ‘Collateral’ or an ‘Underlying Asset.’  You might be wondering, what kind of an asset qualifies as collateral. It depends on the kind of loan you are taking up. The asset’s fair market value should be commensurate to the loan amount. 

The next question that arises is what is the purpose of a mortgage? Well, you might be in urgent need of money. One of the most common purposes of a mortgage is to buy a house.

In this case, the mortgager looks at your salary or business income, over a given period in the past. Depending upon your eligibility, you get a mortgage loan. 

Till the time you don’t pay off the loan, you don’t own the house and once you do, you become its owner. However, you can start living in the house immediately after you have bought it. Therefore the house itself acts as the collateral in this case. 

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How to get a mortgage?

There are two ways of getting a mortgage loan. Either you can directly approach your bank or any other bank. This requires you to be aware of mortgage terminology and concepts. However, if you are not sure about your understanding, you can approach a broker.

A mortgage broker is a professional or a firm that provides you advice on which mortgage products will be best suited for your needs. He charges you a fee that adds to your cost of mortgage but in return, he also gives you advice on the best suitable product from the best bank or lender. So it is a trade-off. 

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How to calculate mortgage & mortgage payments?

Having understood the concept of a mortgage, let’s look at a few numbers. This will help us understand how to calculate the installment payments of a mortgage and the total amount due.

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Let’s take an example. Suppose you need to purchase a home for 1 million US Dollars. The purchase condition requires, that you pay a 5% down payment. This means that

 

 

 

 

dollars are required to be paid at the time of purchase. The balance of 95% or 950,000 dollars can be taken out as a mortgage and paid in installments.

For this purpose, you approach your bank and after assessing your financial situation, it proposes a 6% annual interest on a loan of 950,000, and payments of the loan will be paid monthly over 10 years.

So these are the terms of the loan and you need to calculate the monthly payment and the total amount that you will be paying to the bank over the 10 years. Below formulae and the amortization schedule will help you understand the same.

Sl. No. Particulars Particulars
Loan Period (n) 10 years
Interest rate (r) 6.000%
Payment frequency 12 (Monthly)
Loan amount (PV) $950,000.00 

(95% x 1,000,000.00)

Periodic payment (PMT) $10,546.95

The periodic payment is calculated by solving the following equation:

 

 

 

 

  • A mortgage is an amortizing loan which means that with each periodic payment, the original loan decreases
  • Periodic payment includes two components, interest and the principal repayment
    • Interest is the cost of borrowing
    • Principal repayment is a portion of the loan that is repaid on each payment
    • The principal repayment portion reduces the outstanding loan amount
    • In the following period, the interest is charged on the reduced outstanding balance and not on the original amount of the loan
  • r is the annual interest rate, as the payments are made monthly, the interest is charged only for the month on the outstanding loan balance. This is the reason why the annual rate is divided by 12 or any periodic frequency depending upon the terms of the loan
  • If the loan is for 10 years, with monthly payments, then the total number of payments will be 10 x 12 = 120

Now we can calculate the periodic payment for the given loan

 

 

Below is the amortization schedule:

Month Beginning Balance PMT Interest Principal repayment Ending Balance
1 $950,000.00   $10,546.95   $4,750.00  $5,796.95  $944,203.05 
2 $944,203.05   $10,546.95   $4,721.02  $5,825.93  $938,377.12 
3 $938,377.12   $10,546.95   $4,691.89  $5,855.06  $932,522.06 
4 $932,522.06   $10,546.95   $4,662.61  $5,884.34  $926,637.72 
5 $926,637.72   $10,546.95   $4,633.19  $5,913.76  $920,723.96 
6 $920,723.96   $10,546.95   $4,603.62  $5,943.33  $914,780.63 
7 $914,780.63   $10,546.95   $4,573.90  $5,973.04  $908,807.59 
8 $908,807.59   $10,546.95   $4,544.04  $6,002.91  $902,804.68 
9 $902,804.68   $10,546.95   $4,514.02  $6,032.92  $896,771.75 
10 $896,771.75   $10,546.95   $4,483.86  $6,063.09  $890,708.67 
11 $890,708.67   $10,546.95   $4,453.54  $6,093.40  $884,615.26 
12 $884,615.26   $10,546.95   $4,423.08  $6,123.87  $878,491.39 
13 $878,491.39   $10,546.95   $4,392.46  $6,154.49  $872,336.90 
14 $872,336.90   $10,546.95   $4,361.68  $6,185.26  $866,151.64 
15 $866,151.64   $10,546.95   $4,330.76  $6,216.19  $859,935.45 
16 $859,935.45   $10,546.95   $4,299.68  $6,247.27  $853,688.18 
17 $853,688.18   $10,546.95   $4,268.44  $6,278.51  $847,409.67 
18 $847,409.67   $10,546.95   $4,237.05  $6,309.90  $841,099.77 
19 $841,099.77   $10,546.95   $4,205.50  $6,341.45  $834,758.32 
20 $834,758.32   $10,546.95   $4,173.79  $6,373.16  $828,385.17 
21 $828,385.17   $10,546.95   $4,141.93  $6,405.02  $821,980.14 
22 $821,980.14   $10,546.95   $4,109.90  $6,437.05  $815,543.10 
23 $815,543.10   $10,546.95   $4,077.72  $6,469.23  $809,073.86 
24 $809,073.86   $10,546.95   $4,045.37  $6,501.58  $802,572.29 
25 $802,572.29   $10,546.95   $4,012.86  $6,534.09  $796,038.20 
26 $796,038.20   $10,546.95   $3,980.19  $6,566.76  $789,471.44 
27 $789,471.44   $10,546.95   $3,947.36  $6,599.59  $782,871.85 
28 $782,871.85   $10,546.95   $3,914.36  $6,632.59  $776,239.26 
29 $776,239.26   $10,546.95   $3,881.20  $6,665.75  $769,573.51 
30 $769,573.51   $10,546.95   $3,847.87  $6,699.08  $762,874.43 
31 $762,874.43   $10,546.95   $3,814.37  $6,732.58  $756,141.86 
32 $756,141.86   $10,546.95   $3,780.71  $6,766.24  $749,375.62 
33 $749,375.62   $10,546.95   $3,746.88  $6,800.07  $742,575.55 
34 $742,575.55   $10,546.95   $3,712.88  $6,834.07  $735,741.48 
35 $735,741.48   $10,546.95   $3,678.71  $6,868.24  $728,873.24 
36 $728,873.24   $10,546.95   $3,644.37  $6,902.58  $721,970.66 
37 $721,970.66   $10,546.95   $3,609.85  $6,937.09  $715,033.56 
38 $715,033.56   $10,546.95   $3,575.17  $6,971.78  $708,061.78 
39 $708,061.78   $10,546.95   $3,540.31  $7,006.64  $701,055.14 
40 $701,055.14   $10,546.95   $3,505.28  $7,041.67  $694,013.47 
41 $694,013.47   $10,546.95   $3,470.07  $7,076.88  $686,936.59 
42 $686,936.59   $10,546.95   $3,434.68  $7,112.26  $679,824.33 
43 $679,824.33   $10,546.95   $3,399.12  $7,147.83  $672,676.50 
44 $672,676.50   $10,546.95   $3,363.38  $7,183.57  $665,492.94 
45 $665,492.94   $10,546.95   $3,327.46  $7,219.48  $658,273.45 
46 $658,273.45   $10,546.95   $3,291.37  $7,255.58  $651,017.87 
47 $651,017.87   $10,546.95   $3,255.09  $7,291.86  $643,726.01 
48 $643,726.01   $10,546.95   $3,218.63  $7,328.32  $636,397.70 
49 $636,397.70   $10,546.95   $3,181.99  $7,364.96  $629,032.74 
50 $629,032.74   $10,546.95   $3,145.16  $7,401.78  $621,630.95 
51 $621,630.95   $10,546.95   $3,108.15  $7,438.79  $614,192.16 
52 $614,192.16   $10,546.95   $3,070.96  $7,475.99  $606,716.17 
53 $606,716.17   $10,546.95   $3,033.58  $7,513.37  $599,202.81 
54 $599,202.81   $10,546.95   $2,996.01  $7,550.93  $591,651.87 
55 $591,651.87   $10,546.95   $2,958.26  $7,588.69  $584,063.19 
56 $584,063.19   $10,546.95   $2,920.32  $7,626.63  $576,436.55 
57 $576,436.55   $10,546.95   $2,882.18  $7,664.76  $568,771.79 
58 $568,771.79   $10,546.95   $2,843.86  $7,703.09  $561,068.70 
59 $561,068.70   $10,546.95   $2,805.34  $7,741.60  $553,327.10 
60 $553,327.10   $10,546.95   $2,766.64  $7,780.31  $545,546.78 
61 $545,546.78   $10,546.95   $2,727.73  $7,819.21  $537,727.57 
62 $537,727.57   $10,546.95   $2,688.64  $7,858.31  $529,869.26 
63 $529,869.26   $10,546.95   $2,649.35  $7,897.60  $521,971.66 
64 $521,971.66   $10,546.95   $2,609.86  $7,937.09  $514,034.57 
65 $514,034.57   $10,546.95   $2,570.17  $7,976.77  $506,057.79 
66 $506,057.79   $10,546.95   $2,530.29  $8,016.66  $498,041.14 
67 $498,041.14   $10,546.95   $2,490.21  $8,056.74  $489,984.39 
68 $489,984.39   $10,546.95   $2,449.92  $8,097.03  $481,887.37 
69 $481,887.37   $10,546.95   $2,409.44  $8,137.51  $473,749.86 
70 $473,749.86   $10,546.95   $2,368.75  $8,178.20  $465,571.66 
71 $465,571.66   $10,546.95   $2,327.86  $8,219.09  $457,352.57 
72 $457,352.57   $10,546.95   $2,286.76  $8,260.18  $449,092.38 
73 $449,092.38   $10,546.95   $2,245.46  $8,301.49  $440,790.90 
74 $440,790.90   $10,546.95   $2,203.95  $8,342.99  $432,447.91 
75 $432,447.91   $10,546.95   $2,162.24  $8,384.71  $424,063.20 
76 $424,063.20   $10,546.95   $2,120.32  $8,426.63  $415,636.57 
77 $415,636.57   $10,546.95   $2,078.18  $8,468.76  $407,167.80 
78 $407,167.80   $10,546.95   $2,035.84  $8,511.11  $398,656.69 
79 $398,656.69   $10,546.95   $1,993.28  $8,553.66  $390,103.03 
80 $390,103.03   $10,546.95   $1,950.52  $8,596.43  $381,506.59 
81 $381,506.59   $10,546.95   $1,907.53  $8,639.41  $372,867.18 
82 $372,867.18   $10,546.95   $1,864.34  $8,682.61  $364,184.57 
83 $364,184.57   $10,546.95   $1,820.92  $8,726.02  $355,458.54 
84 $355,458.54   $10,546.95   $1,777.29  $8,769.65  $346,688.89 
85 $346,688.89   $10,546.95   $1,733.44  $8,813.50  $337,875.39 
86 $337,875.39   $10,546.95   $1,689.38  $8,857.57  $329,017.81 
87 $329,017.81   $10,546.95   $1,645.09  $8,901.86  $320,115.96 
88 $320,115.96   $10,546.95   $1,600.58  $8,946.37  $311,169.59 
89 $311,169.59   $10,546.95   $1,555.85  $8,991.10  $302,178.49 
90 $302,178.49   $10,546.95   $1,510.89  $9,036.06  $293,142.43 
91 $293,142.43   $10,546.95   $1,465.71  $9,081.24  $284,061.20 
92 $284,061.20   $10,546.95   $1,420.31  $9,126.64  $274,934.56 
93 $274,934.56   $10,546.95   $1,374.67  $9,172.27  $265,762.28 
94 $265,762.28   $10,546.95   $1,328.81  $9,218.14  $256,544.14 
95 $256,544.14   $10,546.95   $1,282.72  $9,264.23  $247,279.92 
96 $247,279.92   $10,546.95   $1,236.40  $9,310.55  $237,969.37 
97 $237,969.37   $10,546.95   $1,189.85  $9,357.10  $228,612.27 
98 $228,612.27   $10,546.95   $1,143.06  $9,403.89  $219,208.38 
99 $219,208.38   $10,546.95   $1,096.04  $9,450.91  $209,757.48 
100 $209,757.48   $10,546.95   $1,048.79  $9,498.16  $200,259.32 
101 $200,259.32   $10,546.95   $1,001.30  $9,545.65  $190,713.67 
102 $190,713.67   $10,546.95   $    953.57  $9,593.38  $181,120.29 
103 $181,120.29   $10,546.95   $    905.60  $9,641.35  $171,478.94 
104 $171,478.94   $10,546.95   $    857.39  $9,689.55  $161,789.39 
105 $161,789.39   $10,546.95   $    808.95  $9,738.00  $152,051.39 
106 $152,051.39   $10,546.95   $    760.26  $9,786.69  $142,264.70 
107 $142,264.70   $10,546.95   $    711.32  $9,835.62  $132,429.07 
108 $132,429.07   $10,546.95   $    662.15  $9,884.80  $122,544.27 
109 $122,544.27   $10,546.95   $    612.72  $9,934.23  $112,610.04 
110 $112,610.04   $10,546.95   $    563.05  $9,983.90  $102,626.14 
111 $102,626.14   $10,546.95   $    513.13  $10,033.82  $92,592.33 
112  $92,592.33   $10,546.95   $    462.96  $10,083.99  $82,508.34 
113  $82,508.34   $10,546.95   $    412.54  $10,134.41  $72,373.94 
114  $72,373.94   $10,546.95   $    361.87  $10,185.08  $62,188.86 
115  $62,188.86   $10,546.95   $    310.94  $10,236.00  $51,952.85 
116  $51,952.85   $10,546.95   $    259.76  $10,287.18  $41,665.67 
117  $41,665.67   $10,546.95   $    208.33  $10,338.62  $31,327.05 
118  $31,327.05   $10,546.95   $    156.64  $10,390.31  $20,936.74 
119  $20,936.74   $10,546.95   $    104.68  $10,442.26  $10,494.48 
120  $10,494.48   $10,546.95   $      52.47  $10,494.48   $        -0.00 
Total $1,265,633.72  $ 315,633.72  $950,000.00 

Explanation of the amortization schedule:

  • Beginning balance = previous year’s ending balance
    • For the first month, the beginning balance is the loan amount of 950,000
  • Ending balance = Beginning balance -Principal repayment
    • For the first month, the ending balance is the loan amount – the principal repaid
      • Ending balance is the 950000 – 5796.95 = 944203.05
  • Interest = 0.06 /12 x Beginning balance
    • So for the first month, the interest will be:
      • equation_5.pdf
      • equation_6.pdf
    • But for the second month, the interest will be:
      • equation_7.pdf
      • equation_8.pdf
  • Principal repayment = PMT – Interest
    • For the first month, principal repayment = 10546.95 – 4750.00
      • Principal repayment = 5796.95
      • Similarly, it is calculated for every month
  • So for a loan of $950,000.00 total payment of $1,265,633.72 was made. The difference between the two amounts is the interest of $ 315,633.72
  • The below graph shows the bifurcation of periodic payment into interest and principal repayment

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  • As time passes, the outstanding balance reduces, and in turn interest portion also reduces while the principal repayment portion goes on increasing.

Factors combination resulting in the lowest monthly mortgage payment 

As understood from the above calculations, several factors impact the monthly payment of the mortgage. These are as follows:

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  • Loan period: Longer the loan period, the higher is the monthly payment
    • A 30-year loan is riskier than a 10-year loan so the monthly payment is higher for the 30-year loan
  • Interest rate: Higher the interest rate, the higher the periodic payment
    • 6%  interest rate will lead to lower interest than a 10% interest rate
  • Frequency: higher the frequency, the lower the periodic payment.
    • If the frequency is monthly, some portion of the loan is repaid every month. This reduces the outstanding balance more quickly than if the frequency is annual or semi-annual. The faster the loan is repaid, the lower is the interest charged.
    • This also makes sense intuitively. The lender of the loan recovers the amount faster. This makes the loan less risky and therefore the interest charged is lower. 

So a 30-year loan with annual payments at a 10% annual interest rate will have higher monthly payments than a 10-year loan with monthly payments and a 6% interest rate. Changing any factor will result in a mortgage payment amounting to somewhere in between.

What are the current mortgage rates?

The mortgage rate varies from lender to lender, product to product, and from borrower to borrower. The example showed above is that of a fixed-rate mortgage, where the interest rate remains constant.

There are other mortgages too such as an adjustable-rate mortgage where the interest rate varies over the life of the mortgage, based on any reference rate such as the LIBOR or the treasury security interest rate of the same maturity. 

For a good FICO credit score, the conventional fixed 30-year mortgage loan is close to 3% per annum. You can check the current rate on the website of your preferred lenders such as Wells Fargo or Freddie Mac or even consult your mortgage broker.

Is mortgage interest tax deductible?

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Prior to tax reforms of 1986, interest on various debts was deductible. After the reforms were introduced, only the interest on the debt of the home loan was deductible. The law kept evolving over the years and after the Tax Cuts and Jobs act of 2017, this deduction became even more difficult to achieve.

As per the reforms of 2017, there are several conditions for eligibility of deduction. Some of these are as follows:

  • Mandatory Itemized deduction
  • Itemized deduction should exceed the standard deductions
  • The deduction is allowed only on the primary or secondary deduction
  • The deduction is allowed on the first $1 million, subject to further intricacies.

The best way of understanding eligibility of tax deduction is to check the updated policy on the IRS website or consult a mortgage broker.

What are the points on a mortgage?

In the US, mortgage points or discount points are a means of reducing the interest rate. These points are acquired by paying an upfront fee from the borrower to the lender. Intuitively, the lender recovers a certain portion of the loan at the time of the borrowing and so he reduces the interest rate for the borrower. 

Generally, the per point interest rate reduction lies between 0.125% and 0.25% but it can vary. So if the interest rate is 6% and you purchase 4 prints, each reducing the rate by 0.25%, then you will get the loan for 5% instead of 6%. For this, you will have to pay a fee to the lender.

You can compare whether it is cheaper to pay a 6% interest rate or acquire mortgage points and decide which suits you the best. You can even consult the mortgage broker. 

What is mortgage insurance?

Mortgage insurance is a security to the lender and a cost to the borrower. It is the insurance against events such as borrower defaulting in mortgage payments, or dies or any other covered event in which the scheduled payment is not made. Events covered vary from policy to policy but the concept is the same. 

There can be various kinds of insurance: 

  • Private Mortgage Insurance (PMI): Insurance premium is paid by the borrower and it protects the lender. It is required when the down payment or the equity in the mortgage is below 20%. This is the same as expressing that the loan to value or LTV is greater than 80% 
  • Qualified Mortgage Insurance Premium (MIP): This is required in FHA mortgages. The features of the insurance are similar to PMI but the rules are different. One major rule change is insurance is mandatory at all levels of down payment.
  • Mortgage Title Insurance: This protects the seller of the asset if, at the time of the sale, there is some fault in the ownership or the title of the asset.

How much is mortgage insurance?

Several factors impact the amount of mortgage insurance. Some of these are:

  • Down payment percentage or the LTV 
  • Term of the loan
  • Type of the loan – Fixed Rate, Adjustable Rate, FHA, and so on
  • The credit score of the borrower
  • Purpose of loan
  • Number of borrowers

Depending upon these factors, the insurance value varies but roughly, it is between 0.5% and 1.5% of the loan amount. So if the loan is 950,000 so the insurance would be somewhere between 4,750 and 14,250. This is not payable in a lump sum but added to periodic payments according to the time value of money concept.

Is mortgage insurance tax deductible?

Publication 936 of the IRS has allowed the itemized deduction of mortgage insurance premiums for 2020. The deduction is allowed on line 8d of Schedule A (Form 1040 or 1040-SR) 

For further information, it is best to read the entire publication or consult the broker.

What is a reverse mortgage?

A reverse mortgage is an option of converting the home equity to cash. It is allowed to people of 62 years of age or higher. Generally, people take up a home mortgage when they are young. By the age of 62, they have repaid most of that loan and therefore have gained substantial ownership in the same.  

This ownership can be converted to cash by way of a reverse mortgage. Here the owner receives the payment in a lump sum or form of an annuity as per his requirement. This gives the owner the liquidity he desires.

How does a reverse mortgage work?

As explained initially, it is a way of receiving payments against home equity. However, a reverse mortgage is still a loan on which interest needs to be paid. This interest is for creating the desired liquidity. However, this interest is not paid by the owner periodically. It gets accumulated. 

At the time of the death or the sale of the house, the sale proceeds are given to the lender. The amount paid to the owner and the accumulated interest is adjusted to the sales proceeds.

Should I refinance my mortgage?

Mortgage refinancing implies taking a new loan to pay off the existing loan. It is done to reduce loan payments. Specifically, if any of the four conditions are being met then you are better off refinancing the mortgage:

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  • Market interest rates have reduced since you took the mortgage
  • You are in a position to reduce the loan period and thereby the loan payments
  • It is favorable to convert an adjustable-rate mortgage to a fixed-rate mortgage 
  • A financial emergency requires you to take a loan against your home equity

As refinancing leaves the lender with reinvestment risk, that is, he will have to put in the money at a lower interest rate in the market, there is a fee required to be paid for refinancing. This amount will determine whether to refinance or not. 

Compare the new loan payments to the old ones and deduct the refinance fee to make your decision. Till the point where the difference is positive, you can refinance. This point is known as a refinance breakeven point.

How to refinance a mortgage? 

Refinancing requires the following steps:

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  • Selecting a purpose of refinancing: Determine what is the purpose such as reducing the interest rate or the loan period
  • Looking for the refinance rates of various lenders: This will give you an idea of whether your purpose is being met or not
  • Apply to various lenders: Not all lenders will be ready to refinance, only some will accept your application
  • Pick the lender providing the best terms: This involves reading loan documents thoroughly and picking the best option
  • Negotiate and finalize the terms: Finalize the deal and try to negotiate further is there is some scope

What is today’s mortgage refinance rates?

Refinance rates can vary from lender to lender and other related factors. You can check the rates on the website of the lender. For example, Bank of America is offering a 30 year fixed APR of 3.95% for a given set of details of the loan 

These vary based on the total value of the home, outstanding loan balance, ZIP Code. Other lenders can use other parameters.

How much of a mortgage can I afford?

Although it varies, as a thumb rule, the borrowing affordability ranges between 2 times and 2.5 times the gross income of the borrower. So If the gross income is $70, 000 he should borrow $140,000 to $175,000. Gross income is before all taxes and obligations.

There are two ratios the front-end ratio and the backend ratio. The front-end ratio is the Monthly payment to monthly gross income ratio. It should ideally be around 28% but some lenders allow it to go till 40%

The backend ratio is the overall debt to income ratio. Therefore it involves your credit card and other such payments too. So if your total debt in a month is $3000 and your gross income is $6000 so the ratio is 50%

Should I pay off my mortgage?

As paying off the mortgage early creates a reinvestment risk for the lender, many lenders don’t allow it or restrict it. So it is best to first find out what are the charges and policies of your lender. Compare those charges to the benefits and then only go ahead with the payoff.

How to pay off the mortgage faster?

There can be various ways of paying off quickly:

  • Make additional payment per quarter: It will reduce your interest amount and increase your principal repaid portion
  • Reducing expenses: Making lifestyle changes can lead to reduced expenses and increased savings, which can be used to pay off additional loan payments
  • Refinance: Refinancing will help you renegotiate the terms but might cost you the refinancing fee
  • Swap property: Sell the expensive property, use the money generated to buy a smaller and less expensive property. This might require some legal activities so consult your lawyer.

Can you pay a mortgage with a credit card? 

Most lenders don’t allow mortgage payments

through credit cards. This is so because a credit card is essentially a debt instrument. Paying through that has a cascading effect on the debt amount and increases the risk of default.

However, there are some ways to do so, one is Plastiq service, which charges a 2.5% fee. So it increases your expense. Cash Advance is another way of paying the mortgage using a credit card. The fee range is 3 to 5%

What is a mortgage broker?

A mortgage broker is an independent professional or a firm, that advises the borrowers on various loan products and helps them select the best for a fee. He even connects the borrowers to the lenders and is therefore an intermediary. They charge a fee for such services.

How to become a mortgage broker? 

Below are the steps to becoming a broker:pastedGraphic_9.png

  • Complete pre-licensure class:  This is a 20-hour program on the mortgage laws authorized by  National Mortgage Licensure System 
  • Clear NMLS Test: This test has a federal section common for everyone and a state section specific to the state in which you want to work
  • Develop Networks: Once you have all the required qualifications, you need to strike connections in the industry to start getting work
  • Stay up to date: Laws keep evolving so staying up to date is synonymous with staying relevant.

What is a jumbo mortgage? 

Jumbo Mortgage has very high credit quality but the loan amount is also very high. In fact, it is higher than the general standards or limits set by Fannie May and Freddie Mac.

Due to the higher loan amount, the interest rate is also higher. The difference in the interest rate or the spread can be anywhere between 0.25% and 0.5%

What is a subprime mortgage? 

A subprime mortgage is a loan given to a borrower with a very low credit rating. FICO score of lower than 600 is considered a lower credit rating. The collateral might also be of poor quality. 

This is subprime because there is a higher risk of the borrower defaulting. Due to higher risk, the rate on these mortgages is also higher and the terms of the loan are very strict. 

What is a mortgage note?

These are written promissory notes. The borrower promises to pay the written amount and interest on the mentioned date. This makes the borrower personally responsible to pay off the loan. At times this note is proof of ownership as well.