Mortgages

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How Mortgages Came To Be

You might think that the mortgages we know and enjoy these days have been around for 100’s of years. But in reality, conventional mortgages have been in existence for slightly more than 70 years. The evolution of the mortgage is a fascinating story.

The Creation of the Mortgage

The idea of offering a mortgage did not originally come from banks or other lending institutions. In fact, it came from the Insurance industry.

Lawyers, 150 years ago, as today, were responsible for making sure that property titles were registered accurately and properly. It became apparent, through the court system, that a number of people were losing their homes because lawyers and notaries were giving erroneous title information. Thus, title insurance was created in response to the need for reliable assurance to cover the loss caused by errors in reporting the status of title. In 1874, Pennsylvania enacted the first statutes authorizing the issuance of title insurance.

From 1900 to the early 1930’s, the title insurance industry began to grow rapidly. The insurers were able to convince third-party lenders that title insurance was necessary for the financing of residential properties.

But mortgages back then were not as they are now. In many cases, a person applying for a mortgage had to have an 80% down payment. And the term of the mortgage was for 3-5 years, with interest being the only payments. Then at the end of the term, the homeowner was responsible for a balloon payment, which meant they had to pay off the entire mortgage.

A cynical view in those days was that the insurance companies were not in the business of making money though fees and interest, but rather, like a vulture, hoping that the homeowner could not make the final balloon payment, and thus lose their home.

The Great Depression

With the stock market crash of 1929, and the resulting depression in the early 1930’s, many people lost their homes and property because they were out of work and could not make the balloon payments on their mortgages. Also, many lost their homes because they were unable to pay their property taxes.

The Modern Mortgage

Shortly after the Great Depression, the Federal Government got involved. The majority of people had become renters, not homeowners. So, to get the American population back into home ownership, the Federal Housing Administration developed the modern mortgage in 1934.

Finally, after the Second World War ended, the government wished to lend Veterans money for mortgages so they could own homes as well. They extended the regular term of the mortgage from 15 to 30 years. It was so popular that conventional banks and lending institutions followed suit, and we haven’t looked back since.

David Morris is a successful freelance writer providing tips and advice for consumers on mortgages, personal loans and equity loans. Many have commented that his articles have made financial topics easy to understand.

The age-old question is whether to loan money or not to loan money. And if you do, should you charge interest. Philosophically, there are 3 schools of thought. One says that if you lend someone money, don’t expect repayment. The borrower needs the money badly, and if someone loans money, they should do so for no reason other than benevolence, and they should never "expect" repayment. The borrower may promise repayment, but if they fall on hard times and cannot repay the loan, the lender should accept that fact. The thinking being that the lender should never have lent out the money if they couldn’t afford to lose it in the first place. It’s the same mentality as taking your money to the casinos of Las Vegas.

The 2^nd philosophy is that if money is lent out, then it must be repaid. But no interest should be collected. Most people feel bad about having to borrow money in the first place. There's no need to make them feel worse by hounding them for interest. It’s like lending a rake to your neighbor. When he’s finished, he’ll return it. You don’t charge him interest.

And of course, the 3^rd philosophy, and the one we have come to embrace is the aspect of the commercial, business or personal loan tied directly to repayment plus interest. This is what banks and loan companies generally subscribe to.

Money, both in the paper and coin form, is not the original way humans bought things. If fact, money as we know it today is rather a recent concept. In the past, civilizations would trade cattle or grain. And that was all well and good if you want cattle or grain in exchange. But what happened when the person who has what you need did not want what you have. There had to be some form of currency that could be traded in those circumstances. Something of real value, a currency that everyone could agree on.

African tribes traded bright metal objects call Manillas, Canadian natives traded beads and beaver pelts, while other civilizations have traded animal teeth, ivory, and feathers, to name a few. As long as the people think that these things have value, then everything is fine.

Tally sticks were introduced by King Henry the First around 1000 AD. They were basically sticks of polished wood with notches cut out of them to indicate the denomination. The stick was then split down the middle, with the king keeping half of the stick to prevent against counterfeiting.

The king accepted these sticks as payment for taxes, so the people had confidence that these sticks had value, and therefore traded them for other goods and services. This practice continued for over 700 years.

The earliest banks were not the kind of banks that we know, but rather temples that were used to store grain and other commodities for trade, way back in Mesopotamia about 5000 years ago. The fundamental banking principles used there and in Babylon, the birth place of banking, have remained relatively the same until this present day.

Judah was captured by the Babylonians about 650 B.C.. The Jewish people were taken to Babylonia and held there for 70 years. While there, a man named Jacob Egibi became one of the first known men to set up a business for loaning out money for profit. Thus started the concept of private banking. At the end of the captivity period, the Jewish people were sent back to Judah, but because of the lucrative business some had developed, some, like Jacob Egibi did not want to return.

This practice of loaning out money, which evolved into Loan sharking with interest rates of 30%-50%, continued right up until the time of Christ. When the Christian era became well established, right up until about 500 years ago, charging interest was banned.

In fact, kings such as Alfred the Great, King of England; 849-901 A.D. and James 1, King of England; 1566-1625 A.D. had edicts that forbade taking interest, and men would be banished from England if they were found taking a “usury fee”.

Banks started to appear in Britain from the mid-seventeenth century. They were started by goldsmiths who not only made items with gold, but also began to look after valuables and lend money. Gold was a heavy commodity to carry around, so people would store their gold with the goldsmiths, and in return they would receive a receipt indicating the value of gold stored. These were called bank notes, and because they were easier to carry, they began to get traded like money, and loaned out like money.

During the early part of the twentieth century, the practice of opening bank accounts for saving and to receive wages became very popular. This was followed by many of the smaller banks disappearing with large banks being established with many branches.

In the last 30 years, incredible advances in technology have allowed us to save money and get loans by telephone and through the internet. The business of loans is now a well regulated business with many companies, besides bank, offering their services.

Diane French is a successful freelance writer providing helpful tips and advice for consumers on mortgages, personal loans and equity loans. Her many years of mortgage industry experience have helped others understand the business.

Why We Pay Interest

The first appearance of the concept of interest goes back to the days of the ancient Sumerians. It was based on the concept that if you had a herd of cattle (let’s say 100 head), and you lent that herd of cattle to someone else for a year, you would expect that at the end of the year you would get your 100 head of cattle back plus some extra cattle, because of new births. That extra amount was interest.

We see roots of the word “interest” in the Sumerian language. The word for interest is “mash”, which was also the word for “calve”. For the Greeks, the word was “tokos” which refers to the “offspring of cattle”. And for the Egyptians, the word is “ms”, which means “to give birth”.

In a society like the ancient Sumerians, where the size of your flocks and herds indicated the size of your wealth, it is easy to conceptualize that natural occurring offspring (interest) would add to your wealth.

In more modern America, we are familiar with the concept of raising or lowering the interest rate to stimulate the economy or avoid inflation. But this idea is not so new.

In England, during the 18^th century, the economy also reacted to the amount of interest charged. Normally, interest ran at about 4%. When the rate was lowered, business increased. When the rate was raised, business slowed down.

In the Roman days, interest rates were similar to our current America. Normal interest rates were at about 12%. When they wanted to get things moving, they would lower it to about 6%. For risky loans, they would raise the amount charged to 24%.

In some circles, the concept of making money from loaning it out is sinful or un-natural. The Ancient Greeks struggled with the concept of interest. Philosophers such as Plato and Aristotle felt that money was “barren”, and that no offspring can arise from something that is barren, therefore no interest should be collected. But this may have stemmed from the fact that in early Greek days, there was no imposed restriction on the amount of interest that could be charged on a loan, therefore greedy creditors got very rich. So, to counteract this, they banned interest.

Over time, as the Greek empire gave way to the Roman empire, the Roman’s reinstated interest, but ensured that “gouging” did not occur, by regulation and establishing specific rates.

To stay within the law (or avoid the law, depending on how you look at it), various types of interest have been established over the years. For example, to skirt the issue of charging a certain interest rate, some lenders have charged a “fee for service” which eliminates the term “interest”. The end result is the same for the borrower, it’s just called something else.

Another way to circumvent the term “interest” was to charge a penalty fee for late repayments of principal. The penalty amount was agreed upon before time, and it was also agreed that the borrower would “breach” the contract by making a late payment, therefore insuring that the lender received his penalty payment, or “interest”.

Sometimes the “interest” would be collected as a fee for lost opportunity cost. It was reasoned that a borrower really needs that money today, and they will promise to pay back more in the future after making profits with the money. The lender receives a payment because of his lost opportunity cost.

Another thought is that if the money loaned was for the purpose of investment, then the lender and borrower could agree on a compensation from the profits of the investment. The exact amount of the profit sharing would be determined before hand.

But one thing remains apparent, “interest” or whatever we have wished to call it through the ages, is here to stay. In fact, for the most part, it’s always been with us, because there is always a cost for the use of money.

Diane French is a successful freelance writer providing tips and advice for consumers on mortgages, personal loans and equity loans. Her many years of mortgage industry experience have helped others understand the business.

Glossary of Mortgage Terms

Adjustable Rate Mortgage (ARM): A mortgage that lets the lender adjust the interest rate periodically according to a pre-selected index. Payments may go up or down according to this adjustment.

Acceleration clause: The lender has the right to demand payment of the entire outstanding balance when the first monthly payment is missed. This is a provision written into a mortgage.

Amortization: The systematic and continuous payment, through installments, of a mortgage

Amortization schedule: The schedule showing the amount of each payment applied to interest and principal and the balance remaining.

Annual Percentage Rate (APR): The total yearly cost of a mortgage, on an annual rate, expressed as a percentage. It usually includes a combination of the interest rate, a loan origination fee known as points, and certain other fees paid to a lender to acquire a mortgage. The APR is the most meaningful measure for comparing the cost of mortgage loans offered by different lenders.

Application: A form used by a mortgage lender, either on paper or online, to record necessary information concerning a potential mortgage.

Application Deposit: An amount of money paid to cover expenses such as the appraisal and credit report, during the initial mortgage processing.

Appraisal: A professional opinion of the market value of a property. The term also refers to the process by which this estimate is obtained.

Appreciation: A rise in the value of a property due to changes in market conditions or other causes.

Assessed value: The valuation placed upon real property by a taxing authority for purposes of taxation.

Assessment: A charge against a property for purposes of taxation, such as when the property owner pays a share of the cost of community improvements according to the valuation of the property.

Assumable mortgage: This is a mortgage that can be assumed, or taken over, by the buyer when a home is sold. This is also called “assumption”.

Binder: When a buyer agrees to purchase real estate, a binder is a preliminary agreement, secured by the payment of money.

Borrower: A person who receives funds in the form of a loan or mortgage, with an obligation to repay principal with interest.

Buydown: This is a method of reducing the interest rate on a loan by making a payment to the lender from the seller, buyer or third party.

Cap: A stipulation of an ARM determining how much the interest rate or mortgage payments may increase or decrease.

Cash reserve: A condition of some lenders that buyers have enough cash remaining after closing to make the first two monthly mortgage payments.

Cash to Close: Cash that is readily available to be used to cover the down payment, closing costs, and prepaid items of a mortgage transaction.

Certificate of Occupancy: A certificate issued by a local building department to a builder or renovator, indicating that the building is in proper condition to be occupied and stating the legally permissible use of that building.

Clear title: A title that has no legal questions as to who owns the property, and that it is free of liens.

Closing: A meeting, sometimes called a settlement, during which the title to the property actually changes hands, and the buyer signs the mortgage documents and pays the closing costs

Closing Costs: Also called “settlement costs”, this is money paid by the borrower to cover expenses such as an origination fee, discount points, appraisal, credit report, title insurance, attorney's fees, a survey, and any other expenses in connection with the closing of a mortgage loan.

Closing Statement: A document used at closing that shows the funds received and paid at the closing, including the escrow deposits for taxes, hazard insurance, and mortgage insurance.

Co-Borrower: Additional applicants on a loan whose income helps to qualify for a loan and whose name appears on documents with the same legal obligations.

Collateral: Property (such as securities) pledged by a borrower to protect the interests of the lender.

Commitment letter: A lender's written offer stating the terms, the amount of the loan, the interest rate and any other conditions under which it agrees to lend money to a homebuyer.

Commitment (Loan): A binding agreement made by the lender to the borrower to make a loan, usually at a stated interest rate within a given period of time for a given purpose, subject to the borrower meeting certain conditions.

Commitment Fee (Loan): Any fee paid by a potential borrower to a lender for the lender's promise to lend money at a specified rate and within a given time period.

Condominium: A structure of two or more units in which the homeowner holds title to an individual dwelling unit, an undivided interest in common areas of a multi-unit project, and sometimes the exclusive use of certain limited common areas. The balance of the property is owned in common by the owners of the individual units.

Contingency: A condition that must be met before a contract is legally binding.

Contract of Sale: Written contract signed by a seller and a buyer in which both parties agree to the sale under certain specific terms and conditions. Also called a purchase contract.

Conventional mortgage: Any mortgage that is not insured or guaranteed by the federal government (such as FHA or VA).

Convertible ARM: Under specified conditions, this is an adjustable-rate mortgage that can be converted to a fixed-rate mortgage.

Cooperatives (Co-ops): A structure of two or more units in which the residents own shares in the corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.

Covenant: A clause in a mortgage that obligates or restricts the borrower and that, if violated, can result in foreclosure. Most commonly, assurances set forth in a deed by the grantor or implied by law.

Credit report. A report detailing an individual's credit history, usually prepared by a credit bureau and used by a lender in determining a loan applicant's creditworthiness.

Deed: A legal document conveying title to real property from one individual to another.

Deed of Trust: The document used in many states instead of a mortgage; title is conveyed to a trustee rather than to the borrower (trustor), in favor of the lender (beneficiary) and reconveyed upon payment in full.

Default: The failure to perform an obligation as agreed in a contract, such as making a mortgage payment on a timely basis or to comply with other requirements of a mortgage.

Delinquency: A loan payment that is overdue but within the period allowed before actual default is declared.

Deposit: An amount of money (also called earnest money) given to bind a sale of real estate.

Depreciation: A decline in the value of property, perhaps brought about by age, deterioration, functional or economic obsolescence.

Down payment: The initial payment of cash towards the purchase price which the buyer pays and does not finance with a mortgage.

Due-on-sale clause: A stipulation in a mortgage that states that the borrower must pay the lender in full if the borrower sells the property.

Earnest money: As evidence of good faith, a deposit made by the potential homebuyer to show that he or she is serious about buying the house.

Easement: A right of way giving persons other than the owner access to or over a property.

Encroachment: Physical items such as a wall, fence, building, etc., on the property of another.

Equal Credit Opportunity Act (ECOA): A Federal law requiring lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, sex, age, marital status, receipt of income from public assistance programs or past exercising of rights under the Consumer Credit Protection Act.

Equity: The difference between the market value of property and any outstanding mortgages, loan balances or other encumbrances on the property.

Escrow: Funds held by the lender, set aside for payment of taxes and possible property and mortgage insurance and other recurring charges against real property.

Fair Credit Reporting Act (FCRA): When a lender turns down a potential borrower because of poor credit, a Federal law requires the lender who is declining the loan to inform the borrower of the source of such information.

Federal Home Loan Mortgage Corporation: Known as Freddie Mac, this is a corporation authorized by Congress, which purchases residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) as well as conventional home mortgages. It sells participation certificates whose principal and interest are guaranteed by FHLMC.

Federal National Mortgage Association: Known as Fannie Mae, this is a corporation authorized by Congress to support the secondary mortgage market. It purchases and sells residential mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) as well as conventional home mortgages.

Finance Charge: The total dollar amount your loan will cost you, which includes your origination fee, all interest payments during the term of the loan, any interim interest paid at closing, and any other charges paid to the lender or to a third party. Certain charges like the appraisal, credit report and the title search charges are not included in the finance charge calculation.

First Mortgage: The first mortgage on a property that has priority over any subsequently recorded mortgages.

Fixed Interest Rate: An interest rate which does not fluctuate during the term of the loan.

Flood Insurance: Insurance required by lenders in areas designated as potential flood areas, protecting against loss by flood damage.

Foreclosure: When a borrower defaults on the debt, the property mortgaged as security for a loan is sold to pay the defaulting borrower's debt.

Good Faith Estimate: An estimate, by the lender, which outlines the likely expenses to be incurred in connection with a settlement.

Gross Monthly Income: Total monthly income earned before tax and other deductions.

Guaranteed Loan: A loan that is “backed” or guaranteed by the Federal Government, such as Veteran's Administration or Rural Development. The guarantee protects the lender against loss by the borrower defaulting on a mortgage.

Hazard insurance: Insurance protecting against loss to real estate from physical damage, from fire, wind, vandalism, or other hazards.

High-Ratio Loan: Where the mortgage loan exceeds 80% of the sales price or appraised value.

Homeowners' Association Dues: The monthly or annual fees charged by a condominium or homeowners' association for maintenance of common areas.

Homeowner's insurance: An insurance policy that combines personal liability coverage and hazard insurance for a building and its contents.

Housing Ratio: Sometimes called the payment-to-income ratio, it’s the ratio of the monthly housing payment (PITI) to total gross monthly income.

Homeowner's warranty: A type of warranty or insurance, provided by the builder or seller, that covers repairs to specified parts of a house for a specific period of time.

Index: A rate to which the interest rate on an Adjustable Rate Mortgage is tied. The interest rate may go up or down depending on whether the index rate goes up or down.

Insured Loans: A loan insured by FHA or a private mortgage insurance company.

Interest: Either a) a fee charged for borrowing money, or b) A share or right in some property.

Interest rate cap: Also called a Life Cap or Life Rate, it’s how much interest rates may increase or decrease per adjustment period or over the life of a mortgage.

Investment Property: Property owned, but not occupied by the owner, with the intent of earning income.

Joint tenancy: Joint ownership by two or more persons giving each person equal interest and equal rights in the property, including the right of survivorship.

Late charge: A cash penalty a borrower must pay when a mortgage payment is made after the due date.

Lease-Purchase Mortgage Loan: Low to middle income homebuyers are able to lease a home from a non-profit organization with an option to buy. It’s an alternative Fannie Mae financing option.

Lien: An encumbrance against a property for money due, that must be paid off when the property is sold.

Lifetime cap: Also called an Interest Cap, it dictates how much interest rates may increase or decrease per adjustment period or over the life of an Adjustable Rate Mortgage.

Loan commitment: Also called a Commitment letter, it’s a lender's written offer stating the terms, the amount of the loan, the interest rate and any other conditions under which it agrees to lend money to a homebuyer.

Loan servicing: The responsibility of collection of mortgage payments from borrowers.

Loan-to-value percentage (LTV): The comparison between the outstanding unpaid principal of the mortgage and the lower of the appraised value, or sales price, of the property.

Lock-in: A written guarantee stating that the homebuyer will receive a specified interest rate and points to be paid at closing, provided the loan is closed within a set period of time.

Margin: The number of percentage points a lender adds to the index value to calculate the ARM interest rate at each adjustment period.

Market Value: The highest price which a buyer would pay and a seller will accept, for a property. The market value may be different from the market.

Maturity: The end or final due date on which final payment on a mortgage must be paid in full.

Monthly Payment: Consisting usually of principal, interest, taxes, and insurance, this is the amount that must be paid each month on a mortgage loan.

Mortgage: A legal document that pledges a property to the lender as security for the payment of a loan.

Mortgage banker: A banker that issues mortgages for resale in the secondary market.

Mortgage broker: An individual or company that acts as a “go-between” for borrowers and lenders for a fee.

Mortgage Disability Insurance: In the event of a disability of an insured borrower for a specified period of time, this is an insurance policy which will pay the monthly mortgage payment.

Mortgage Insurance: Insurance protecting the mortgage lender against financial loss due to a mortgage default.

Mortgage insurance premium (MIP): The consideration paid by a mortgagor (borrower) to the FHA or a private insurer for mortgage insurance.

Mortgage Life Insurance: In the case of a death of a covered borrower, this is a term life insurance policy that covers the declining balance of a loan secured by a mortgage, and is payable to the lender.

Mortgage margin: The set percentage the lender adds to the index value to determine the interest rate of an ARM.

Mortgage note: A written promise to pay a sum of money at a stated interest rate during a specified period of time, and the mortgage note is secured by a mortgage.

Mortgage interest rate: The rate of interest in effect for the monthly payments.

Negative amortization: This is when the monthly payments cover only part of the interest then due. The amount of the shortfall is added to the unpaid principal balance to create additional principle.

Non-Conforming Loan: For various reasons, including loan amount and loan characteristics, these are loans that usually have a higher interest rate and origination fee because they are not eligible for sale and delivery to either Fannie Mae or Freddie Mac

Note: A written agreement containing a promise of the signer to pay to a named person, or bearer, a definite sum of money at a specified date or on demand.

Notice of default: A formal written document to a borrower that a default has occurred and that legal action may be taken.

Occupancy: Either a renter or owner who uses the property as a full-time residence.

Origination Fee: A fee paid to a lender for processing a loan application. Usually a percentage of the loan amount.

Owner financing: A property purchase transaction in which the property seller provides all or part of the financing.

Payment cap: With some adjustable-rate-mortgages, it’s a provision limiting the amount by which a borrower's payments may increase regardless of any interest rate increase.

PITI: Stands for principal, interest, taxes, and insurance - the most common components of a monthly mortgage payment.

Planned unit developments (PUDs): A common property that is owned and maintained by an owners' association for the benefit and use of the individual PUD unit owners.

Preliminary Title Report: The results of a title search by a title company prior to issuing a commitment to insure clear title.

Pre-paids: Property expenses such as such as taxes, insurance, rent, etc, which are paid in advance of their due date and will usually be prorated upon sale.

Prepayment penalty: A penalty fee that may be charged to a borrower who pays off a loan before it is due.

Pre-qualification: Determining, in advance of a loan application, how much money a prospective homebuyer will be eligible to borrow.

Primary Residence: A residence which the borrower intends to occupy as a principal residence.

Principal: Either the amount borrowed (i.e. the face value of a note or mortgage) or the remaining unpaid debt, not including interest.

Private mortgage insurance (PMI): Insurance written by non-government insurers that protect lenders resulting from a mortgage default.

Processing: The preparation of a mortgage loan application and supporting documentation for consideration by a lender or insurer.

Purchase Contract (Agreement/Offer): A written contract signed by the buyer and seller stating the terms and conditions of the sale.

Qualifying ratios: The ratio of fixed monthly expenses to gross monthly income, which becomes the guidelines for the lender to determine how large a loan to grant a homebuyer.

Radon: A radioactive gas found in some homes that in large concentrations can cause health problems.

Real estate sales professional: A person licensed to negotiate and transact the sale of real estate on behalf of the property owner.

Real Estate Settlement Procedures Act (RESPA): A Federal consumer protection law that requires lenders to give borrowers information and advance notice of closing costs. It also establishes guidelines for escrow account balances and servicing disclosure.

Refinancing: The process of paying off one loan with the proceeds from a new loan using the same property as security.

Residential Mortgage Credit Report: A report requested by your lender that utilizes information from at least two of the three national credit bureaus and information provided on your loan application. Also see Credit Report above.

Satisfaction of Mortgage: The recordable instrument issued by the lender verifying full payment of a mortgage debt.

Second Home: A residence other than the borrower's primary residence, such as a vacation or weekend home, which the borrower intends to occupy for a portion of each year.

Second mortgage: A mortgage that has a lien position secondary to the first mortgage.

Secondary mortgage market: The buying and selling of existing mortgages. It is different from the primary mortgage market where mortgages are originated.

Security: In lending, the collateral given, deposited, or pledged to secure the payment of a debt.

Seller-take-back: A written agreement where the owner of a property provides financing.

Settlement sheet: The calculation of costs payable at closing that determines the seller's net proceeds and the buyer's net payment.

Survey: A print showing the measurements of the boundaries of a parcel of land,, the location of improvements, easements, rights of way encroachments, and other physical features.

Tenants-by-Entirety: A type of joint ownership of property in which husband and wife are co-owners with rights of survivorship.

Tenancy in common: A type of joint ownership in a property without right of survivorship.

Title: The evidence one has of right to possession of land or ownership of a property.

Title company: A company that specializes in examining and insuring titles to real estate.

Title Insurance: Insurance for the lender or the buyer, against loss resulting from defects of title to a specifically described parcel of real property, or from disputes over ownership of property.

Title search: An examination of public title records to ensure that the seller is the legal owner of the property and that there are no liens or other claims outstanding.

Total Debt Ratio: Monthly debt and housing payments divided by gross monthly income.

Transfer tax: State or local tax payable when title passes from one owner to another.

Truth-in-Lending Act: A federal law requiring a disclosure of credit terms using a standard format.

Zero Point Option: A provision which allows the borrower to avoid the points associated with the loan origination fee. Usually this saving is offset by a slightly higher loan interest rate.

David Morris is a successful freelance writer providing tips and advice for consumers on sites such as mortgages, personal loans and equity loans. Many have commented that his articles have made financial topics easy to understand.

If you're in the market for a mortgage loan, you want to keep one thing high and one thing low.

You want to make sure that your FICO credit score is high and your debt-to-income ratio is low.

If you are seeking a loan, most often the loans officer will do a credit check on you. The most popular credit report comes from FICO, which stands for Fair Isaac & Company, and credit scores are reported by each of the three major credit bureaus: TRW (Experian), Equifax, and Trans Union. On a scale between 365 and 840, a score of 680 will put a smile on the face of your loans officer, and greatly assist you in your quest for a mortgage loan.

On the other side of the coin, the lending company will also want to ensure that your debt-to-income ratio is low. This is the ratio of how much you owe compared to how much you make.

Sometimes when people are hunting for a house, they wish to purchase other large ticket items like furniture, appliances or a CAR. Now, all of these things are great, but there is a time and place for everything. And the wrong time to make these purchases is when you're applying for a mortgage loan.

Why? Because originally the borrower would have qualified in the price range they were looking for, except that the new car payment has raised their debt-to-income ratio, thus lowering their maximum purchase price.

Secondly, how many times have you heard this statement……Buying your first home is probably one of the biggest financial transactions you'll make in your lifetime.

Well, it's true. Before you go out and fall in love with that perfect house, make sure you can afford it. There is nothing worse than finding the perfect house, and then finding out from the bank that they won't give you a big enough mortgage to buy the house of your dreams.

1) compare monthly rental versus monthly mortgage payments;
2) compare the cost of renting to the after-tax cost of owning; and
3) see how rent increases, price appreciation and down payment adjustments can affect your decision.

Use a Home Affordability calculator to determine your price range, and the size of mortgage you need, before shopping for a home. This important step will help you avoid unnecessary frustration by focusing on homes in your price range.

2) You can negotiate the best price because the seller knows you are serious and you have the resources in hand to make the deal. And if you see a house for $250,000, but are only approved for $225,000, you may get the house for $225,000 because the seller knows that's all you have, and he may wish to sell quickly instead of holding out for a higher price later

Resale factor is a big issue when looking for a home, and can impact on your first time mortgage loan. Also, don't forget about tax deductions when trying to decide on the size of your first mortgage.

When looking for the perfect home, before you apply for your first mortgage, remember to think resale factor. In some areas, a swimming pool actually detracts from a home's value and makes the home harder to sell. In neighborhoods with two-car, attached garages, a single-car or detached garage may impact the home sale and future value. Your Realtor can point out features that hurt, as well as those that help, resale value.

Consider taxes. When you buy a home, mortgage interest and property taxes are generally deductible from income taxes. This means while monthly housing costs may be larger when you own than when you rent, what you save in taxes can make up some or all of the difference. For details, speak with a tax professional before your final approval on a first time home buyer loan.

Dave Frizzel is a successful freelance writer providing helpful tips and advice for consumers on mortgages, second mortgages and equity loans. His many years of mortgage industry experience have helped others understand the business.

Consolidation loans can be good, but only if you’re the right fit. Let’s talk about the pro’s and con’s of a debt consolidation loan versus consolidating your debt.

A debt consolidation loan does not mean no debt, and it doesn’t always mean less debt. Consolidation is one of those “buzz” words that you hear everyday, and some debt consolidation companies would have you think that a debt consolidation loan will “set you free”.

A consolidation loan is taking out a loan to pay off your existing creditors. The assumption is that you have a number of outstanding credit card bills and other debts with high interest rates (i.e. 18%-22%), and with a consolidation loan, you pay off all your lenders with this money, and pay a much lower interest rate on this new loan (i.e. 9%).

Two things need to happen for a debt consolidation loan to be successful for you. One, you must insure that your new APR (Annual Percentage Rate) with the loan is less than the total of your outstanding debt, and secondly, you must close off all of the accounts that you just paid off with the loan. If you can do these things, a consolidation loan could be good for you.

Make sure the lender does not charge a large upfront fee that they don’t tell you about. And also watch out if the lender tries to roll the fee into the loan payments in an attempt to hide it.

As mentioned above, you must ensure that you close out all of the accounts that you just paid off with the loan. Otherwise, the tendency will be to start using the cards again because they have a zero balance. Then you’ll have 2 debts. One with 22% and the other with 9%, and you’ll be worse shape than before. CLOSE THOSE ACCOUNTS.

If these things are not spelled out clearly on the contract, or you don’t understand the contract, DON’T SIGN IT. It will come back to haunt you later. Also, don’t keep any of the cash that you got from the loan for yourself. Just borrow what you need to pay off your debts.

Now lets look at the negative. What you’re doing with a loan is converting unsecured debt into secured debt. If you don’t change your spending habits you could be in a worse position than before. Remember, now that you’ve paid off your credit cards, the credit card companies will be eager to renew your cards, with an even higher spending limit.

Quite often, the consolidation loan is a second mortgage which is secured by your home. If you default on your monthly payments, you may lose your home.

So it is important that you get into a debt management program to help you avoid future credit problems and avoid potential bankruptcy.

A debt consolidation program is much different than a debt consolidation loan. In general, with this kind of program, all existing creditors remain the same, except that either through your efforts or a debt consolidation company, interest rates are renegotiated, reduced or eliminated so that your monthly payments are far less.

If you work closely with your creditors, and once again, totally change your spending habits, you may be able to eliminate your debt in 3-5 years.

Paul Sauder is a successful freelance writer providing helpful tips and advice for consumers on personal loans, second mortgages and equity loans. His many years of mortgage industry experience have helped others understand the business.

It's easy to get in debt over your head. Having too many credit cards can lead to overspending.

If you limit the number of cards and set a limit on each card, you can control spending and avoid excessive debt. Carry just one or two and return all unwanted cards. Or, do away with all your high interest cards and obtain a credit card consolidation loan to lower your monthly payment and keep just one card for emergencies.

If your objective is: to reduce interest rates and lower your monthly payments, avoid bankruptcy, consolidate your bills to have one monthly payment, or simply get out of debt the fastest way possible, credit card debt consolidation can help you achieve your goal and save thousands of dollars at the same time.

1) Pay down your highest interest debts first. Avoid making more credit purchases while paying down your debt. Pay the maximum possible toward your highest interest debt, not your highest balance. This method allows you to pay down your debts at the lowest cost.

2) Low interest rate cards can be used as a tool to reduce credit card balances systematically to get out of debt. In certain situations it is wise to transfer balances from high interest cards to new credit cards with low introductory rates, this is known as card surfing. Apply for a lower interest rate card with an opportunity to transfer your balances from current high interest cards. Start paying down your new consolidated balances, doubling the minimum payment you were paying on the old balances. It is crucial that you take advantage of the lower interest rate to pay more each month to reduce your total debt. When the lower initial rate is about to increase, you can move to another lower rate card, if one is offered to you. This is one way you can use credit card debt consolidation but it is trickier and you really have to know your interest rates.

3) Talk to your own bank. As a way for banks to get, or keep, your business, they sometimes offer a balance transfer. This process means that the bank will take your existing credit card balance and transfer it to their credit card. Many times they will offer you a lower rate as an incentive to do so. But remember to close out the credit card that you transferred the balance from.

The interest rate should be less than what you are currently paying on your credit cards. However, you may be able to negotiate an even lower interest rate if you do all your financial banking at the same place you are applying for a credit card consolidation loan.

As a summary, reduce your number of credit cards to one or two, change your buying habits, consolidate your debt to a lower interest rate, and pay a little more than the minimum payment each month so you can pay off that credit card faster and enjoy being debt free.

Paul Sauder is a successful freelance writer providing helpful tips and advice for consumers on loans, second mortgages and equity loans. His many years of mortgage industry experience have helped others understand the business.

There is money in 'them-thar-walls'. Ever done a renovation on an old house, and after tearing down a wall, find thousands of dollars hidden behind the drywall. Believe it or not, I had a friend who found $10,000 hidden in a wall when he was tearing it down. He didn’t feel guilty because his grandma had “willed” him the house, so the money was his anyway. He thanked her in a prayer and the money paid for the renovation.

This is an unusual situation, but in fact, you may even have more than $10,000 in your walls. It’s called equity, and you can withdraw it in an Equity Loan.

How much you can take out depends on the value of the home minus what you owe on it. For example, many lenders will set the amount of your equity loan by taking a percentage (say 75%) of the appraised value of the home and subtracting the balance owed on the existing mortgage

An Equity Loan can allow you to consolidate debt, finance a new business, pay off high interest credit cards, improve your home or simply get cash to buy a car or go on vacation. Equity loans are generally tax deductible so you may save on your taxes also.

The costs of obtaining an Equity Loan are similar to getting a regular mortgage. There is the standard fees for property appraisal, loan application, title and escrow search, etc.

To get your application costs and interest rates as low as possible, shop around, because lenders are always trying to be competitive in this field.

In the olden days (way back, like 20 years ago), if you needed information about how much an equity loan would cost, or how large of an equity loan you could afford, you had to go to a mortgage "professional" and use his loan calculator. All that has changed with the advent of the internet.

In reality, you never have to interact face-to-face with a human anymore to use a home equity loan calculator, get a mortgage or secure a loan. Not that we wish to create totally unsocial people, but when time is at a premium, it is so convenient to simply sit in front of your computer and do all the legwork from the seat of your pants.

And a home equity loan calculator is just one type of calculator. Check this out. You can calculate almost anything. There are Mortgage calculators, Mortgage payment calculators, Home affordability calculators, Loan calculators, Mortgage qualifier calculators, New car payment calculators, Moving calculators, Relocation calculators, Military relocation calculators, Insurance calculators, Lifestyle calculators, Community calculators, Rent-vs-buy calculators, Refinancing your home calculators, and the list goes on.

When you're ready to apply for your home equity loan, use one of the many calculators available on the Net to see how much equity you have, and how much your monthly payments will be.

Rene Hill is a successful freelance writer providing helpful tips and advice for consumers on loans, second mortgages and home equity loans. Her many years of mortgage industry experience have helped others understand the business.

Choosing the best home loan in many cases comes down to choosing the best loans officer, and not the institution.

If you go to a particular lending institution and ask the loans officer "Who offers the best loan package?", the officer will probably recommend the institution they are working for. And when that loans officer moves to a new company, they will probably state that the best package is from their new company. Hmm. See a pattern forming here.

You can contact traditional sources such as Banks, Credit Unions, Savings and Loans, or Mortgage Bankers. All of these institutions have their strengths and weaknesses, and you may be satisfied with your search. But remember, in most cases, they are trying to "sell" their own programs, and will not inform you of a potentially better home loan, because it is a conflict of interest.

This is where a Mortgage Broker comes in, either through traditional channels or on the Internet. Their major strength is that they can shop the market for whichever lender has the best rate. (And this is faster and more effective than you can do on your own). They can also handpick a particular home loan lender that suits your needs exactly, and if that submission is declined, they can simply repackage the loan and submit it to another lender. Once again though, make sure you do some homework yourself to make sure that you're getting the best rates. You don't want to find out that your mortgage broker has a "greedy" loans officer who is finding the best deal, then charging you a higher service fee, which nullifies the lowest rate.

You’ve gotten yourself approved, and now you need to decided which type of mortgage is right for you.

The type of life you lead (or you wish to lead) should have a bearing on your decisions. Below is a brief outline of the 4 different types. (To get a full explanation of these mortgages, talk to your mortgage lender or lawyer).

1) The Fixed Rate Loan is where the interest rate stays the same for the entire length of the mortgage. If you plan to stay in your house for 15-30 years, this could be a good option because the monthly payments are easy to budget and your payments are predictable.

2) An Adjustable Rate Loan starts with an interest rate which is normally lower than a conventional fixed rate loan, and after a specific period of time (ie 3,5,7, etc years), the rate will change to whatever the current market conditions dictate. As the rate changes, your monthly payment changes. So if you feel that you’re in an abnormally high interest rate period, and you think that in the upcoming years the rate is going to drop substantially, you may wish to try this option. With this option, you may feel safer if your mortgage is for a shorter period of time. And sometimes these loans have a limitation on how much an interest rate can go up or down, thus once again protecting you.

4) And finally, there are home mortgage loans for first time home buyers. You can maybe take advantage of FHA or VA government loans based on your income or property location. You may be able to qualify with less income and incur no down payment.

And remember, the shorter your mortgage term, and the higher your monthly payments, the more you’ll save in interest payments.

Jennifer Fountain is a successful freelance writer providing helpful tips and advice for consumers on new mortgages, loans, and financing.

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