Many people dream of owning their own home, but the high cost of homes generally requires a home mortgage to make this become a reality. On this page, we discuss some of the basic terms and concepts related to mortgages.

Mortgage Terminology

A mortgage is a loan you obtain to pay for a home and any land it sits on. The home and land is used for collateral on the loan, which means that if you don't make your payments, the lender can take the home away to cover your missed payments.

The loan principal is the amount you actually borrow to purchase the home.

Interest is the amount the bank charges you to use their money; it is a percentage based on current economic indicators.

Because the loan is for such a high amount, it is usually financed for between fifteen and thirty years. The amount of time is called the loan's term. Principal and interest together comprise most of your payment.

The total is then divided into equal payments over the life of the loan using a process called amortization. With amortization your payments mostly go toward interest early in the loan and then more goes toward the principal later in the life of the loan.

For example, if you borrow $100,000 dollars with a 30-year loan at 7% interest, amortization will calculate your payments something like this:

In this example, after thirty years you would have paid off the $100,000 you originally borrowed, but you also would have paid an additional $139,509 in interest. (Try our onlineamortization schedule calculator to experiment with your own figures.)

Your total payment is more than just the principal and interest. The acronym PITI can help you remember all the parts of your payment. It stands for principal, interest, taxes, and insurance.

If you put less than twenty percent down on the loan, the bank considers it a little riskier and requires an escrow account. They pay your annual insurance and taxes from this account and collect money monthly to gather the required amounts.

If you have less than twenty percent down, your lender will probably also require you to include an amount for private mortgage insurance (PMI) in your payment. These are then added to the required principal and interest amounts to total your monthly payment.

This part of the site discusses some of the more common mortgage questions you may have.^*

Less Points or Lower Interest Rates?
Some mortgage loans have no "points"; other mortgages have a lower interest rate. This article discusses the pros and cons of each type.

What Does My Credit Score Mean?
About the influence your credit score or FICO score will have on your mortgage application, with a few things you can do to improve your score.

What If I Don't Have A Down Payment?
Things you should know about down payments, with a few ideas to come up with the down payment that most lenders prefer.

What If I'm Turned Down for a Mortgage?
About the steps you could take if your mortgage application is denied.

^* Don't forget to read our DISCLAIMER: it contains important information!

When you receive a quote from a lender, it will usually include the interest rate and points. A point is one percent of the loan amount, and lenders can charge from one to several points on a loan. Points are paid as part of closing costs.

Discount points are prepaid interest; the more points you pay at closing, the lower the interest rate on your mortgage is.

Origination points are basically just a fee to cover the lenders cost of making a loan.

Discount points are tax deductible, but origination fees are not. When choosing between loans with points or no points, consider how much money you have available for closing, and how long you plan to own the home.

If you do not have much money for closing, a loan with no points will require less money up front. However, if you plan to live in the home for a long time, a lower interest rate will ultimately be better for you.

You can ask the seller to pay the points as part of the purchase agreement; if they agree to pay the points, you still get the tax deduction.

What Is My Credit Score and What Does My Credit Score Mean?

A down payment is the biggest hurdle most first-time homebuyers face. Most lenders prefer at least 20% down and require at least 5% to 10% down. Financing a mortgage with less than 20% down requires you to get private mortgage insurance (PMI). Putting more money down on a house may persuade lenders to overlook credit problems, as well as loan you more money.

To come up with a down payment, you can save money by cutting out extras, borrowing from your 401(k), or borrowing from family members.

You should have your down payment available at least two months before you apply for a mortgage.

If you are still unable to come up with 20% down, look for special mortgages or programs for first-time homebuyers or those with low income.

Many people applying for a loan worry about this possibility, but it is actually a somewhat unusual occurrence. Lenders can usually adjust loan terms in many ways in order to help you qualify for a loan.

However, if you are denied, there are several steps you should take:

First, ask the lender for an explanation. They are required to tell you, in writing, exactly why your application was denied within thirty days. The most common reasons given are inadequate down payment, too much debt, and poor credit rating. All of these can be corrected with time however.

Second, ask for a review of the decision. It is possible you could still qualify if you can satisfy the reviewer that your credit was damaged by an isolated and unpredictable incident such as a major illness.

Finally, if the first lender still denies your application, go to another lender. Just because one lender feels you are not qualified for a loan doesn't mean they will all feel the same way. Different companies operate under different guidelines, and although you may pay higher rates, you should be able to find someone who is willing to offer you a loan.

How do banks decide how much money to lend you? They base their decision on their estimate of your ability to repay the loan.

To make this estimate, they look at your income, your available cash, your debt, and your credit history.

The information contained on this web site is provided for general information purposes ONLY, and the mortgage calculators are provided as a free service to our users.

NO guarantee, explicit or implied, is made regarding the accuracy or applicability of the materials on this site to any specific purpose.

The mortgage calculators and other information provided on this site are NOT a substitute for legal or other professional advice.

Always consult with a professional advisor before making financial decisions!

Refinancing is when you apply for a secured loan in order to pay off another different loan secured against the same assets, property etc. If this original loan had a fixed interest rate mortgage which has now declined considerably, then you would like to avail of a new loan at a more favorable interest rate.

When is Refinancing an Option

Typically home refinancing is done when you have a mortgage on your home and apply for a second loan to pay off the first one. While taking the decision to go for the home refinancing option, it is important to first determine whether the amount you save on interests balances the amount of fees payable during refinancing.

Home Refinancing Benefits

Imagine a scenario where you can have access to extra cash, while simultaneously lowering your monthly mortgage payment. This dream can become a reality through mortgage refinancing.

A house is the largest asset you may ever own. Likewise, your mortgage payment may be the largest expense you'll have in your monthly budget. Wouldn't it be great to use this asset to reduce your monthly payment and put extra cash in your pocket? When you refinance your mortgage, you can take advantage of the equity in your home and enable this to take place.

Lower Refinance Rate, Lower Payments

When you purchased your dream home, the financial environment dictated interest rates. While certain factors, like your credit rating and the amount of the down payment that you were able to afford, influenced your interest rate, the single most important factor was the prevailing rates at that moment. However, interest rates fluctuate. When the Federal Reserve enters a rate-cutting period, the prevailing rates may become significantly lower than when you originally purchased your home.

By refinancing your mortgage when interest rates are lower, you can exchange a higher interest rate for a lower one, which, in turn, will lower your monthly payment.

Shorten the Length of Your Mortgage when Refinancing

Another advantage of home refinancing is that you can shorten the term of your mortgage. Let's say, for example, that you originally had a 30-year mortgage and have been paying it for eight years. Thanks to mortgage refinancing, you can switch to a shorter term of either 10, 15 or 20 years. This can save you thousands of dollars of interest. Also, if the refinance rate is lower, but you maintain the same monthly payment, you will build up equity in your home more quickly, because more of your payment will be going towards principal.

Exchange an Adjustable Rate (ARM) for a Fixed Refinance Rate (FRM)

When interest rates are low, adjustable rate mortgages (ARMs) are the housing market's darlings. However, as interest rates increase, that adjustable rate may not look as sweet. It's also possible that you opted for an ARM because your financial future was less secure, or you weren't sure how long you'd stay in your home. If, however, you've become financially stable and know that you'll be staying in your home for several years, it may be beneficial to swap that fluctuating adjustable rate for a fixed one. You'll have more security knowing that your monthly payment will remain steady, regardless of the current market environment.

Cash-out refinancing

One way to put more money in your pocket is to tap into the equity you've built in your home and do a "cash-out" refinancing. In this scenario, you can refinance for an amount higher than your current principal balance and take the extra funds as cash. This can provide money for remodeling your home, paying off high-interest rate bills, or sending your kids to college.

PMI (Private Mortgage Insurance)

If you were unable to make a down payment of 20 percent when you purchased your home, you may have been required to purchase Private Mortgage Insurance or PMI. If your house has appreciated since then, and you've steadily paid down your mortgage, your equity may now be more than 20 percent. If you refinance, you will no longer need PMI.

In many ways, your house is like a cash cow. If you have discipline and knowledge of the benefits of refinancing, you can tap into its milk for years to come.

To find the best refinance loan offers complete our short form. You will find lenders and brokers that offer home refinance loans in California, Florida and all other states.

Sources

• U.S. Department of Housing and Urban Development (external)
  
• U.S. Department of Treasury (external)

Refinance Articles & Resources

• Streamline Refinancing
• No Cost Refinance
• Refinancing FAQ
• FHA Refinance
• Should I refinance my home mortgage?

Donna McCartney made phone call after phone call and wrote letters about her family's deteriorating financial predicament and their inability to make their mortgage payments.

She appealed to her mortgage company, beginning more than a year ago, hoping to get her interest rate reduced. She wrote to the president, her congressman and her senators.

Her husband, Brent, is an electrician whose industry was hit hard by the recession. He filed for unemployment insurance last year.

The couple's income has fallen $10,000 a year in the past four years. They are six months behind in their mortgage payment.

They got rid of their cell phones, Internet and cable services. They depleted their savings and 401(k) plans. Their van was repossessed. A powerboat that was written off by a bank still sits in their yard.

Her husband is working at a job two hours away in Chesapeake from their home in the Northern Neck.

Her persistence has paid off. A loan modification has come through -- after a certified mortgage counselor associated with the Virginia Foreclosure Prevention Task Force recently intervened on their behalf.

"I got my first night's sleep in over a year," she said.

Still, she is not thrilled. "It's a shame that you need a mortgage professional on the phone to say 'let's cut the crap and get down to business.'"

The offer will give them some financial relief. "It boggles my mind that the banks couldn't do more."

. . .

The McCartneys' story could be told over and over again -- with different names and circumstances.

Many are not so lucky, as foreclosures continue to mount in Virginia and across the nation. And people who thought they were negotiating for loan modifications end up losing their homes anyway.

In Virginia, 1.6 percent of households, or 52,127 borrowers, had trouble making their mortgage payments in 2009, up 220 percent from 2007, according to RealtyTrac, an online researcher of foreclosures.

Victoria Harris of Chesterfield County had her house foreclosed on Oct. 13, but she is still in the house and hopes to have the foreclosure rescinded.

Harris, a retired machine operator at Philip Morris, has lived in the house for nearly 14 years. She told the new owners that she hadn't sold her house and she was in the middle of a loan modification.

"This is not just something happening to my mother -- it is happening to a lot of people," said Berneatha Terrell, Harris' daughter. "People get tired, worn out. They are weary. They give up."

Sandra Russell lost her home in Ruther Glen in Caroline County Oct. 22, also in a botched loan modification attempt. She moved in with her daughter and son-in-law and their four children in a three-bedroom house with one bath.

"Right now, I am trying to pull myself together," said Russell, who works in customer service in the hospitality industry. "I've been depressed for two and a half months. I am trying to work through this and move forward."

. . .

It can take a year -- or more -- to get a loan modification, loan experts say.

The system is so bogged down with applications that borrowers often need to submit multiple financial packages to their lenders.

"The borrower submits information, but the lender can't get to the packet for three months and by then, the information is outdated," said Paula Sherman, lending protection coordinator for Housing Opportunities Made Equal of Virginia Inc., a housing advocacy group in Richmond.

If or when a loan modification comes through, a borrower's financial situation often is worse. Arrearages and late fees have piled up. A modified loan may end up costing more in monthly payments.

"The worst part is while these banks drag their feet, you're trapped," McCartney said. "You can't refinance because your credit is destroyed."

. . .

Harris' problems started early last year when she attempted to do a loan modification to reduce her monthly mortgage payments.

"President Obama said he had a plan to help homeowners lower their mortgages," Harris said. "That is all I was going on."

Making no headway with her lender, she contacted a third party in California who was supposed to negotiate for her. She paid $2,000 to him.

Harris was sent an eviction notice and was supposed to be out of the house Jan. 25. She posted a $5,000 bond as a last-ditch effort to stay in the house.

"My mother believed it was a mistake and the mortgage company would correct it," Terrell said. "She's still fighting trying to see if the mortgage company will take back the loan."

Housing experts warn homeowners to refuse to deal with people who offer for a fee to negotiate with mortgage companies and who claim they can stop or delay a foreclosure. They say homeowners should deal only with housing counselors certified by the Department of Housing and Urban Development.

. . .

Russell had an adjustable rate mortgage and had tried for years to get a fixed-rate loan.

Her lender would not

consider a loan modification unless she was delinquent on her monthly payments.

She stopped paying her mortgage. Ten months later, her lender foreclosed on her house. The next day, the new owners knocked on her door.

Russell told them she was in the middle of a loan modification and they must have the wrong address. She had to move by Jan. 20.

She wonders what she would have done had she been unable to move in with family. "Would I be homeless? It's beyond scary."

Loan experts say it is not unusual for lenders to stipulate that borrowers must be delinquent with their payments before they can do a modification.

Borrowers should set aside their monthly payments while their applications are being reviewed, Sherman said. "Unless you heard it from your mortgage company, keep making your payments. Don't let someone other than your mortgage company make decisions for you."

. . .

The Obama administration's housing relief plan has helped about 12 percent of borrowers who have applied for loan modifications since the Home Affordable Modification Program was started a year ago.

The program was designed to help keep up to 4 million Americans in their homes by preventing avoidable foreclosures. To date, about 116,000 borrowers have had their monthly payments permanently reduced. Nearly 1.3 million borrowers have received offers for trial modifications.

Treasury officials say they are working with mortgage lenders to expedite the process.

"With the Obama stimulus package, we are seeing a huge increase in the number of customers who think they are automatically entitled to a loan modification," said Sandy Case, default administration manager for Virginia Housing Development Authority.

"It's a big downfall when they find out they are not eligible."

For a government-sponsored modification, the property must be owner-occupied. The borrower needs to document a financial hardship and have income to support a payment.

Lenders, including those working outside government programs, are coming through with loan modifications, but some are more forthcoming than others.

"It's still a major bureaucracy," said Connie Chamberlin, president and chief executive officer of Housing Opportunities Made Equal.

The process can require talking to seven departments within the same mortgage company and trying to get them to talk with each other.

A recent case in Richmond involved a person in one department who agreed to do a short sale, basically selling a house to another buyer for less than what was owed.

Meantime, a person in another department at the same company was proceeding with a foreclosure. "Even though there was a contract on the house for four months, it was foreclosed on," Chamberlin said.

The house sold on the open market for $30,000 less than the short sale offer, she said.

. . .

The McCartneys applied for the federal program. They weren't eligible. They contacted Housing Opportunities Made Equal, also to no avail.

"There is never any guarantee that a lender will do a work-out with you," Chamberlin said.

To qualify, a person would need to spend 31 percent or more of gross monthly income on housing costs. The general rule doesn't take into account household circumstances, such as the number of dependents.

Donna quit her job in 2007 when their son was born. She and her husband are raising four children, including their nephew whose mother was killed.

She said she hopes people won't judge them for their decision to send their nephew and oldest son to Fork Union Military School without knowing the difficult circumstances.

McCartney's husband is a Navy Gulf War veteran. She said they could have qualified for a Veteran's Administration loan when they bought their $180,000 vinyl rancher in 2006.

Instead, they went through a mortgage broker who has since gone out of business. They took out two high-interest, adjustable rate mortgage loans.

The couple had hoped they would get a market-rate loan -- a 30-year fixed rate with about a 5 percent interest rate -- in their negotiations.

Bank of America, their primary mortgage holder, offered to reduce their interest rate from 8.59 percent to 6.25 percent interest-only for the next five years, with principal added after that time.

Their second loan had an interest rate of 11.7 percent. CitiMortgage offered to reduce the rate, which will bring their total monthly mortgage payment to $1,232 from $1,632.

"The banks tried very hard not to help us," McCartney said. "The only reason we could get any relief is because I made so much noise and contacted as many people as I could."

Bank of America spokeswoman Nicole Nastacie said, "Bank of America is committed to helping customers facing financially difficulties remain in their home. We apologize for Ms. McCartney's experience."

The couple did not meet eligibility requirements for the government program, she said. "Bank of America went a step further and worked directly with the investor on their loan to develop a program that was affordable."

An online mortgage calculator can quickly and accurately predict both your mortgage payment and amortization schedule with just a few pieces of information. You won't have to figure out a bunch of math equations and operations.

To use this type of calculator, you'll need the following information:

1. Mortgage amount.

2. Mortgage term.

3. Interest rate.

4. Mortgage start date.

Once that information is entered into the mortgage calculator and you click "Calculate," the mortgage calculator instantaneously performs a series of equations and displays your monthly payment.

Clicking "Show/Recalculate Amortization Table" reveals a complete amortization table that displays what you've paid versus what you owe month by month through the end of the loan. Want to know what you'll owe on your mortgage in July 2019? The calculator will show you. Want to find out how much interest you'll pay on a 15-year versus a 30-year mortgage? You can find that out, too.

You can even find out how much extra payments will cut down on your term and the amount of interest you'll pay. Just enter a monthly, yearly or one-time payment into the "Extra payment" blanks and click "Show/Recalculate Amortization Table." The mortgage calculator then will display the new payoff date and the new total amount of interest you'll pay.

Bankrate has more information about how to use mortgage calculators.

Most people use a mortgage calculator to estimate the payment on a new mortgage, but it can be used for other purposes, too. Here are some alternative uses for Bankrate's calculator.

1. Planning to pay off your mortgage early.

Use the "Extra payments" functionality of Bankrate's mortgage calculator to find out how you can shorten your term and net big savings by paying extra money toward your loan's principal each month, every year or even just one time.

To calculate the savings, enter a hypothetical amount into one of the payment categories (monthly, yearly or one-time) and then click "Show/Recalculate Amortization Table" to see how much interest you'll end up paying and your new payoff date.

2. Decide if an ARM is worth the risk.

To get an idea of how much you'll really save initially, try entering the ARM interest rate into the mortgage calculator, leaving the term as 30 years. Then, compare those payments to the payments you get when you enter the rate for a conventional 30-year fixed mortgage. Doing so may confirm your initial hopes about the benefits of an ARM -- or give you a reality check about whether the potential plusses of an ARM really outweigh the risks.

3. Find out when to get rid of private mortgage insurance.

Simply enter in the original amount of your mortgage and the date you closed, and click "Show/Recalculate Amortization Table." Then, multiply your original mortgage amount by 0.8 and match the result to the closest number on the far-right column of the amortization table to find out when you'll reach 20 percent equity.

Bankrate has more information about how to use mortgage calculators.

Kim Jackson and her husband, Ken, have spent the last four years renting a house just outside of Atlanta. During that time, they've had two kids, changed jobs, and outgrown their rental. The Jacksons know just where they want to live and how much money they can put down on a new house and still live a good life. They’re smart shoppers, in no need to rush into a purchase. You might say the Jacksons have discovered one of the best-kept secrets of homebuying: Finding the right lender or broker is as important as finding the right home. The right lender or broker can save you money over the lifetime of a loan, not just by providing or finding the best possible interest rate but also by making sure that the specific mortgage product is the right one for your family's long-term financial needs. (See Mortgage.com's articles on different mortgage products and features.)

So how do you find a lender or broker you can trust? Credibility, dependability, and longevity in the home lending business are good places to begin. Start with credibility. It's not easy to know if the prices quoted by lenders are reliable. Some will quote you precise, competitive rates, but others will claim low rates to bring in customers or tell you that the rates offered by competitors will change as you get closer to locking-in your mortgage. Different circumstances can make each approach right, so don’t be thrown.

Here’s where dependability matters. You want a lender or broker to deliver on what they promise. It’s not just a question of who has the lowest rate, but who can work with your financial needs to find the right mortgage product for you. The best way to gauge a lender’s dependability is to shop. Get a good grasp of the lingo – become an educated customer who can throw around terms like PMI, LTV, 10/1, and Interest Only (I/O) with ease. Learn the differences between fixed rate and adjustable rate mortgages (ARMs), about how different terms (lengths) and mortgage features can affect the price. Get complete breakdowns of actual dollars in closing fees and other potential costs from each lender. Consider whether paying points to buy down the interest rate makes financial sense for your situation. But look closely at how the math is being done—and what fees are being added to your mortgage. Indeed, shop the fees and rates together.

Both banks and brokers have their strengths and weaknesses. Brokers work with many mortgage bankers and, as a result, can sometimes find slightly more competitive rates—perhaps one-eighth of a percent lower—but dealing directly with a mortgage banker can move a loan along more quickly. Depending on your situation, that may make a bank loan more appealing than a mortgage processed by a broker, although most mortgage experts say that rates are pretty much the same wherever you go, give or take this tiny percentage.

Your buying business isn’t complete until you’ve gone through the process of filling out a 1003 (say Ten, Oh, Three) form (the basic loan application form developed by Fannie Mae and Freddie Mac and used by most banks and mortgage brokers). Once you do, by law, you will receive a Good Faith Estimate and TIL (Truth in Lending) disclosure from your loan officer—an official estimate of your closing costs and cost of your credit in chart form—within three days of providing your loan application. This is your lender’s estimate of what it will cost you to close including the Annual Percentage Rate (APR)—the cost of money borrowed in a percentage rate, inclusive of all fees. Here as elsewhere, use caution in accepting any figures that aren't specific to your situation.

Types of mortgage instruments

Two types of mortgage instruments are commonly used in the United States: the mortgage (sometimes called a mortgage deed) and the deed of trust.^[11]

The mortgage

In all but a few states, a mortgage creates a lien on the title to the mortgaged property. Foreclosure of that lien almost always requires a judicial proceeding declaring the debt to be due and in default and ordering a sale of the property to pay the debt.

Security deed

The deed to secure debt is a mortgage instrument used in the state of Georgia. Unlike a mortgage, a security deed is an actual conveyance of real property in security of a debt. Upon the execution of such a deed, title passes to the grantee or beneficiary (usually lender), however the grantor (debtor) maintains equitable title to use and enjoy the conveyed land subject to compliance with debt obligations.

Security deeds must be recorded in the county where the land is located. Although there is no specific time within which such deeds must be filed, the failure to timely record the deed to secure debt may affect priority and therefore the ability to enforce the debt against the subject property.^[12]

The deed of trust

The deed of trust is a deed by the borrower to a trustee for the purposes of securing a debt. In most states, it also merely creates a lien on the title and not a title transfer, regardless of its terms. It differs from a mortgage in that, in many states, it can be foreclosed by a non-judicial sale held by the trustee.^[13] It is also possible to foreclose them through a judicial proceeding.

Most "mortgages" in California are actually deeds of trust.^[14] The effective difference is that the foreclosure process can be much faster for a deed of trust than for a mortgage, on the order of 3 months rather than a year. Because the foreclosure does not require actions by the court the transaction costs can be quite a bit less.

Deeds of trust to secure repayments of debts should not be confused with trust instruments that are sometimes called deeds of trust but that are used to create trusts for other purposes, such as estate planning. Though there are superficial similarities in the form, many states hold deeds of trust to secure repayment of debts do not create true trust arrangements.

Mortgage lien priority: "title theory" and "lien theory"

Except in those few states in the United States that adhere to the title theory of mortgages,^[15] either a mortgage or a deed of trust will create a mortgage lien upon the title to the real property being mortgaged. The lien is said to "attach" to the title when the mortgage is signed by the mortgagor and delivered to the mortgagee and the mortgagor receives the funds whose repayment the mortgage secures. Subject to the requirements of the recording laws of the state in which the land is located, this attachment establishes the priority of the mortgage lien with respect to most other liens^[16] on the property's title.^[17] Liens that have attached to the title before the mortgage lien are said to be senior to, or prior to, the mortgage lien. Those attaching afterward are said to be junior or subordinate.^[18] The purpose of this priority is to establish the order in which lien holders are entitled to foreclose their liens in an attempt to recover their debts. If there are multiple mortgage liens on the title to a property and the loan secured by a first mortgage is paid off, the second mortgage lien will move up in priority and become the new first mortgage lien on the title. Documenting this new priority arrangement will require the release of the mortgage securing the paid off loan.