Loan Term

The loan term is the length of time that the loan has to be repayment back to the lender as specified in the promissory NOTE between the borrower and the Lender.

Loan terms include but are not limited to the interest rate, conditions under which the interest rate can change and how such changes are determined, loan fees, payment amount and due date, the length of time for repayment, prepayment penalties, use of loan proceeds and lender recourse in the event of default.

Federal law requires that the terms of a loan be disclosed to borrowers before they can be obligated by them.

Loan Terms Explained

Loan terms are the various requirements of a loan that determine the borrower’s and lender’s financial obligations. Common terms used in conjunction with loan terms are Annual Percentage Rate (APR), principal and length of loan. A good combination of loan terms is simple interest, a low APR and no prepayment penalties.

When you are deciding what kind of loan to get, there are a few things to keep in mind.  Usually the most manageable loans are those with a low APR, low closing costs and those that let you build equity.

Simple interest is a pretty attractive loan term as well, especially if the interest is relatively low.  Simple interest is charged only once, whereas compound interest is more expensive because it can be charged repeatedly-monthly, weekly, even daily-depending on the loan terms.

The APR, or annual percentage rate, on loans includes both the interest rate and the fees and charges, such as loan-processing fees and charges for credit-related insurance.  For example, a loan may have an APR of 6 percent but an interest rate of 5.5 percent.  The missing 0.5 percent APR represents fees and charges that you’ll probably pay up front at the closing of the loan.  Your monthly payments will be based on the 5.5 percent rate which is usually compounded monthly.

If the loan terms include a prepayment penalty and you are considering accelerating payments to pay off your loan faster, you should probably read the fine print.  Prepayment penalties are charges for repaying your loan within the first few years.  When a loan is repaid early, lenders lose a portion of their projected profits, so to compensate for that potential loss, they might include a prepayment penalty in the loan terms.

Common Amortization Terms for Fixed Rate Mortgages

The most common amortization terms for fixed rate mortgages in the US are 30 year, 20 year and 15 year terms. This is the length of time that fixed payments of principal and interest are paid to the Lender over the agreed to term, or period, of the loan. Other terms are available depending on the Lender chosen.

Definition

A down payment is the difference between a home’s purchase price and the amount of the mortgage against the property. The down payment must be paid upfront before the home purchase can close.

Down Payment Requirements

The down payment requirement depends on the type of mortgage the home buyer chooses. Here is a partial list:

• 0% : VA home loans for military and veteran borrowers and USDA loans in eligible rural areas
• 3%: HomeReady (Fannie Mae) and Home Possible (Freddie Mac) programs for first-time buyers
• 3%: Conventional loans (non-government) with private mortgage insurance
• 3.5%: FHA home loans with credit scores of 580 or higher
• 10%: FHA home loans with credit scores of 500-579
• 20%: Conventional mortgage without private mortgage insurance

Approved Sources

Down payments can only come from approved sources. Examples of approved sources, depending on the program, are:

• Savings / Checking
• 401(k) loan
• Grant from an approved down payment assistance program
• Gift from relative
• Proceeds from the sale of an asset

Sources Not Allowed

Down payment help from parties that benefit from the property sale is not allowed. For example:

• The home seller
• Real estate agent representing either the buyer or seller
• Lender for the transaction
• Home builder

Down payment funds must be documented to prove that they come from an approved source. That can include bank statements, deposit slips, gift letters stating the funds need not be repaid, bills of sale and other paperwork.

Down Payment for a Home

In the context of home buying, a down payment of 20 percent or more of the purchase price can keep you from having to pay private mortgage insurance, or PMI.  Private mortgage insurance may require an initial premium payment of 1.0 percent to 5.0 percent of your mortgage amount, as well as an additional monthly fee depending on your loan’s structure.  PMI protects lenders from losing money if borrowers default or fails to repay their debt.

Effect on Monthly Payment

Down payments can also help make your monthly payments manageable.  Generally, the larger your down payment, the less you will have to pay each month.  This can help you stay within your monthly budget so that you can save and invest money as you please.

Definition

Private mortgage insurance (PMI) is Insurance that covers mortgage lenders if the borrower defaults on the mortgage. It is nearly always required for loans exceeding 80 percent of the property value or purchase price.

PMI Explained

Mortgage insurance is almost always required whenever borrowers finance more than 80 percent of a home’s value or purchase price. Government mortgages are insured by the agencies that oversee them – the FHA, USDA and VA, using premiums paid by borrowers. For conventional mortgages (non-government), insurance can be purchased from private insurers, and in that case it’s called private mortgage insurance or PMI. The borrower is evaluated not just by the lender, but also by the mortgage insurer. The cost of mortgage insurance is based on the borrower’s credit score and the mortgage loan-to-value (LTV). Higher LTV mortgages have more expensive PMI premiums, but borrowers with higher credit scores pay lower PMI premiums. Mortgage insurance is not for the borrower’s protection; it’s for the lender, and it kicks in if the proceeds from a foreclosure sale don’t cover what the lender is owed – the mortgage insurance covers some or all of the loss. The higher your credit score and down payment or equity in the home, the lower the PMI you pay and vice versa.

Loan Amount

This is the principal amount that was borrowed and is calculated as the difference between Home Value and Down Payment.

Total Interest

This is the total interest paid for the loan amount borrower over the life of the loan based on the calculator inputs and assumptions.

Total of All Payments

This is the sum of all payments made over the life of the loan and includes payments towards principal, interest, property taxes, home owners insurance, HOA dues and PMI based on the calculator inputs and assumptions.

Disclosures

Calculators are made available as tools for your use in researching and comparing products. Lendia does not guarantee the accuracy of the results and you should consult with Lendia for individualized advice tailored to your personal financial circumstances. All tools and calculators are deemed examples and are for illustrative purposes only. Your final payment, interest rate, loan, amount and/or fees are unknown and all calculations are estimates only.