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.

VA Base Loan Amount

This is the base loan amount not including financed Funding Fee.

VA Funding Fee

VA loans require no down payment from the borrower. To help offset the costs to the taxpayers, the borrower must pay a VA funding fee the Department of Veteran Affairs. Most borrowers finance the Funding Fee into the Loan Amount.

Funding Fees vary depending on transaction type (purchase or refinance), down payment (if any).

VA Funding Fee On purchase Transactions:

• Funding Fee = 0%
  • If disabled. For Regular Military OR Reserve/National Guard, regardless whether it’s “First-time Use” or not.
• If Regular Military OR Reserve/National Guard AND this is a “First-time Use”
  • VA Funding Fee = 2.3% Less than 5% down payment
  • VA Funding Fee = 1.65% (5% to less than 10% down payment)
  • VA Funding Fee = 1.4% (10% or more down payment)
• If Regular Military OR Reserve/National Guard AND this is NOT “First-time Use”
  • VA Funding Fee = 3.60% Less than 5% down payment
  • VA Funding Fee = 1.65% (5% to less than 10% down payment)
  • VA Funding Fee = 1.4% (10% or more down payment)

VA Funding Fee for Cash Out Refinance Transactions

• Funding Fee = 0%
  • If disabled. For Regular Military OR Reserve/National Guard, regardless whether it’s “First-time Use” or not.
• If Regular Military OR Reserve/National Guard AND this is a “First-time Use”
  • VA Funding Fee = 2.3% (regardless of equity)
• If Regular Military OR Reserve/National Guard AND this is NOT “First-time Use”
  • VA Funding Fee = 3.60% (regardless of equity)

VA Funding Fee for Streamline IRRRL Refinance Transactions

• Funding Fee = 0%
  • If disabled. For Regular Military OR Reserve/National Guard, regardless whether it’s “First-time use” or not.
• If Regular Military OR Reserve/National Guard is selected regardless of “First-time Use”
  • VA Funding Fee = 0.5% (regardless of equity)

Total Loan Amount

This is the Total Loan Amount financed including Funding Fee.

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.