Home Loans | Frequently Asked Questions

A mortgage payment typically consists of 4 parts:

• Principal: Reduces the outstanding balance of your mortgage.
• Interest: Goes toward the cost of the loan. Early mortgage payments are heavily weighted toward interest; that’s why it’s better to refinance sooner rather than later when you’re paying more principal.
• Taxes*: Property taxes are charged by the state.
• Insurance*: Homeowners, flood and hazard insurance protect against property damage loss due to the elements and other crises.

*Depending on the type of loan, taxes and insurance are collected by the lender and kept in an escrow account. It is the lender’s responsibility to manage the account, disbursing funds to pay these costs as they are incurred. Lenders often keep an escrow cushion to ensure that if any expenses increase, there are sufficient funds to pay in full.

With a fixed-rate mortgage, the monthly principal and interest payment remain constant for the life of the loan. Fixed-rate mortgages work well if you’re on a fixed income or plan to stay in your home for more than 5 years because they offer stable payments and long-term protection against rising mortgage interest rates.

After a predetermined fixed-rate period, an adjustable rate mortgage (ARM) adjusts annually in accordance with current market rates. It usually offers lower initial rates than a fixed-rate mortgage, but can increase after the fixed-rate period. ARMs are ideal if you don’t qualify at higher fixed interest rates, you can financially manage fluctuating payments, or you’re planning to sell within 5-10 years.

There are numerous adjustable rate mortgages, but they’re structurally the same. After a predetermined fixed-rate period, the interest rate can increase or decrease depending on market conditions. It’s typically calculated by adding a current index rate and a margin. The maximum amount the interest rate can fluctuate during any adjustment period and over the life of the loan is usually capped.

In an effort to help low- to moderate-income families transition to homeownership, Provident provides Federal Housing Administration loans that feature competitive rates and down payment requirements as low as 3.5%. FHAs have both fixed and adjustable rates and a variety of terms. Most importantly, they offer more flexibility than conventional loans, accepting applicants who would otherwise be denied for their inability to make a down payment (like recent college graduates or people trying to complete their education), a higher debt-to-income ratio, or a credit rate that’s been marred by bankruptcy or foreclosure.

For more information about FHA loans, please visit www.fha.com.

A home equity loan and a home equity line of credit are both low-interest financing options that borrow against the equity in your home; however, a home equity loan gives you a lump sum and a HELOC works more like a credit card (you have a certain amount of money to borrow and pay back, but you can take what you need as you need it). This fact, plus the variable interest rate, means your monthly minimum payment will fluctuate.

Conversely, home equity loans have fixed-interest rates. Because of this, they’re better suited for home renovations, paying down debt, and college expenses. HELOCS work best for minor home improvements, appliances, medical bills, and unexpected expenses.

The APR (Annual Percentage Rate) represents the cost of the mortgage as a yearly rate. There are two APRs you need to be aware of. The first is the nominal APR, which is the monthly interest rate multiplied by 12. The second is the effective APR, which takes into account compounding and any fees charged on the loan, including account points, private mortgage insurance, origination fees, etc. The effective APR allows you to more easily compare mortgage loans.

One point equals 1% of your mortgage amount. By paying points up front, you can lower your interest rate, which means lower monthly mortgage payments.

Private Mortgage Insurance (PMI) works much like a typical insurance policy, but it protects the lender against loss in the event of your defaulting. It is obtained by the lender but paid for (with a monthly premium) by the borrower and is often required if your down payment or equity is less than 20% for a new purchase or refinance. That way, the lender can assume the additional risk that comes with less money upfront or less equity in the home.

A loan default or foreclosure triggers the policy payout, which covers a portion of the principal balance you still owe: typically, the difference between a 20% down payment and what you paid up front.

The cost of a policy is based on the size of loan, the down payment, and your credit score. It can range from .5% to 1% of the total loan amount, which is then divided by 12 and added to your monthly house note.

So, take heart: that scary, impossible-seeming 20% down payment doesn’t have to stand in the way of homeownership!

A loan-to-value ratio is the amount of the mortgage divided by the property’s value. For example, if the sales price is $100,000 and the mortgage amount is $75,000, the loan-to-value ratio is 75% ($75,000 divided by 100,000). That means the lender is lending 75% of the total value of the property.