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This infograph helps explain the subprime mortgage crisis which can be important to understand when applying for mortgage refinancing, or when applying for a new home mortgage. Understanding the big picture helps plan a new home loan, or deciding if you should refinance.

At eHomeMortgages we work with established financial experts and want you, the consumer, to have all the proper information when making a decision. If you have any specific questions thoughts, please leave a comment.

1. Mortgage brokers:

These mortgage companies or individuals are independent contractors that serve as intermediaries between lenders and borrowers, originating mortgage loans for the latter and earning a placement fee in the process.  Mortgage brokers generally provide origination services and focus on the bulk sale of home loans on the secondary market, short-term funding of large projects, and residential mortgage loans.  Typically, a mortgage broker originates loans and then places them with numerous other lenders with whom they normally conduct business.  The role of mortgage brokers is advisory in nature and involves assisting clients in locating funds, describing complex home loan products and options, and negotiating the financing.  These professionals perform a multitude of tasks including the following:

• Assisting prospective borrowers in the application process and in loan processing;
• Obtaining the customer’s credit report, conducting a credit check, and assessing the customer’s financial circumstances (i.e. income) in order to ascertain the amount of funds that he or she can borrow;
• Counseling borrowers on the loan process and on an extensive selection of mortgage products available from a wide array of wholesalers (i.e. credit unions, trust companies, and banks) and that offer an optimal rate as well as advantageous terms and conditions and that match their home purchasing needs;
• Gathering and submitting the required documentation- confirmation of income, loan application, credit rating, financial data, and proof of equity- to the lender;
• Communicating with third parties such as surveyors, estate agents, title companies, and appraisers; and
• Negotiating on behalf of borrowers (i.e. interest rate).

Since mortgage brokers do not work for a particular lending institution but maintain a business relationship with dozens of lenders, they are equipped to recommend the most suitable mortgage program to their customers.  Mortgage brokers are able to offer low rates due to their minimal setup and overhead costs.  When recommending a particular lender, they generally focus on the following attributes: 1) its satisfaction of borrowers’ needs, 2) its capacity to finance the loan in a timely manner, 3) its underwriting criteria, and 4) its reputation for quality service.

Mortgage brokers also provide a number of services to wholesale lending institutions, such as : 1) preparation of home loan applications, 2) pre-qualification of prospective borrowers, 3) marketing of loan products, as well as 4) assembly and delivery of the final loan package.  Borrowers pay mortgage brokers a commission or fee for the services they provide and only if and until the loan closes.

2. Mortgage lenders:

These are the institutions that actually provide the mortgage funds to borrowers seeking to purchase real estate.  Mortgage lenders include private companies, life insurance companies, trust companies, credit unions and banks.  Unlike brokers, which may only be authorized to lend funds in a handful of states, mortgage lenders are usually licensed to loan money in every state.  They serve the public in numerous capacities including the following:

• Underwriting and funding mortgages;
• Ensuring the mortgage’s satisfaction of underwriting guidelines;
• Issuing the final approval for loan requests;
• Presenting the funds to the borrower at the closing in exchange for a lien on the real estate in question and a note confirming the client’s debt and duty to repay;
• Providing loan applicants with information such as pre-eligibility underwriting criteria such as housing and debt ratios;
• Explaining the offer in detail, including such items as the fees (appraisal, mortgage, underwriting fees) and interest rate;
• Requesting financial information such as liabilities, expenses, income, bankruptcy filings (if any), and employment record from loan applicants;
• Applying for the customer’s credit score in order to assess the latter’s debt repayment ability;
• Deciding whether to grant, refuse, or adjust the borrower’s application for a re-evaluation;
• Ascertaining and servicing the loan amount for which the applicant qualifies;
• Furnishing the borrower with a good faith estimate, and
• Closing and servicing the mortgage.

Mortgage lenders that originate the loan themselves are known as “retail lenders”, whereas those who delegate certain duties to mortgage brokers are dubbed “wholesale lenders”.  Costs and fees are typically charged by lenders for purposes of loan processing.

3. Mortgage bankers:

Also referred to as “direct mortgage lenders”, these entities finance home loans in their own name, sell them to investors, set up monthly payments, and take charge of the escrow.  Mortgage bankers, which may be corporations, firms or individuals, are engaged in the origination, resale, and servicing of loans backed by collateral on real estate.  A large mortgage banker typically services home loans, whereas those smaller in size generally sell their servicing rights.  Mortgage bankers perform a wide range of services, including the following:

• Deciding whether to grant or deny the credit application;
• Presenting to prospective borrowers a list of its mortgage programs;
• Selling the home loan to investors such as Fannie Mae and insurance providers;
• Financing mortgages by putting short-term notes up for sale or borrowing from lending institutions; and
• Closing home loans directly and with their own funds or those of a warehouse lender.

So how do you know which one is right for you? When it comes to determining which rate of interest would work best for you, it is important to evaluate the advantages and disadvantages of both mortgage rates as well as your individual situation. After all, what works for some people doesn’t necessarily work for everyone, which is why it is important to first understand these mortgage rates and what they entail.

The Pros and Cons - Evaluate Your Options

If you opt for fixed mortgage rates, the rate of interest you pay will stay the same for the entire life of the loan, regardless of any interest rate fluctuations that the market may experience. Adjustable mortgage rates, on the other hand, are characterized by adjustments that are made to the rate of interest you pay on the loan, as a result of periodic rate changes that occur in the market.

The major benefits reaped from choosing fixed rates are stability and security. This is mainly because the mortgage interest rates remain the same throughout the term of the loan, and your monthly payments also follow suit. Therefore, there are no surprises because you can count on your mortgage payments to be consistent each and every month. However, the negative side to fixed mortgage rates is the fact that they are likely to be higher than adjustable rates. This is because financial lending institutions need to charge higher rates of interest for fixed loans in order to balance out their inability to raise mortgage rates when general market rates are in flux.

It is a common practice for lenders to offer adjustable mortgages at a very low “introductory” interest rate for the first year of the loan term. Unfortunately, it’s after the initial year that you have to be very careful because your mortgage payments can drastically increase. This is because adjustable mortgage rates change in accordance to the rise or fall of standard market rates. Keep in mind, however, that there are certain limitations on just how much adjustable rates can actually vary during the life of your loan. This is typically based on the index chosen, as well as the terms and conditions agreed upon by the lender and borrower. Generally speaking, most lenders incorporate an annual adjustable term, which allows them to adjust your mortgage rates once a year based on industry trends.

Look at Your Individual Situation & the Market

When it doubt, remember to consider your individual situation, and factor in your plans for the future, if appropriate. For example, even though your initial monthly payments can be somewhat higher, fixed mortgage rates might still be the better option if you are planning to stay in your home for many years to come.

Additionally, keep in mind that adjustable mortgage rates are most ideal when interest rates are dropping, but you can’t always depend on a continued decline in interest rates. The bottom line with these two types of mortgage rates is that there are pros and cons to both. Therefore, the only person that can truly determine the best mortgage rates is you!

Home Equity Loans

Home equity loans allow you to receive a loan by using the equity of your home as collateral, acting as a secured debt against your property. To determine the estimated amount of your home equity loan, a simple calculation can be used. Take the current value of your home and subtract the balance on your mortgage from it. The resulting value will be the home equity.

When searching for the best home equity loan for you, be sure to have your income, employment status, credit history, and the current value of your home. The lender will use this information to determine your riskiness as a borrower. The riskier you are, the more expensive your interest rate will be.

These loans are useful for large expenses, including debt consolidation, home repairs, medical bills, and college tuition. Home equity loans can be obtained in either a collective sum, or used as a revolving home equity line of credit.

Home Equity Lines of Credit

Home equity lines of credit are loans that offer you a large amount of cash with a low interest rate. Although they may seem appealing to a homeowner, they are actually dangerous credit lines. Since you are required to use property as a security for the loans, your home may be jeopardized if you are late with monthly payments. Before deciding on the home equity line of credit, be sure that you will not fall behind on your monthly payments.

When applying for a credit line, the lender will consider your income, debts, credit history, and a variety of other financial obligations to determine your actual credit limit. To calculate the borrower’s credit limit, the lender will take a set percentage of your home’s appraised value and subtract the balance on your existing mortgage.

Home equity lines of credit hold a variety of costs, including fees for property appraisals, an application fee, up-front charges, and closing costs, such as attorney fees, title search, insurance, and taxes. You may also have to pay annual membership and transaction fees each time the credit line is drawn upon. If you opt for the home equity line of credit, keep in mind that you will not want to draw a small amount on your credit line. If you do this, the initial charges of the line will dramatically increase the cost of the funds being borrowed.

Equity Lines of Credit vs. Mortgage Loans

Unlike the equity line of credit, mortgage loans provide you with a fixed amount of money which is repayable over a fixed amount of time. If you need a set amount of money for a specific purpose, including home remodeling or medical payments, you might want to consider a home mortgage loan instead of an equity line of credit.

Consider the APR and other charges when deciding between the lines of credit and home mortgage loans; however, do not directly compare the APR as each are calculated differently. The APR for mortgage loans take into account the periodic interest rate, points, and other finance charges, whereas the APR for the equity line of credit is based only on the interest rate.

Home Improvement Loan

Home improvement loans are another option to home equity loans and lines of credit if you are only considering borrowing for home improvement projects. This loan is a fixed rate loan requiring no collateral and does not tap into the equity of your home. Generally used for home repairs, remodeling, and room additions, this loan is a good option to maintain or increase the value of your home without using your property as security.

In order to apply for a home improvement loan, you should have a detailed plan for the home improvement project you plan on carrying out. This plan should include both the calculated and estimated costs for improvements, as well as the expected value of the improvements on your house.

As you can tell, there are many different options for you to consider when looking for a home equity loan or credit line. The best thing you can do as a homeowner is to know what you need to use the money for and look for the best plan and rate available for your lifestyle.

A free home mortgage calculator, which is available on thousands of financial websites, enable consumers to perform the following tasks, among others:

1. Calculate their monthly mortgage fees and payments
2. Comparison shop to secure the lowest monthly payment
3. Quickly evaluate mortgage interest rates on different loans
4. Determine how much home they can afford based on their income and liabilities
5. Work out and fine tune a monthly budget
6. Compare costs
7. Decide whether it is more profitable to rent or buy
8. Plan for their future

Consumers may choose from a multitude of mortgage calculators, including the following:

1. Rent versus buy calculator: This mortgage calculator helps prospective borrowers compare the cost of ownership to that of renting.
2. Required-income calculator: The amount that individuals can borrow hinges upon their current liabilities, income, and interest rates.  Consumers may employ this mortgage payment calculator to compare their total monthly bills, including their mortgage payment, to their monthly revenue.  They can then determine the income needed to be eligible for a specific mortgage amount.
3. Balloon mortgage calculator: With this tool, prospective borrowers can find out what their remaining balance and monthly payments will be when the balloon payment becomes due.
4. Amortization calculator: Based on the information provided by the consumer, this calculator amortizes the home loan over the mortgage period.  An amortization calculator helps consumers to ascertain future payments over the course of the loan.
5. Home affordability calculator: To obtain an estimate on the size of the home or mortgage loan for which they qualify, consumers may utilize a home affordability calculator.
6. Adjustable rate mortgage calculator: This tool enables prospective borrowers to determine their initial and subsequent monthly payments and observe how future adjustments in mortgage rates will impact their monthly payment.
7. Points calculator: For consumers who are refinancing, the points calculator provides the cost of loan points as well as a computation of the savings they generate, and informs borrowers of the minimum duration of time necessary for recovery of the loan points.
8. Debt consolidation calculator: This tool enables consumers to determine the monthly savings that could be reaped by obtaining a consolidation loan.
9. Interest-only mortgage calculator: Typically, prospective borrowers must enter the interest rate, number of payments, loan term, and initial principal.  This calculator, which is particularly useful vis-a-vis adjustable rate mortgages, will then show them any increases in monthly payments that take place upon the termination of the introductory period.  Consumers can find out how much principal will be due following a certain number of payments and can calculate the new payment at different rates of interest.
10. APR adjustable rate mortgage calculator: This calculator provides an estimate of the APR on an adjustable rate mortgage.
11. Interest-only mortgage calculator v. fixed-rate mortgage: With this calculator, consumers can compare the payments on an interest-only mortgage with those on a fixed rate mortgage.
12. Bi-weekly home loan calculator: This tool makes it possible for prospective borrowers to calculate the difference in paying off the mortgage on a bi-weekly as opposed to monthly basis.
13. Monthly payment calculator: Consumers can determine their monthly payment by entering the loan amount and interest rate.  Many websites offer consumers the opportunity to view the impact of expenses such as private mortgage insurance and property taxes on their monthly mortgage payments and provide an amortization schedule.  To figure out the monthly payment, generally all that a borrower needs to enter are the following variables: 1) the loan amount, 2) the APR or interest rate, 3) the repayment term, 4) and the preferred amortization schedule (annually/monthly).  A number of mortgage websites also require consumers to provide the following information: 1) the property value, 2) the monthly taxes, 3) the start date of the mortgage, and 4) the type of loan (home equity, refinance, purchase).

FHA home loans are guaranteed by a branch of the Department of Housing and Urban Development (HUD) known as the Federal Housing Administration (FHA).  While FHA does not furnish the loan, it insures payment of the mortgage in the event of the purchaser’s default, thus reducing the risk to the lender.  This provides an incentive for lenders to issue loans they otherwise might deem excessively risky.  FHA mortgages are dubbed ‘non-conforming’ loans due to their liberal requirements enabling individuals with credit issues, first-time home buyers, and those in a lower-income bracket to own a home.  This type of home loan boasts numerous advantages over traditional loans:

1. Low down payment

2. Low closing costs - Borrowers may include the closing costs in their FHA mortgage amount.  Typically, the closing costs range from 2 to 3% of the mortgage amount.

3. Easy credit qualifications - The requirements for an FHA home mortgage are much less stringent than those for a conventional mortgage.  To satisfy the income criterion, applicants must usually show 2 years of regular employment and the same or an increasing income over the last two years.  Any bankruptcy filing must be at least 2 years old, and the borrower must have since re-established a good credit rating.  Consumers who have foreclosed must have done so more than 3 years ago and have since rebuilt their credit.  A consumer’s mortgage payment should constitute approximately 30% of his or her gross income.

4. Flexibility on the debt-to-income ratio - FHA home loans allow debt-to-income ratios that are higher than those mandated for conventional loans.

5. No credit score requirements - Applicants with a less than stellar credit report (i.e. a credit score below 600) or with financial problems may qualify for this type of loan.  Even prospective borrowers with no credit history are eligible for a FHA home mortgage if they can demonstrate fulfillment of past financial obligations.  Individuals who have filed for bankruptcy are also not disqualified, provided that the bankruptcy was discharged at least two years beforehand and that they have since maintained a good credit score.  Similarly, foreclosure is not a disqualifying event, as long as it took place at least three years ago and that the applicant has since maintained solid credit.

6. Low interest rates - FHA mortgage rates are lower than those of conventional loans.  This is because the FHA’s backing of the loan significantly diminishes the lender’s risk.  To lower the mortgage’s rate of interest, FHA loan borrowers pay points (1 point equaling approximately 1% of the mortgage’s value) to the lender.

7. Low mortgage insurance - The mortgage insurance is financed into the FHA home loan, rather than paid out-of-pocket.  Borrowers are required to pay private mortgage insurance (PMI) on their FHA mortgage in order to protect the lender against default.

Currently, consumers may apply for a FHA mortgage amount ranging from $271,050 to $729,750.  While there are no income limits, these loans are very popular among individuals in the low to middle-income bracket.  Qualifying properties include condos, single-family homes, modular homes, double-wide manufactured houses, and 2-to-4 unit properties.  FHA home mortgages serve a myriad of purposes including the following:

First home purchase - Compared to the standard 5% down payment required by conventional lenders, a minimal 3% down payment is required on FHA home loans.  At times, the down payment may be as low as zero when the FHA loan is supplemented by other kinds of loans.  The loan usually includes the closing costs and fees.  One-to-four unit properties are eligible for FHA first home purchases.

Refinancing - Consumers may refinance a traditional loan to a FHA home mortgage.  They may also consolidate a number of mortgages into an FHA loan.  In the process referred to as streamline refinancing, the need for paperwork is eliminated, and credit, income, and employment checks are waived.  FHA refinances result in a lower interest rate and monthly payments.

Fixer-upper - Through an FHA mortgage, borrowers may purchase a home, renovate or repair it, and refinance the amount due and include the repair costs in one loan.

Reverse mortgage for seniors - To qualify for an FHA reverse mortgage, an applicant must meet the following requirements: (1) be a homeowner or have a small mortgage balance that can be repaid at the closing, (2) be 62 years of age or older, and (3) live in the home.  Reverse mortgages allow borrowers to transform part of the equity in their home into cash for purposes of effectuating home improvements, paying off debts, or preventing foreclosure.

Energy-efficient improvements - FHA offers energy efficient mortgages (EEMs), which allow borrowers to include the cost of energy-efficient features or improvements in the FHA mortgage amount.  The applicant is not required to qualify for the supplemental funds or make a down payment on the EEM.