What exactly is a mortgage? How is it related to the deed and note?
- A deed is a document that serves as a public record of the property’s legal ownership. It is recorded at the registry of deeds or in some cases the land court.
- The note is the actual loan agreement between the borrower and the lender. It specifies the terms of the loan, including the interest rate, if and how the interest rate may change, when payments are due, late charges, etc. Whoever is listed on the note is financially responsible for paying back the lender.
- A mortgage, also referred to as the security instrument, is the agreement that ties the note to the deed. It establishes the lender’s rights to the property in the event that the borrower is not able to honor the terms of the note. It is the mortgage that allows a lender to lend large amounts at relatively low interest rates. Each owner of record on the deed, must sign the mortgage in order to obtain the loan. The mortgage is then recorded at the registry or land court along with the deed.
Simply stated, it boils down to a choice between a fixed rate and an adjustable rate.
Types of Mortgages
- A fixed rate mortgage is a home loan that has an interest rate that is fixed for the entire term of the loan, which is typically between 15 and 30 years. This means that your loan payment will remain the same, until the loan is paid off. (Although your mortgage payment can change. More on that below.) Generally, loans with a shorter term have a lower rate than those with longer terms.
- An adjustable rate mortgage, also known as an ARM, is a home loan with an interest rate which can change over the life of the loan. The initial rate is generally lower than those offered with fixed rate mortgages with the same term, however, it is guaranteed for only a set period such as five or seven years, and may increase to a higher rate after that time.
- When considering an ARM, it’s important to ask your lender how much your rate and payment could possibly change, in order to better weigh the potential benefits and risks. Our adjustable-rate vs. fixed-rate mortgage calculator can show you sample monthly payments.
Massachusetts is fortunate to have two prominent state housing agencies, the Massachusetts Housing Finance Agency and the Massachusetts Housing Partnership. These agencies partner with lenders throughout the state to offer a selection of safe and affordable housing options. For many homebuyers, especially first-time buyers, these can be an excellent choice. You should talk to several lenders before selecting one to work with. Make certain to include at least one that offers each of the state housing agency options, just in case one is the best choice for you.
Affordable Housing Options
When purchasing a home, you may need to purchase several types of insurance in order to obtain a mortgage and protect your investment.
Types of Insurance
- Homeowners insurance, also called hazard insurance, protects your property from damage caused by things such as fire and wind. It is required when purchasing a home. If you are purchasing a condominium, the hazard insurance coverage may be included in the monthly association fees. Make sure to ask your real estate agent if the insurance is included, and if so, whether it covers both the exterior and interior of the unit
- Flood insurance is required if any part of the home is located within a flood zone. Homeowners insurance does not provide coverage for flood damage. When looking at properties, always ask if any part of the structure is in a flood zone so that you can factor in the additional cost.
- Mortgage insurance is generally required by a lender if your down payment will be less than 20% of the cost of the property. This insurance is paid for by the borrower, but protects the lender in the event that the buyer defaults on the mortgage.
A monthly mortgage payment can be made up of several components, including the Principal, Interest, Taxes and Insurance(s). This is why a mortgage payment is often referred to as the PITI.
- Principal refers to the portion of the monthly mortgage payment that is applied to reducing your loan balance.
- The interest that you pay each month is determined by applying the interest rate to the remaining loan balance. As your loan balance decreases, so too does the portion of the payment that is needed to pay the interest. This is why a little more of the payment is applied to the principal each month. A good way to pay off your loan sooner, and avoid paying more in interest, is to pay more than the minimum payment. The extra will reduce the loan balance, and avoid the interest that would have been charged on it each month thereafter.
- Real estate taxes and required insurance(s) are generally paid through an escrow account. This is an interest bearing account that your lender will establish for you when you get your mortgage. Your lender will automatically hold a portion of your monthly payment in this account, and then use the funds to pay the taxes and insurance bills when they come due. The escrow portion of your monthly payment can increase over time as the taxes and insurance premiums increase.
Points and Credits
Points and credits allow you to make tradeoffs between your mortgage payment and closing costs.
- A point is a fee that is paid at the time of closing in exchange for a lower interest rate, which can save you money over time. A point is equal to 1% of the loan amount. For example, one point on a $300,000 mortgage is $3,000. The amount that the interest rate is reduced can vary, but will generally be around .25%.
- Credits are the opposite. In exchange for agreeing to pay a higher interest rate, the lender agrees to provide you with a credit to offset some or all of the closing costs. You’ll pay less on the day of closing, but a little more with each monthly payment.
- If you opt for a mortgage with “no closing costs”, you are choosing to receive a credit. The closing costs will still apply, but the lender is agreeing to cover all or part of them in exchange for a higher interest payment. This can be a benefit if you’re short on cash at the time of the closing, or know you will not have the loan for an extended period. If you have a choice, you should compare the costs with and without the credit.
Taking the next step on your first-time homebuyer journey
Middlesex Savings Bank is here with a team of friendly, knowledgeable experts who are ready to assist you through every step of the home buying process. We’re proud that our customers voted us first place for mortgages in the 2019 and 2020 Best of MetroWest Awards, the official community choice awards presented by The MetroWest Daily News.
If you’re ready to buy a home, our home loan specialists will help you select the best mortgage option for your needs. If you’re wondering if you’re ready to get started on the home buying journey, we’ll help you determine that too.
Contact our local Mortgage Center at 1-877-672-7654 to speak with a specialist. You may also have a specialist contact you directly by completing a simple form on our website.