Finance tricks that make mortgages click

Conventional loans: issued by private lenders, not insured by government. Conforming: meets Fannie Mae/Freddie Mac guidelines (loan limits apply). Non-conforming/Jumbo: exceeds conforming limits. FHA: Federal Housing Administration insures — low down payment (3.5%), more flexible credit. VA: Veterans Affairs, no down payment for qualifying veterans. USDA: rural properties.

Early in the loan: most of each payment is interest, very little principal. As balance decreases: less interest owed, more goes to principal. Fully amortized loan: last payment brings balance to exactly zero. Negative amortization: payment doesn't cover interest — balance grows.

Front-end ratio (housing ratio): PITI ÷ gross monthly income. Conventional guideline: ≤ 28%. Back-end ratio (total debt ratio): all monthly debt payments (PITI + car, student loans, credit cards) ÷ gross monthly income. Conventional guideline: ≤ 36%. FHA allows higher ratios.

Fixed rate: interest rate locked for entire loan term. Predictable. Higher initial rate than ARM. ARM (Adjustable Rate Mortgage): initial fixed period then adjusts based on an index (LIBOR, SOFR) plus a margin. Caps limit how much rate can change per adjustment and over life of loan.

PMI protects the lender if the borrower defaults. Required on conventional loans with less than 20% down. Does NOT protect the borrower. Homeowners Protection Act: lender must automatically cancel PMI when loan reaches 78% LTV. Borrower can request cancellation at 80% LTV with good payment history.

APR reflects the true cost of borrowing: interest rate + origination fees + points + mortgage broker fees + other costs. Two loans with same interest rate may have different APRs. Truth in Lending Act (TILA) requires lenders to disclose APR. Use APR to compare loans on equal footing.

Mortgage: two parties — borrower and lender. Borrower keeps title but gives lender a lien. Judicial foreclosure required. Deed of trust: three parties — trustor (borrower), trustee (neutral third party), beneficiary (lender). Trustee holds title. Non-judicial foreclosure (faster). Most western states use deed of trust.

Acceleration clause: upon default, lender can call the entire loan balance due immediately. Alienation clause (due-on-sale clause): loan must be paid in full when property is sold — prevents buyer from assuming the loan without lender approval. Most modern mortgages contain both.

TILA (Truth in Lending Act): requires clear disclosure of loan terms including APR and total cost. Right of rescission: 3 business days to cancel certain refinances. RESPA (Real Estate Settlement Procedures Act): prohibits kickbacks between settlement service providers, requires Loan Estimate and Closing Disclosure.

FHA insures the loan — lender is protected if borrower defaults. Minimum 3.5% down payment (with 580+ credit score). MIP: upfront MIP (1.75% of loan amount) plus annual MIP. Lower credit score requirements than conventional. Loan limits vary by county. Property must meet FHA condition standards.

VA guarantees portion of loan — no down payment required. No PMI (replaced by one-time funding fee, which can be financed). No minimum credit score set by VA (lenders set their own). Entitlement: how much VA will guarantee. Certificate of Eligibility required. Primary residence only.

Permanent buydown: pay discount points at closing to permanently lower the rate. Temporary buydown: seller or builder pays to reduce buyer's rate for first 1-3 years. 2-1 buydown: rate 2% lower first year, 1% lower second year, then full rate. Used in slower markets as seller concession.

When lenders qualify you, they calculate your full PITI — not just principal and interest. This is what the front-end ratio measures.

Interest rates and bond prices always move in opposite directions. Mortgage rates are tied to bond markets. Think of a seesaw — rates up, bonds down.

FHA loans are government-backed and require only 3.5% down. Minimum credit score 580. Requires MIP (Mortgage Insurance Premium) — stays for the life of the loan if less than 10% was put down (removable after 11 years with 10%+ down) — otherwise only refinancing removes it.

VA loans require NO down payment and NO PMI — for eligible veterans, active duty, and surviving spouses. Government guarantees the loan. One-time VA funding fee required (unless exempt).

1 point = 1% of loan amount at closing. Each point typically lowers the rate 0.125%-0.25%. Break-even: upfront cost ÷ monthly savings = months to break even.

Usury = charging interest above the legal maximum set by state law. It's the LENDER breaking the law, not the borrower. Lenders who charge usurious rates face penalties.

LTV = (Loan Amount / Appraised Value) × 100. Example: $180,000 loan on $200,000 property = 90% LTV. Below 80% LTV: no PMI required, better interest rates. 80-95% LTV: PMI required (protects lender, paid by borrower). Above 95%: limited conventional options. FHA loans: up to 96.5% LTV (3.5% down). VA loans: up to 100% LTV (0% down). The lower the LTV, the lower the lender's risk and the borrower's rate.

Front-end (housing) ratio: (PITI ÷ gross monthly income) × 100. PITI = Principal + Interest + Taxes + Insurance. Target: ≤28% for conventional. Back-end (total debt) ratio: (all monthly debt payments ÷ gross monthly income) × 100. Includes housing + car, student loans, credit cards. Target: ≤36% conventional, ≤43% FHA. Example: $5,000 gross income, $1,200 PITI → 24% front-end. Add $500 car payment → 34% back-end. Both within conventional guidelines.

ARM format: 5/1 ARM = fixed for 5 years, then adjusts every 1 year. Rate tied to an index (SOFR, Treasury) plus a margin. Three caps: Initial cap (how much rate can jump at first adjustment), Periodic cap (max change per adjustment period), Lifetime cap (max total change over life of loan). Example 2/2/6: first adjustment max 2%, each subsequent max 2%, never more than 6% total. ARMs start lower than fixed rates — good if planning to sell before adjustment period.

RESPA: prohibits kickbacks, referral fees, and unearned fees between settlement service providers (lenders, title companies, agents). Affiliated Business Arrangements (AfBAs) allowed only with disclosure. TRID (TILA-RESPA Integrated Disclosure): replaced old forms. Loan Estimate: given within 3 business days of application — shows estimated costs. Closing Disclosure: given at least 3 business days before closing — shows actual costs. Borrower has right to compare LE to CD. Tolerances: some costs cannot increase, others limited to 10% increase.

Fannie Mae (FNMA): buys conventional conforming loans from lenders — packages into mortgage-backed securities (MBS). Freddie Mac (FHLMC): same function as Fannie, different lender relationships. Both are GSEs (Government-Sponsored Enterprises) — private but with government backstop. Ginnie Mae (GNMA): guarantees MBS backed by FHA and VA loans — true government agency. Why it matters: lenders sell loans → get cash back → make more loans → rates stay competitive. Conforming loan limits (set by FHFA annually) determine which loans Fannie/Freddie will buy.

Balloon mortgage: payments calculated as if it were a 30-year loan (low monthly payment) BUT the entire remaining balance (balloon payment) is due at the end of a shorter term — typically 5, 7, or 10 years. Used in: commercial real estate, bridge financing, seller financing. Risk: if borrower cannot refinance at maturity (rates rose, credit changed, property value fell), they face default. Advantage: lower rate than a fully amortizing loan of same term. Negative amortization: payment is less than interest owed — balance GROWS. Found in some ARMs with payment caps.

Lien priority: normally determined by recording date — first recorded has first priority (except property taxes). Subordination agreement: a lienholder voluntarily agrees to move to a lower priority position. Used when: refinancing (new lender wants first position — existing second lender must subordinate), construction financing (land seller subordinates so construction lender can be in first position). SNDA: Subordination, Non-Disturbance, and Attornment — commercial lease agreement where tenant subordinates to lender, lender agrees not to disturb tenant's possession if foreclosed, tenant agrees to recognize new owner.

Discount points: prepaid interest paid at closing to permanently reduce the interest rate. 1 point = 1% of the loan amount. Rule of thumb: each point reduces rate by approximately 0.125–0.25%. Break-even analysis: cost of points ÷ monthly savings = months to break even. Example: 2 points on $300,000 = $6,000 upfront. Saves $100/month → break even in 60 months (5 years). If selling before break-even: not worth it. 2-1 buydown: rate is 2% lower in year 1, 1% lower in year 2, then goes to full rate — often seller-paid concession.

Prepayment penalty: fee charged if borrower pays off loan early — compensates lender for lost interest. Common in commercial loans; rare in modern residential (banned in many QM loans). Soft penalty: applies only if refinancing. Hard penalty: applies even if selling. Due-on-sale clause (alienation clause): requires full loan payoff if property is sold or transferred — prevents buyers from assuming the loan without lender approval. Assumable loans: FHA and VA loans are assumable — buyer takes over seller's loan (with lender qualification). Assumption can be attractive when seller has a low-rate loan.

Hard money loans: made by private investors or companies based on asset value (LTV), not borrower creditworthiness. Fast to close (days, not months). High rates (8-15%+) and fees (2-5 points). Short terms (6-24 months). Used by: fix-and-flip investors, borrowers who can't qualify conventionally. Bridge loan: short-term loan bridging the gap between buying a new property before the old one sells. Allows buyer to make non-contingent offers. Repaid when old home sells. Construction loans: short-term, interest-only during construction — convert to permanent mortgage on completion (construction-to-permanent or "one-time close").