A mortgage is a loan from a bank or lender to help you finance the purchase of a home. When you take out a mortgage, you make a promise to repay the money you’ve borrowed, plus an agreed-upon interest rate. The home is used as “collateral.” That means if you break the promise to repay at the terms established on your mortgage note, the bank has the right to foreclose on your property.
Your loan does not become a mortgage until it is attached as a lien to your home, meaning your ownership of the home becomes subject to you paying your new loan on time at the terms you agreed to. When you’re ready, reach out to us. We can answer your questions and connect you to a trusted lender if you don’t already have one.
Getting Pre-Approved
Pre-approval is a great way to signal to both lenders and sellers that you’re a serious homebuyer. Pre-approval is a thorough process completed before even finding a home, and is a way for a potential lender to screen someone looking to take out a mortgage loan. At the end of the pre-approval process, you’ll receive a pre-approval letter, or PAL. This way, a lender will have a better sense of your ability to pay back any loans you may take out, and you’ll be able to easily show sellers and other lenders that you’re prepared for this financial decision. Pre-approval typically takes anywhere from 2 to 4 weeks with most banks, credit unions or lenders; during this time a lender will look at information such as your credit score, monthly expenses, employment history, and income history, among other things.
Down Payment
A down payment is the sum of money you pay upfront to get a mortgage loan. This payment is a percentage of your new home’s full purchase price. Most lenders prefer a down payment of 20%, but a down payment can be either higher or lower than that. A down payment anywhere from 3 to 10% is usually ok. A gift from a relative, fiancé or domestic partner is a valid down payment source for most mortgages today.
Additionally, loans that are backed by federal agencies, such as the FHA, VA, and USDA, tend to both be tailored to the needs of first-time homebuyers and come with low/no down payments. The lower your down payment is, however, the higher your interest rate will likely be. Some buyers may also have to pay mortgage insurance with a down payment less than 20%.
Types Of Loans
Every home loan has two parts: principal and interest. The principal is the amount you borrow, and the interest is what you pay to borrow the money. Different types of home loans give you choices on how to structure your interest payments to meet your specific financial needs.
When shopping for a home loan, there are two major types of loans that you can choose from: a fixed-rate mortgage or an adjustable-rate mortgage (ARM).
The main features of a fixed-rate mortgage are:
- The interest rate doesn’t change on your loan.
- Your monthly mortgage payment (principal and interest) will always be the same amount
- As a tradeoff for the security of knowing your monthly payment will never increase, the interest rate will be slightly higher than the rate on an adjustable-rate mortgage
The main features of an ARM are:
- The initial interest rate will be lower than the rate on a fixed-rate loan.
- The interest rate adjusts periodically after the initial term expires (anywhere from 1 to 10 years), depending on movements in market interest rates.
- Your monthly mortgage payment could increase or decrease in the future, based on the annual adjustments to the interest rate on the loan
Tip: If you are considering an ARM, it is a good idea to ask your mortgage banker what your monthly payment would be if interest rates rise 1, 3 or 5 percentage points in the future, so you can get a sense for how much more you may be required to pay in the future.
Government loan programs offered by the Federal Housing Authority (FHA) are also popular and are available in both fixed-rate and adjustable-rate structures. In general, government loan programs are easier to qualify for and have lower down payment requirements as well as more flexible credit requirements. However, like conventional loan programs, FHA loans have specific fees and payments associated with each of them.
