Know Your Loan. Know Your Budget. Buy With Confidence.
Getting a Mortgage doesn’t have to be overwhelming. This guide walks you through the mortgage loan process step-by-step so you know what to expect when buying a home.
What is a Mortgage?
Unless you’re planning to make an all-cash purchase you’re going to have to get a mortgage (a loan) when purchasing a home. The process can be complex – it helps to understand what to expect. This section was created to help you understand the process, and some of the terms, putting you in a better negotiation position.
For your mortgage loan, you will pledge the property as security for repayment of the loan. The lender will hold title to your property until you have paid back your loan plus interest.
Mortgage Application Process
- Step 1: Check Your Credit
- Step 2: Choose a Lender
- Step 3: Get Pre-Qualified
- Step 4: Compare Loan Options
- Step 5: Submit Application
- Step 6: Get Pre-Approved
- Step 7: Find and Make an Offer on a House
- Step 8: Underwriting
- Step 9: Submit Any Additional Documents
- Step 10: Funding and Closing
Common Mortgage Terms
Principal
Principal is the actual amount of money you borrow to buy your home.
If you borrow $150,000, your mortgage principal is $150,000.
Interest
Interest is what you pay for the use of the money you borrow. How much you pay depends on several elements: including rate, type of loan, down payment, special programs, and buy down points. Interest can be deducted from your taxes, making it one of the most attractive practical benefits of home ownership. Your tax advisor will be able to provide more details about the tax savings benefits.
Amortization
Amortization is the way the balance of principal versus interest changes over time. During the first few years of your loan (typically for the first 2 to 3 years of a 30-year loan) most of your payments will be applied to Interest. During the final years of your loan, your payments will be applied almost exclusively to the remaining principal. This process is called Amortization.
Types of Mortgage Providers to Explore when Buying a Home.
Mortgage Brokers
Unlike mortgage bankers, mortgage brokers do not loan their own money. Brokers will arrange financing for a borrower from a lender, which could be a bank, savings and loan, a private individual or a credit union or pension fund. As the liaison between borrowers and lenders, they are paid a commission or a fee, which is paid by the borrower, the seller or even the lender.
Mortgage Bankers
Bankers typically use their own money to fund mortgages; however, they ultimately sell the loans to another entity such as a bank, a savings and loan, pension or retirement funds, private investors or government agencies such as FNMA (“Fannie Mae”) or GNMA (“Ginnie Mae”), which purchase residential mortgages. When mortgage bankers sell a block of mortgages, they often will continue to service the loan and will be responsible for the collection of your payments. The mortgage banker is paid a small percentage of the interest (usually 1/4 % to 1/2 %) for this servicing agreement.
Commercial Banks
The largest and most diverse of all finance institutions, commercial banks offer a wide variety of services including savings accounts, investments, charge cards, as well as commercial, personal, residential and business loans, among others.
Savings and Loan
Historically, Savings and Loan organizations have concentrated on home loans. However, with deregulation, the U.S. government has opened the door for S & Ls to provide checking accounts, savings accounts, personal and business loans, etc. Nevertheless, their primary lending focus still is on home loans.
How do I choose the right loan type for me?
Your personal situation will determine the best kind of loan for you.
Types of Mortgages:
FHA – Federal Housing Authority Loan
These loans are insured by the Federal Housing Administration (FHA) a division of the U.S. Department of Housing and Urban Development (HUD). They are designed for, low- to middle-income borrowers and many first time buyers.
However, there are limits to the maximum loan amount. FHA loans have somewhat more relaxed qualifying standards and ratios than conventional loans and have the availability of both 15 and 30 year fixed as well as 1 year adjustable mortgages.
Conventional
This is a “traditional” mortgage loan, not directly insured by the Federal Government. Most conventional loans under $300,700 are administered through Fannie Mae or Freddie Mac (private corporations but regulated by the government). Loans greater than this amount are called “jumbo loans” and are funded by the private investment market.
Adjustable Rate Mortgages
Adjustable rate mortgages all have certain similar features. They have an adjustment period, an index, a margin, and a rate cap. The adjustment period is simply how often the rate changes. Some change monthly, some change every six months, and some only adjust once a year. An Adjustable-rate mortgage (ARM) is a loan in which the interest changes periodically according to corresponding fluctuations in an index. All ARMs are tied to indexes. Indexes are simply an easily monitored interest rate that moves up and down over time. Adjustable rate mortgages vary and are tied to different indexes.
Fixed Rate Mortgage
Fixed-rate mortgages are the most popular type of mortgage. With this mortgage, the interest rate will remain the same for the entire term of the loan. Typically, the longer the term of the mortgage, the more interest is paid over the life of the loan.
Veteran Administration Insured Loan – VA Loan
For those qualified by military service, the Veteran’s Administration (VA) insures (it does not fund) 15 and 30 year fixed as well as 1 year adjustable mortgages with lower down payment requirements and somewhat more lenient qualifying ratios.
No/Low Down Payment Mortgages
There is an array of no and low down payment mortgages though different financial institutions. These types of loans are designed for homebuyers’ varying needs, taking into account many factors that qualify the financial condition of the borrower. Some loans are designed for buyers with good credit histories, some offer more flexible qualifying requirements and may be helpful for limited incomes, and others balance a low down payment with a higher interest rate.
Hybrid Mortgage
Mortgage hybrids are a cross between a fixed rate and an adjustable-rate mortgage. They generally have fixed rates for the first three, five, seven or ten years and then they convert to adjustable-rate mortgages (ARMs) for the remainder of the loan term. With hybrid loans the fixed rate is established up front. Once the fixed-rate portion of the loan ends, the mortgage then behaves like an ARM with rate changes and monthly payments moving up and down each year as interest levels change. The attractiveness of these types of loans is that a borrower can sometimes find a 5/1 ARM rate at up to a full percentage point below a comparable fixed rate loan, and for several years the homeowner can benefit from a lower rate. Generally, the shorter the fixed-rate period, the better the up-front discount, the longer the fixed-rate period, the smaller the discount when compared to 30-year financing.
What is Negative Amortization?
Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes the minimum payment it may not cover all of the interest that would normally be due at the current interest rate.
Basically, the borrower is deferring the interest payment, which is why this plan is called “deferred interest.” The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller, which is called negative amortization.
Talk to your financial planner about the effects of negative amortization.
Other Important Terms:
Down Payment
There are mortgages available that only require a down payment of 5% or less.
But, generally speaking, the larger amount you place as the down payment, when buying a home, the less you have to borrow, and the more equity you’ll have in the property. Mortgages with less than a 20% down payment generally require a private mortgage insurance policy (PMI), which can be expensive.
Interest Rate
A lower interest rate allows you to borrow more money than a high rate with the same monthly payment. Interest rates fluctuate from day-to-day, so ask lenders if they offer a rate “lock-in,” which guarantees a specific interest rate for a certain period of time
Lenders must disclose to you the Annual Percentage Rate (APR), which shows the cost of a mortgage in terms of an annual interest rate.
Because it includes the cost of points, mortgage insurance and other fees, the APR generally will be higher. It will provide a good estimate of the actual cost of the loan.
Discount Points
Discount Points or “points,” as they are sometimes called, allow you to lower your interest rate by paying some interest up front when buying a home. Each point equals 1% of the loan amount, each point paid on a 30-year mortgage will lower the interest rate by 1/8 (or.125) of a percentage point.
When you shop for a loan, ask Lenders for an interest rate with no points.
Then ask how much the rate decreases with each point paid. Discount points are smart if you plan to stay in a home for some time since they can lower your monthly loan payment. Points are tax deductible when you purchase a home and you may be able to negotiate for the seller to pay some of them.
Ready to Buy a home?
Contact us today. We’ll discuss your goals, and build a plan tailored to you.