The process of understanding mortgages and choosing the right one, then taking out a home loan can be daunting, particularly if you’re a first time home buyer. It’s essential to do as much research as possible to understand all the options and possibilities you have for a home loan. The right mortgage for you is very much an individual choice, and it’s strongly recommended that you seek the advice and guidance of an experienced mortgage broker. To help you understand the different mortgage options and prepare for your first meeting with a mortgage broker, we put together a full guide to your home loan options.
What Are The Types Of Mortgages?
It’s important to be familiar with the types of mortgages available to get an idea of what you need and what might suit you. Understanding mortgages will go a long way toward helping you in the loan application process.
Conventional Fixed Rate Loans
Conventional loans are not made or guaranteed by the U.S. government but can be offered by Fannie Mae, Freddie Mac, and other banks, credit unions, and mortgage companies. Fixed conventional loans offer an unchanging mortgage principal and interest payment throughout the life of the loan.
Conventional Conforming Loans
Some conventional loans can also be conforming loans. Conforming loans are offered by Fannie Mae and Freddie Mac and are called conforming because they conform to the guidelines set by these government-sponsored companies.
Adjustable Rate Loans
Adjustable Rate Mortgages (ARMs) have interest rates which fluctuate according to the market throughout the life of the loan. This helps homebuyers take advantage of current low interest rates, but could pose the risk of subjecting borrowers to higher rates in the future. Also, if you start one of these loans during a time of market high interest rates, you could enjoy lower rates in the future.
Jumbo loans are for mortgage amounts that exceed conforming loan limits, which are set annually. These mortgages offer higher purchase limits for more expensive properties, but they also have more stringent qualifying guidelines. Jumbo loans are available as both fixed rate and adjustable rate mortgages, however the rates aren’t quite as good as for conforming loans.
FHA loans are mortgages that are insured by the Federal Housing Association (FHA). These loans include mortgage insurance that protects the lender if the borrower defaults on the mortgage. These are offered to those who don’t meet the qualification guidelines or down payment requirements for other loan types. These loans can help buyers with lower credit scores and less savings obtain a mortgage.
VA loans are mortgages offered by approved lenders and guaranteed by the U.S. Department of Veterans Affairs (VA). These loans help returning service members obtain mortgages without needing a down payment or a great credit score. These loans are federally guaranteed which protects the lender against loss in the case of default.
The are many variables that need to be considered when choosing the right home loan for you, including rates, length, down payments and qualifying guidelines. This means you can’t always just choose the right mortgage type for you, but you need to look at your individual situation and weigh the options from different lenders. Understanding mortgages involves understanding how your situation relates to their structure.
What Factors Go Into Choosing A Mortgage?
Because it’s not easy to simply choose the right type of loan for your situation, it’s important to consider a number of different factors which will help you evaluate your individual position and needs. Once you have clarity around these issues, you can then work towards finding the right home loan for you.
The down payment is the amount you pay up front from your personal funds to go towards the cost of a home. Your down payment is an investment in your home purchase and an indication to your mortgage lender that you intend to pay off the loan. The funds for your down payment may come from personal savings, the money you get when you sell another asset or home, or gifts or grants from family, employers or non-profits.
The down payment is usually expressed as a percentage of the total cost of the home, with the remaining portion of the cost supplied by your mortgage loan. Different types of loans require different down payment amounts. Most mortgage lenders require a down payment of at least 3%. FHA loans require a down payment of 3.5%. For other loans, the lender may determine a different down payment requirement depending on your credit score, the type of house and your reasons for buying. The down payment requirement could be 5%, 10%, 20% or more.
If your down payment is less than 20%, you will be required to pay more mortgage insurance. This insurance protects the lender if the borrower defaults on the mortgage. Mortgage insurance can either be private mortgage insurance (PMI) which you take out yourself and can be paid either monthly or in a lump sum at the time you take out the loan. FHA insurance is the other type of mortgage insurance you may take out if you have an FHA loan, and it is paid to the Federal government.
The interest rate is the amount you need to pay on top of the principal monthly mortgage payment as you pay off your loan. Interest rates are usually expressed as an annual percentage of the loan outstanding, even though it is paid monthly. The lower the interest rate percentage, the less money you have to pay extra on top of the principal amount as you pay off your loan. Different loans have different interest rates depending on the lender, the amount borrowed, and the type of loan, and your credit history, down payment and loan term, can also influence the interest rate you’re offered.
Fixed Rate or Adjustable Rate
Differences also exist between the interest rates for fixed term and adjustable rate mortgages. Adjustable rate mortgages usually start out with lower interest rates than fixed rate mortgages, however, the rates can go up or down over the life of the loan. On the other hand, the interest rate for a fixed term mortgage is set at the beginning of the loan. ARMs can be attractive due to their low initial interest rate, but it’s important to be aware of how and when your interest rate could change over the life of the loan. That’s why ARMs can be attractive short-term options, but it can be safer to go with a fixed rate loan in the long term.
The length of the mortgage is how long you have to pay the loan off. For most mortgages, the terms are 15-year or 30-year. Ultimately, the term of the mortgage will be determined by the amount of your down payment, how much you can pay each month, and how long you plan on living in your home.
Monthly Mortgage Payment
In the process of paying off your mortgage, you will have to make a monthly payment. The monthly mortgage payment is made up of the principal (part of the amount you actually owe), plus the interest, and other monthly fees like taxes or mortgage insurance. The main factors that determine the size of your monthly payment are the term and size of the loan. Obviously, the more you borrow, the more you’ll have to pay off each month. Whereas the longer the term of your mortgage, the lower your monthly payment will be.
A point is a fee that is equal to 1% of the amount of your loan. Discount points are like pre-paid interest on the loan and help to reduce your interest rate. Origination points are fees charged by the lender for making the loan. You can decide whether to pay points and how many, based on your individual need and circumstances.
First Steps In Finding a Home Loan
When looking for a home loan, your first steps should be aimed at understanding mortgages, researching loan types and offers available to you, as well as collecting relevant information about your circumstances that will guide your choice. After this initial investigation, the best step is to speak with an experienced mortgage broker. They can review your information and offer guidance and recommendation about your individual situation.
Your Financial Information
As well as understanding the types of home loans available, choosing the right mortgage for you involves reviewing and analyzing your current needs. This includes looking at your financial situation, as well as your goals in taking a mortgage.
This is an indication of the earnings you receive on a regular basis. Your income may be assessed from tax returns, pay stubs or other financial documentation, so be prepared to provide these when applying for a loan.
Your investments reflect other assets or liabilities that you may have.
Outstanding debt may be other loans or payments that you need to make. Mismanaged debts can reflect badly on your credit score, so be sure to address these before seeking a home loan.
It’s likely that your savings will be the source of your down payment. Evidence of your savings can help you and your mortgage broker decide what down payment and loan you can afford.
Varying income sources
You may have varying source of income such as rental income and income from investments as well. Be sure to include these in your application.
Your Reasons For Applying for a Mortgage
Buying a home is not the only reason borrowers seek a mortgage. You may be looking to refinance your current mortgage, or take out a new mortgage to purchase an additional property or investment. Clarifying your reasons for seeking a mortgage is important because it can help your mortgage broker understand your priorities, and what you are looking for in a mortgage.
Why Working With A Mortgage Broker Gets You the Right Home Loan
Whether you’re looking for the right mortgage to refinance, invest or buy your first home, working with a skilled mortgage broker can be the best way to get the right mortgage for your needs.
- They Focus On Your Needs – One of the greatest difficulties in choosing a mortgage is that there is no one right solution for everyone. A loan that offers the perfect criteria for one person may be completely inappropriate for another person. The right loan for you depends very heavily on your unique situation, and your individual goals and needs.
- They Work With You One on One – When you’re searching for a home loan, the one thing that every borrower needs is personalized advice. Without a mortgage broker, personalized, specialist advice is almost impossible to come by. That’s why borrowers really benefit from a mortgage broker to work with you one on one to get the right advice.
- They Have A Deep Professional Knowledge of Loan Types – With the range and scope of home loans available, it’s almost impossible for a borrower to be aware of every possible option, and to identify the best choice. Because a mortgage broker researches and studies different loans and lenders day in and day out for many years, they are uniquely qualified and experienced in understanding mortgages.
- They Know How To Prepare – Preparation for mortgage applications is essential to ensure a higher chance of approval, and your long-term satisfaction with the mortgage. Having worked with hundreds of clients in your situation, a mortgage broker knows how to identify exactly what you need to prepare for mortgage applications. Being prepared means a greater chance of approval, and a greater chance of you securing the house of your dreams.
- They Know How To Get You Approved – Working with a mortgage broker gives you a greater chance of success in securing the home loan you want, or being pre-approved before you go house hunting. Applying for mortgages is not something you should do unprepared as rejection can set your home buying back and even negatively affect your credit score. Working with a mortgage broker gives you the highest chances of success and gets you to your new home sooner.
Choosing the right home loan for your situation can be made simple with adequate preparation, help understanding mortgages, and the assistance of a skilled mortgage broker. Now is the perfect time to start discussing your home buying goals, so call Karen today for personalized advice to begin your journey to the ideal home loan.