There are many different types of mortgage loans. Most borrowers choose a 30-year term, but loans are also available in 15-, 20- and 25-year terms.
A fixed-rate mortgage is stable because the interest rate is set for the term of the loan and you make the same monthly payment of principal and interest for the life of the loan. This stability makes it easy to plan a budget and manage your finances.
Adjustable-Rate Mortgage (ARM)
An ARM usually starts with a lower interest rate than a fixed-rate loan. After the initial period, which ranges from 6 months to 7 years, the rate will adjust up or down annually (or semiannually) for the life of the loan based on a specified index. Your monthly payment changes as the index changes. The ARM features a lifetime cap, which is determined at the time you lock in your interest rate. You know from the start the maximum rate on your loan.
Finding the loan that’s right for you depends on several factors, such as how long you plan to stay in your home and your financial goals. Consider how quickly you want to repay the loan. The sooner you repay your loan, the more you’ll save in interest and the faster you’ll build equity. However, the longer you extend your loan, the lower your monthly payments will be.
Use the loan amount and monthly payment calculators to help you determine how quickly you want to repay the loan. Enter the loan term and interest rate for the mortgage(s) you are interested in to see what your monthly payment would be. To consider different loan terms, change the number of years in the Term field.
Pre-Qualified vs Pre-Approved
Pre-qualification is an informal estimate of how much of a home you can afford. It is based solely on what you verbally tell the lender about your income and debt obligations. The lender does not verify any information and does not provide a written letter stating the amount of money you’re qualified to borrow. There are no fees involved with pre-qualification.
It’s a good idea to go a step further and get pre-approved. When you get pre-approved, you are actually beginning the loan application process. This means the lender will verify your credit rating, employment history, income and assets. Once your offer on a home is accepted, final approval of your loan can be completed more quickly, since your financing has already been arranged. Please note the lender will put your pre-approval in writing. Some lenders may charge pre-approval fees.
Rates and Points
As you shop for mortgages, you may see two similar types of rates: mortgage interest rate and annual percentage rate (APR). It is important to understand the difference between them.
The interest rate is the cost for the use of a loan. It is usually expressed as a percentage of the loan, paid over a specific period of time. The interest rate does not include fees charged for the loan. Unlike your interest rate, the APR includes other charges, such as the origination fee, to reflect the total cost of the loan over the life of the loan.
Your monthly mortgage payment (principal and interest) is calculated on the mortgage interest rate - not the APR.
Points (also known as discount points) are paid by the borrower to the lender to obtain a lower interest rate. Each point is equivalent to 1% of the loan amount. For example, on a $100,000 loan, one point would equal $1,000. Typically, a borrower can purchase from one-quarter of a point to three points.
Private Mortgage Insurance
If your down payment is less than 20% of the home purchase price, you can expect to pay private mortgage insurance (also known as PMI). With private mortgage insurance, you can buy a home with a lower down payment than the lender usually requires. Two federal agencies, the Federal Housing Authority and the Veterans Administration, provide insurance for some of their mortgage loans.
The cost of private mortgage insurance varies, depending on your down payment and the type of loan you select. It is usually included in your monthly payment, along with principal, interest, and taxes. Private mortgage insurance ensures that the lender is protected in case you default on the loan.
Regardless of whether you decide to get pre-approved or not, you will have to provide several types of financial documentation to the lender. This information is necessary to verify that you have the funds to pay for the down payment and closing costs and the income to afford the monthly payments.
Most lenders charge an application fee. Some lenders charge additional fees for ordering a credit report and appraisal. The number of copies and specific documents a lender requires may vary, but basically, you can expect to provide the following:
Within three business days of receiving your application, the lender is required by law to send you the following federal disclosures and disclosures specific to the state where your property is located: -Good Faith Estimate, an itemized list of estimated closing costs. Since you will have to pay these costs, this estimate alerts you to the additional cash you will need at closing. Costs may include:
Once you’ve reached an agreement with your lender on the type of mortgage loan, you will want to consider “locking in” your interest rate. This will protect you from any rate increase if interest rates rise while your loan application is being processed. Discuss this possibility with your lender as well as any fees the lender may charge to lock in the rate.
You have two opportunities to lock in your interest rate: At the time you submit your loan application or afterwards - up to 5 days prior to closing.
Please note once you lock in your rate, if interest rates fall, you will not be able to receive the lower rate. If you decide to lock in your rate, make sure your lender puts in writing when the lock-in takes effect and how long it will last - it should last through the closing date listed on your purchase agreement.
By requesting a mortgage loan, you're putting the home itself up as collateral. Naturally, the lender will want to know that the home is worth at least as much as the loan amount, which is why property valuation, or appraisal, is required.
The lender hires a real estate appraiser and passes the expense on to you as part of the closing costs. The appraisal provides an estimate of the home’s market value. It is based on what at least three similar houses in the neighborhood recently sold for, coupled with the specific conditions of the house you are purchasing.
Some lenders use an alternative to an appraisal, called a home evaluation. Instead of sending a person to look at the property, they use a database that pools information on recent sales and tax assessments to determine the value of your property. While this automated process may be less expensive, it does not assess the interior condition of the home. Only an appraiser can do that.
Ask your lender which method they use to establish the value of the home you want to buy.
The most important closing activity that you are responsible for is the home inspection. While not required by the lender for loan approval, it is strongly encouraged because it can only benefit you, the buyer. It is important that you attend the home inspection to ensure it is being done properly to protect yourself from unexpected, costly problems that could arise after you move in.
What Does a Professional Inspection Cover?
A home inspection is an objective examination of the home’s exterior and interior physical structure and systems. Hire an inspector who is a structural expert and knows how to evaluate hidden structural defects and high-cost maintenance items, such as electrical, plumbing, heating, air conditioning, hot water heater and appliances.
Your purchase agreement usually allows for one last walk-through of the property within 24 hours of closing. Most people walk through on closing day. This is your chance to make sure the seller has completely vacated the property, that all mechanical and electrical systems are in good order and that any agreed-upon repairs have been made. You can delay the closing if you feel the terms of the purchase agreement were not met.
The closing is usually held at the closing agent’s office. People in attendance may include: you, your real estate agent, your attorney, your lender, the seller, the seller’s real estate agent and the seller’s attorney.
When you arrive at your closing, the closing agent will review with you all documents that you need to sign and go over the funds needed for closing, which should be paid in the form of a cashier’s check. Congratulations, you’re a homeowner!