Understanding Mortgages

There’s a lot to consider when researching the mortgage loans available to you to finance your home purchase. When you’re ready to start your home search, read through these points on a mortgage to gain a better understanding of different home loans and the mortgage process.

The most important of all points on a mortgage to understand is the definition of a mortgage. A mortgage is a type of loan that’s used to finance a home. This loan is an agreement between a borrower (you) and a lender (the bank) to buy a home when you don't have the money to do so upfront. Mortgages are secured loans, which means that if a borrower doesn’t continue paying off a mortgage, the lender can secure the home as collateral.

There are many different ways to get a mortgage, and you don’t necessarily have to have a bank account to do so. When you work with the right realtor, they will have a list of lenders they have built personal relationships with. You can work with them, review your details together, and they can let you know the best lender to go with. This can be a much better route than finding a local branch or finding an online lender because you’d have a direct connection with the ability to have your agent on your side.

No matter what mortgage types you’re considering, what makes up a mortgage payment mostly stays the same. The first part of the payment is the loan principal, which is the amount you have to pay off on your loan. It’s the amount you typically think of when imagining paying off a loan. You also have to pay interest, which will decrease as you pay off more of your principal. Prepare to pay for property taxes and homeowner’s insurance, particularly if your loan includes an escrow account. Lastly, mortgage insurance is usually part of the deal, unless you pay a 20% down payment on the property.

When getting a mortgage, you’ll need to get pre-approved for it in order for sellers to consider your offer seriously. A lender will review preapproval factors that include your income, assets, and credit report to figure out how much you qualify for. Don’t mix up getting pre-qualified with getting pre-approved. Prequalifications don’t guarantee how much you’ll actually receive for a mortgage and don’t tell a seller that you’re able to follow through on your offer. Getting pre-approved also makes the approval process much easier later down the road.

You’ll also need to think about mortgage interest rates when shopping for mortgages. Rates fluctuate and can be higher or lower due to current market rates and economic conditions. It may be worth waiting for a better time to buy if interest rates are high. Personal factors like your income, assets, and credit score also affect the rate you’ll get on your mortgage.

With a better understanding of what a mortgage is and how they work, it’s time for a deep dive into different mortgage types. Review each type to determine which is the best for you to use when financing your home.

The first mortgage type on this list is conventional loans. Conventional loans aren’t government-backed and come in two types: conforming and non-conforming. Conforming means that it follows Federal Housing Finance Agency (FHFA) standards, while non-conforming means they don’t follow these standards. If you have a good credit score, some savings, and a steady income, then a conventional loan is a good option.

There are three different types of government-insured mortgages: FHA loans, VA loans, and USDA loans. Backed by the Federal Housing Administration, FHA loans require smaller down payments and lower credit scores. If you’ve served in the military, VA loans offer you funding with zero down payment.

To get a USDA loan, you have to live in a rural area and have an income that doesn’t go over 115% of the area's median income. This loan type also requires zero down payment for those who qualify. These three options are good for those who are having trouble qualifying for a conventional loan or who have served in the military.

The main difference between a fixed-rate and an adjustable-rate mortgage (ARM) is that the interest on a fixed-rate mortgage doesn’t change, while the rate on an ARM does. The predictability of a fixed-rate mortgage offers stability for homeowners planning to pay off their mortgage for a while. However, you may end up spending more on interest in the long term.

An ARM’s rate changes with the market and begins with a “teaser rate” lasting five to ten years. This can be a good option if you don’t plan on keeping your home over the leaser rate time, although you should consider that the housing market may make it difficult for you to sell in the future. This type is also good if you want to chance on the possible advantage of lower interest rates after the fixed period is over.

Jumbo loans go over the standard loan limits and are ideal for buyers interested in purchasing a property that they need more financing for. The requirements for a jumbo loan are much more rigorous than other loan types, and usually include a minimum 20% down payment and a lot of paperwork.

If you’re building your own home, look up different construction loans to finance the project. If you’re worried about accumulating interest, switch to an interest-only mortgage, which lasts five to seven years. If you’re in between buying and selling, then a piggyback loan (or an 80/10/10 loan) may be for you. And if you’d rather save money to make a large payment at the end of your loan term, then consider a balloon mortgage.

Make sure to consider these points on a mortgage when beginning to search for a loan that works best for you. When you’re ready to start the homebuying or selling process, contact trusted local agent Sara Vaughn to guide you through every step of the way.