What is a mortgage: The Guide to Getting Your First Home Loan
Buying a house is a huge decision - one that has lifelong consequences. It's important to understand all the moving parts, and one of the most important ones is your mortgage. What is a mortgage? How do you get one? This guide will answer those questions and more, so you can feel confident in taking the next step on your homeownership journey.
Today, we're going to tackle a big topic. We're going to be breaking down mortgages. Now, I could probably spend hours talking about mortgages, but for the nature of this article, I will try to keep this brief and as informative as possible.
Here are all the basic terms you want to know to secure your first mortgage.
What is a mortgage loan?
A mortgage is a loan that a homebuyer takes out to purchase a home. The mortgage loan is secured by the home, which means that if the borrower defaults on the loan, the lender can foreclose on the home. Mortgages are typically repaid over a period of 15 or 30 years, and the interest rate is usually fixed, which means that it does not change over the life of the loan. Mortgage payments typically include principal and interest, which are paid monthly. The mortgage market is very large and complex, and many different types of products are available. borrowers should carefully shop around to find the mortgage that best suits their needs.
What is a mortgage lender?
The first term you will hear throughout this process is "lender." A lender is a financial institution or bank giving you your mortgage loan. They will set the terms of your loan, like the rate and your monthly mortgage payment.
What is a mortgage broker?
The next term you'll be hearing a lot is "mortgage broker." A mortgage broker acts as an intermediary between you and the financial institution or a lender. This mortgage broker could be tied directly to one lender or be an independent company that works with many different banks to get you the best deal possible on a mortgage loan.
Do you have to make a 20% down payment?
One of the biggest concerns when getting a mortgage is the down payment. There's this old-school myth that you have to have 20% down to purchase a home, which is simply not the case. Nowadays, you can get a mortgage with as little as 3% down, and the average across the US is 7% down.
You'll have to pay private mortgage insurance (PMI) if you put less than 20% down. Private mortgage insurance is usually a nominal fee. It could be anywhere from $60 up to $250 a month. But you can stop making the PMI payments once you reach 20% equity in your home.
How does a mortgage inquiry affect your credit score?
One of the other big concerns that my clients express when getting a mortgage is the effect on their credit score. When you're getting preapproval, it should only affect your credit by a few points. But the nice thing about it is that you get a 45-day period where you can go to other banks and get other quotes, which will have no effect on your credit whatsoever.
Read more: Ranking the Best home buying sites
What are the main mortgage types?
We will go over three main types of mortgages: FHA loans, conventional loans, and jumbo loans.
FHA loans are going to be the most accessible mortgage loans to qualify for. They have lower requirements regarding credit score and income, and you could put down as little as three and a half percent. The downsides are that you have fewer options in terms of mortgage products, and you're going to have to do some extra inspections and appraisals when buying a home or condo.
Next up on the list are conventional loans. This is the most common type of mortgage loan. You can get them for as little as 3% down. However, conventional loans have a limit on the amount that you can finance. Anything over roughly $647,000 is going to be considered a jumbo loan.
Jumbo loans are going to be the hardest to qualify for. They have the strictest requirements in income and credit, and you will have to put in a larger down payment.
Fixed Rate Mortgages vs. Adjustable Rate Mortgages
Within the loan types I listed above, there will be two main subgroups: fixed rate mortgage and adjustable rate mortgage.
With a fixed rate mortgage, you will have a fixed interest rate throughout the life of that loan.
Adjustable rate mortgages (ARMs) will have a period where they have a fixed rate. So let's say, for example, a seven-year adjustable rate mortgage is going to be fixed for the first seven years, and then the rate can go up or down based on the market.
However, you can always refinance the loan to get a fixed rate if you haven't sold the property by year 7.
How much does the mortgage broker charge?
Mortgage brokers are going to get paid in two different ways. First, they get something called an origination fee. This is also something to watch out for because every mortgage broker will charge you a little bit different origination fee, and you don't want it to be insanely high.
The next way they get paid is a commission. So they'll get roughly 1% of the loan amount, which will be paid to them either by the borrower or the lender at closing.
How do you find a mortgage broker?
Your best bet is to shop from different mortgage lenders. Your current bank is often an excellent option to start, and your real estate agent should always have at least 2 trusted mortgage lenders you can use.
Bonus term: Paying for Points
You might have heard of the term "paying for points.” Basically, you pay a lump sum of money upfront to get a lower interest rate over the term of your loan. Sometimes this could be a good move if you plan on living in that home for an extended period, but if you're not going to be there longer than seven or eight years, it probably doesn't make sense to buy points.
Everything is situational. Make sure you have a good real estate agent who will talk through your situation and give you the best advice.
Here are a couple of tips to keep in mind when you start buying a home and when you're first getting a mortgage loan.
Start getting documents in order early so that when your mortgage lender asks you for income statements and tax returns, you have those on hand ready for them to expedite the process.
Your number one resource throughout this whole process should be your realtor. They should be able to put you in touch with an excellent mortgage broker that can talk you through your situation and give you honest advice. If your realtor isn't providing that, maybe you should get a new one.
The mortgage process can be daunting, but it doesn't have to be. Armed with the proper knowledge and a great real estate agent by your side, you can feel confident in your decision-making and secure in your home purchase. Don't hesitate to contact us if you still have questions about mortgages or the home-buying process. We're here to help!
