Mortgage Basics for the First Time Home Buyer
What is a Mortgage? A mortgage is a loan you take out to finance the purchase of your home. It's a legal contract stating that you promise to make a monthly payment until your loan is paid off.
Today, there are more than 40,000 lending entities in the United States. Some are very small companies and may originate loans only for people in a particular state. Others, like Quicken Loans, are large companies that work with people all over the country.
Mortgage Rates Think of your mortgage rate as the interest rate, or fee, you're charged to borrow money from your lender. Mortgage rates are tied to a particular economic index. How your mortgage rate moves up or down, or whether it moves at all, will depend upon the mortgage program you select.
For example, with a fixed-rate program your interest rate is fixed for the entire term of your loan. In contrast, with an adjustable-rate mortgage, your rate is fixed for a period of time-usually one, three, five or seven years-and then changes based on the index to which it's tied.
The rate on your mortgage is expressed as a percentage and interest accumulates over time on the unpaid balance of your loan. Generally speaking, the higher your mortgage rate, the larger your monthly mortgage payment. Keep in mind, however, that unlike the interest you pay on a credit card, the interest you pay on your home loan is usually tax-deductible*. This is one of the reasons that people "roll", or combine, their credit card debt into their mortgage.
Your Credit Matters While your credit history is certainly not the only factor lenders take into account, it is very important. Your credit report contains a credit risk score, which is an assessment of your credit-worthiness. Credit bureaus provide risk scores to credit grantors who use them to objectively evaluate an applicant's credit-worthiness. You should review your credit report for errors and discrepancies. Bills that have been paid could remain on your credit report and might cause your lender to deny the loan. If you find any inaccuracies, contact each of the three major credit bureaus (Trans Union, Experián and Equifax) to have them cleared from your report.
Fixed-Rate Mortgages Fixed-rate mortgages have a fixed interest rate over the entire term of the loan and are very popular. Many people like this type of loan because it offers certainty: the interest rate never changes. And, many home buyers believe that a fixed-rate loan is the best way for them to pay off their mortgage.
Adjustable Rate Mortgages (ARM) Adjustable rate mortgages, or ARMs, are mortgage programs that are fixed for an introductory period (typically one, three, five or seven years), but after the fixed period, the rate adjusts based on a pre-determined index. If the index goes up, so does your interest rate and mortgage payment. Conversely, a drop in the index will reduce your rate and payment.
Perhaps the greatest benefit to an ARM is that this type of program usually offers consumers lower initial rates (and therefore, a lower initial monthly mortgage payment) than a comparable fixed-rated mortgage.
Interest-Only Mortgages Fixed-rate and adjustable rate mortgages sometimes come with the option to pay only the interest for part of the mortgage term. An interest-only mortgage means you are only required to pay the interest portion of the mortgage payment for an initial period of the loan term. After that, you are required to make the principal and interest payment in full every month.
For any given month during the interest-only period, the homeowner has the choice whether to pay all of the interest and as much or as little of the principal as he wants. This is very popular because it gives the homeowner the flexibility to allocate their money towards other objectives.
What Mortgage Program Should I Choose? When selecting a mortgage, it's very important to choose a program that best fits your particular circumstances. Unfortunately, there isn't one program that is best for everyone. A mortgage banker can help you decide which is best for your situation.
Do Your Research Before you start the mortgage process or house hunting, do some research. The Internet is a wonderful resource for countless informative articles that explain the mortgage process in great detail. In fact, many lenders have online mortgage calculators that will answer a variety of tough questions, including: 1. How much money can I borrow? 2. What is my price range? 3. What tax savings are associated with homeownership?
Applying for a Mortgage Once upon a time when home buyers applied for home loans, they had to take time off of work to meet their lenders, fill out reams of paperwork, wait days to find out if they'd been approved for a loan and then wait weeks to close. Not anymore! Many lenders now have online tools that allow you to apply for a loan from the comfort of your own home. With new and innovative technology, you even can sign your mortgage documents electronically.
How Do I Find a Reputable Mortgage Banker? Whether you decide to work with a mortgage banker, credit union or another lending entity, it is crucial to choose a reputable, experienced mortgage professional who is associated with a company that isn't likely to go out of business when rates increase. Since there are thousands of mortgage companies in the United States, selecting a mortgage expert can be challenging. Seek out recommendations from relatives and friends.
At Alpine Mortgage, we specialize in assisting first time home buyers find the right financing that best suits their needs. Apply online today or contact us at (800) 876-LOAN to have one of our loan specialists assist you with your first time home purchase.