Buying a home is typically the largest financial decision you will make in your life. Knowing as much information you can about mortgages, mortgage options and the housing market will help you in this process and make sure you find your home at the right price with the lowest overall cost mortgage. The lowest rate with higher fees may not be the best program long term. The wrong strategy with the lowest rate may cost you thousands of dollars in the long run.
What is a Mortgage?
What a Mortgage Payment Consists of:
- Principal: The repayment of the original amount borrowed on a monthly basis.
- Interest: The cost of borrowing the principal amount, repaid on a monthly basis.
- Taxes: Real Estate taxes paid to a local government agency.
- Insurance: Homeowners insurance on the home. Also any mortgage insurance, which is paid to protect the mortgage company. Mortgage Insurance isn’t applicable on all loans.
The total of these items is known as the PITI (Principal/Interest/Taxes/Insurance) payment.
Types of Mortgages
Fixed: A fixed term (for example, 15 or 30 years) as well as a fixed interest rate. The interest rate and term are fixed at the start of the mortgage. The monthly amount for the payment of principal and interest will not change during the term of the mortgage.Adjustable:Often referred to as an ARM (Adjustable Rate Mortgage). An Adjustable Rate Mortgage usually has an initial fixed period. The period is typically 6 months, 1 year, 3 years, 5 years or 7 years. The adjustment period is after this initial fixed period. The interest rate during the adjustment period is determined by two important components. Those components are the index and the margin. The margin is the fixed portion of the adjustable rate mortgage and will not change during the life of the loan, this is typically 2.25 or 2.75. The index is the adjustable component of the loans, usually based of the 6 month LIBOR or 1 year Treasury Bill. You add the index to the margin and that is the interest rate you will have for the next period. There are usually caps on how high or low the rate can go.
How much down payment?
One of the first questions that home buyers ask is, "How much down payment are we going to need?" Unfortunately, there is no standard answer. Down payments will vary from 0% (with a VA--Veteran's Administration loan) to upwards of 25% (with certain "non-conforming" loans). FHA loans, a popular first-time homebuyer loan, currently requires 3.5% down payments. As an average, most home buyers make down payments in the 5%-15% range, although your own personal situation may dictate more or less down payment. When you are factoring money for a down payment, don't forget about closing costs, which will total in the 3-5% range, payable in cash at the time of closing.
What is Prequalification? Does it mean that the loan is approved?
Prequalification is the initial step in securing a mortgage. A lender will analyze your current income, debt and basic credit history situation in order to qualify you for a maximum loan amount. This gives you a clear picture of your financial parameters and a maximum housing price (the mortgage amount plus your down payment). With preapproval, the lender verifies your income, debt and financial picture, conditionally approving the loan subject to a favorable appraisal of the property you select plus a few other conditions.
How Much Can I Afford?
Here's a question most people don't ask themselves: How much house can I afford? Instead, they ask a bank how much they can afford which is a very bad mistake.This question really has two very different answers:
- How much will a lender give you? and, more importantly,
- How much do you feel comfortable borrowing?
Especially for first-time homebuyers, you really need to start with question #2, and no one can answer it better than you can. If you’ve never made a budget, sit down and come up with one. How much cash do you think you can comfortably afford to devote each month to housing (mortgage) payments? Some people are willing to forego movies and dinner out, bring lunch to work every day and give up their car, anything to own a home. Some stretch too far and find themselves pouring all their income into the house, leaving themselves in permanent financial stress. Decide what's right for you. Check out this mortgage calculator - *This is a tool, do not rely on this for your final decision*
Is it the Right Time to Buy a Home?
Clearly, it is a better time to do so today than was the case a year or two ago. Housing has generally become more affordable, and in certain cases, a bargain. Yet in terms of prices alone, it is impossible to say if the market has reached its lowest point in the current cycle. Normally, pinpointing the bottom of the market cycle is challenging until an upturn has already occurred. No matter what the immediate future might hold for prices, the timing is right to be a little more serious about shopping for a home. Interest rates are another key factor to consider when buying a home. Mortgage rates remain relatively low on an historic basis, which translates into lower monthly payments. But, the direction of interest rates can be notoriously difficult to predict. However, components that can affect rates are trends in the cost of living - as interest rates tend to move somewhat in sync with the inflation rate. With factors like rising gasoline and food prices becoming bigger concerns, inflation might be a bigger threat today than it has been in recent years. Trends in home prices and mortgage rates are only part of the equation in determining whether to buy now. Your own financial circumstances and your ability to find the "right" house are just as important. A few years ago, when housing prices were rising rapidly, it often proved costly to wait to purchase a home.In contrast, the environment today makes it easier for buyers to be more deliberate before making decisions. Take your time in finding the right home, the best mortgage deal and the right price. Being able to reflect on your decision is a benefit to dealing with a buyer's market, where there are more sellers than potential purchasers in the marketplace. Now that Americans have learned that there is no guarantee that home prices will always rise year-after-year, it is even more important for you to pay the right price for both the home, and for the money you will borrow to purchase the house. A major lesson of the recent meltdown in the housing market is not to become overextended, and risk finding yourself in a situation where you owe more than your house is worth. Part of that strategy is to avoid buying too much house for your needs. Keep in mind more expensive homes may take longer to sell. So as you consider your future, think not just about how the home fits your needs, but how easy it will be for you to find a buyer at some point down the road.
Current Home Mortgage Incentives
Home Mortgage Terminology
- Adjustable Rate Mortgage (ARM) – A mortgage loan with an interest rate that adjusts periodically, based on the movement of a pre-selected market index.
- Amortization – A repayment plan that includes regular, consistent payments of principal and interest over the course of the loan.
- Closing Costs – All the fees associated with a real estate transaction, excluding the purchase price.
- Conventional Loan – A mortgage loan that is not insured by government agencies like the FHA or VA.
- Debt-to-Income Ratio – The percentage of a borrower's monthly income that is used to repay debts. This ratio helps lenders determine how large of a mortgage a borrower can afford.
- Down Payment – The amount of money a borrower contribute upfront on a real estate purchase.
- Fixed Rate Mortgage – Home loans with fully-amortized payment schedules. The interest rate and monthly payment amount remain constant for the life of the loan.
- Jumbo Mortgage – A loan amount that exceeds the limits set by government-backed companies Fannie Mae and Freddie Mac.
- Points – A fee paid to buy down the interest rate. One point is equal to one percent of the loan amount.
- Private Mortgage Insurance – Insurance paid by the borrower to protect the lender on loans with a down payment of less than 20 percent.