To help put you on the path to home buying success we’ve put together a quick guide on mortgage lending and buying a home.
What is a mortgage?
Let’s start at the beginning, a mortgage is a loan you will use to purchase your home. Unless you’re paying for your new home in cash, most of us will need a mortgage to purchase a home. Mortgages are similar to other loans in that there is an amount borrowed, an interest rate paid to the lender, and a predetermined term (number of years) for the loan to be repaid.
Mortgage payments are typically maid on a monthly basis, and include payments for principal, interest, taxes and insurance (known as PITI):
Principal – What you borrowed or financed.
Interest – The fee to pay to access the money used to purchase or refinance your home.
Taxes – What you pay in property taxes.
Insurance – What you pay to ensure your home from damages (fire, natural disasters, etc.). There is also Private Mortgage Insurance (PMI) which is usually required on most loans when your down payment is less than 20%. PMI is paid monthly until you reach the 20% equity threshold.
Note: Your monthly mortgage payment may also include your HOA (homeowners association) fees, if applicable.
Understanding Mortgage Interest Rates
There are a few factors that come into play when it comes to determining your mortgage interest rate. Broadly, interest rates are based on the general level of interest rates in the economy, which are based on market conditions. Your interest rate will also be impacted by how much you are borrowing, for how long, and how much you’re putting down as collateral for your loan (down payment). The third element that will affect your interest rate is the loan program that you select. Some programs, such as VA, have rates which are designed to provide assistance to veterans. Other programs may use rate to mitigate risk.
Once you’ve selected your loan program and have a ‘base rate’ determined by market conditions and your financial parameters, you have a few options:
- The ‘base rate’ quoted by your Loan Officer will require that you pay closing costs.
- If you want a lower mortgage rate, you can typically opt to pay additional “points” or closing costs.
- If you want fewer closing costs, you can typically opt to accept a higher mortgage interest rate. Depending on your loan program you may have the option to pay zero closing costs in exchange for a mortgage rate increase. It’s important to discuss these options with your lender as you work to lock in your rate.
Explore Your Purchasing Power
Half the fun of buying a home is getting to explore different purchasing scenarios. Give one of our high powered mortgage calculators a go. With just a few clicks of your mouse, you can explore how much house you can afford to purchase.
Costs of Homeownership
Aside from your monthly mortgage payment, it’s important to be prepared for the maintenance and the unexpected repair costs that come with owning your own home. As you’re looking at your whole financial picture, you should also consider how buying a home may impact things like your electric and utility bill.
You may also want to consider how much time you’ll actually have to work on maintaining your house and if some of those tasks may need to be outsourced. Time is a precious commodity and it’s worth examining how owning a home may impact your lifestyle.
Are you ready to buy a home? Check out our post on the 5 questions you should ask yourself before buying a home.
Still, have questions about mortgages? We’ve got you covered. Think of us as your mortgage spirit animal, guiding you through the process and here to answer all of your questions. If you have worries or concerns, don’t hesitate to reach out. Working with a lender, like HomeVantage, early in the process will give you an opportunity to address any questions or challenges early in the process.