We all gotta start somewhere. After all, nobody starts off being an expert in anything. However, if you’re about to talk to a mortgage broker, and you don’t know a thing about mortgages, it’s a good idea to get at least the basics down. Especially if you don’t want to fudge anything up with your house. Below is some information you might find useful:
How does a mortgage work?
A mortgage is when a lender (like a bank, credit union, or mortgage banker) loans you some money to buy a house. In return, you will pay back some interest on your loan. You will usually have 15, 20, or 30 years to pay back the loan. During the time it takes to pay back the loan, you will accrue interest. This means that you will eventually pay back to the lender more than what was initially borrowed.
So, if you took out a loan of $350,000 that had an interest rate of 3.5% and paid it off over the course of 15 years, it would cost you a total of $450,375.94, with $100,375.94 going just towards interest. This is only if your interest rate is fixed though.
A fixed interest rate will not change during the time you have the loan. Therefore, your monthly payment should not change. However, if you have a variable interest rate, this will not be the case. A mortgage with a variable rate (also known as an adjustable rate mortgage or ARM) will start off with a lower rate than a fixed loan, but will fluctuate depending on U.S. or world interest rates.
For a comparison of how much you would have to pay depending on how long you took to pay back the loan or what kind of loan you took out, check out the chart below.
To clarify, a 5/1 ARM has a fixed rate for the first 60 months. After that, every year is a new interest rate. A 10/1 ARM has a fixed rate for the first 120 months. After that, every new year is a new Interest rate. This chart used an interest rate of 3.5% for fixed loans, 3.125% for 5/1 ARM, and 3.375% for 10/1 ARM.
Just so you don’t look like a complete newb, here are some basic terms you should be familiar with. And, if you’re already familiar with these terms, give yourself a pat on the back and kick back and relax as you review these common mortgage terms!
- Mortgage – a loan that uses a house or real estate as collateral. To pledge a property to a lender as security on a loan.
- Interest Rate – the percentage of the mortgage loan charged by the lender for use of the lender’s money.
- Variable Rate – a mortgage that has fluctuating interest rate. Variable rate mortgages generally fluctuate in respect to the prime lending rate.
- Fixed Rate – a mortgage for which the interest rate is fixed for a certain period of time (generally the length of a mortgage term).
- Amortization Period – this is the number of years it will take to pay off the principal balance of your mortgage. The most common amortization period is 30 years.
- Down Payment – the amount of cash that the buyer can invest in the property. The down payment is the difference between the purchase price and the value of the mortgage loan.
- Credit Score – the grade given to your credit situation and credit history. Usually a number between 300 and 850
- Credit Report – history of an individual’s credit.
- Private Mortgage Insurance (PMI) – usually required if you put in a down payment less than 20% of the value of the house. It protects the lender in the event that a borrower defaults on a mortgage.
- Pre-approval – approves you for a loan amount before you start looking for houses. It also acts as a rate hold, guaranteeing you today’s interest rates until up to 120 days (or 3 months) in the future.
- Pre-qualification – the process of applying for a mortgage, having an underwriter review your mortgage application, and submitting mortgage documents to a mortgage lender for review.
- Loan-To-Value – the ratio of the value of the mortgage loan to the purchase price of the property . For example, if someone purchased a home for $100,000 and had $20,000 as a down payment, the mortgage would be $80,000, or 80% of the value of the home. Therefore, it has an 80% LTV.
Good things to have on hand
- your social security number
- an idea of your credit score
- how much savings you have available for your down payment
- whether or not you have any delinquencies
- your employment history (so keep that resume nearby)
- yearly gross income
- your current address
- knowledge of any debt you have
And, if you have any co-signers, you will need all the information above for them as well.
Of course if you don’t have all this information, it’s not the end of the world. While it is helpful to have all your documents ready to go, this is not required until a bit later in the mortgage process.
Take your time to understand the basics of mortgages. Whenever you’re ready, feel free to get in touchn with us.