Mortgage is a rather common word. It is heard often throughout the average person’s lifetime. But do you really know what it means? When first-time home buyers are preparing for one of the most important decisions in their life, do they truly understand what a mortgage is? For those who are familiar with the word but realize, after stopping to consider, they may not be clear on what it means, Mortgage 101 is for you.
Mortgage Defined: Look the word up in a dictionary and the entry probably reads something like this:
“A legal agreement between a bank or creditor who lends money at interest to a debtor for the purpose of purchasing property. The lender maintains title of property until debt is paid in full.”
Sounds simple, right? Then why does the home buying process seem so complicated? What are all the details that add to the complexity of a mortgage?
Options: First-time buyers may be surprised that there is an extensive menu of mortgage options. This makes it easier to customize a lending scenario for the unique situations of each buyer. So, become familiar with the most common mortgage options available for your own circumstances.
Preparation: Despite the many different mortgage options, there are many things that each one has in common. Here are a few things to have prepared going into the process:
- Cash for down payment.
- Money set aside for closing costs.
- Comprehensive understanding of your personal finances.
- Budget for future house-related expenses that reflects you can actually afford to live in it. The general rule of thumb is that a mortgage not exceed 30% of take-home income.
- Know the price range of the home you can afford.
- Expect to take your time.
Pre-Approved/Pre-Qualified: A pre-qualified loan assures sellers that a buyer has already completed the initial lender screening. Pre-approval signals that the next step has been completed, bank approval. Once pre-approved, a bank supplies a pre-approval letter that can be used in the offer stage of purchasing a home. Getting pre-approved or pre-qualified is not necessary to secure a mortgage. What it does is give potential home buyers an edge over competitive offers. Sellers recognize that a pre-approved/pre-qualified offer is less risky.
Credit and Rates: This can be very confusing for first-time home buyers. There is no universal standard for determining interest rates. It is up to individual lenders to determine the premium they attach to what they consider risk. So, even if someone has credit issues, there may be reasonable mortgage solutions. Don’t let bad credit prevent you from realizing your dream of home ownership.
The Fed: Anyone who listens to their local news regularly has heard the phrase, “The Feds raised rates today.” What does that mean for mortgages? It means that, overnight, the cost of borrowing money just increased.
What Are Points? Fees paid by the borrower to the lender at the time of closing are often referred to as points. For example, a 2-point $200,000 loan will require a $4,000 payment to the lender. To break it down simply, the points cover what a borrower’s credit costs the lender. Not every mortgage will have points. However, a no-point loan often has a higher interest rate.
GSEs: Government sponsored enterprises, like Fannie Mae and Freddie Mac, are private companies the government sponsors to provide home mortgages. They’re designed to facilitate the flow of money throughout the US economy by making home-buying more affordable.
Cost Minutiae: Additional costs and fees can quickly overwhelm first-time home buyers. Here are expenses that may get overlooked when preparing a budget for living in your new home:
- Property taxes
- Hazard insurance
- Homeowners’ association fees
- Private mortgage insurance
- Repairs and maintenance cost.
- Improvements such as landscaping.
The Best Advice: Mortgage experts offer these 2 pieces of advice:
1. Take your time.
2. Pre-qualify for a loan.