Applying for a mortgage can be an exciting and exhilarating time as the thought of owning your own home gives you warm, fuzzy feelings inside. Unfortunately, there is a lot to a mortgage, so it can also be an extremely stressful time, an emotional roller coaster filled with ups and downs. Here are a few basics to help you understand mortgages and the mortgage process.
There are several factors that go into whether or not you can successfully qualify for a mortgage. The application process can seem very detailed and intimidating, especially for first time buyers. However, remember that the basic information that is needed is employment, your finances and information about the home you are buying. However, you will need to supply quite a few details about each of these things.
Your credit score is also an important factor in whether you can qualify for a mortgage. The better your credit score, the better the deal you are likely to get. If you have a poor credit score, don’t fret as some lenders will work with you. Your credit score gives lenders an idea of how likely you are to repay the debt. If you have a poor credit score, it is an indication to the lender that you may not make payments on time or in a stable manner, and you may not qualify for the best rate you can get.
Another important factor in qualifying is the underwriter. While the lender will attempt to get you the best deal, the final decision on your mortgage rests with the underwriter. The underwriter will compare the risk that the specific investor is taking with the home. Underwriters and investment companies have their own guidelines and, while they may use the same information as the lender, they may treat, weigh or calculate it differently.
Another factor that ties in to how much you will have to pay for your home is the down payment. You will need to put an initial payment down on your home, often from 3.5 to 20 percent of the home’s total value. The exact value will depend on the loan you get, and some home loans require a lower initial down payment.
Types of Mortgages
There are many types of mortgages, but there are two general categories. The two categories of mortgages are fixed-rate mortgages and adjustable-rate mortgages. There is also a sort of third category of mortgages called the reverse mortgage which is generally specifically for those sixty-two years of age or older.
The two most common types of fixed-rate mortgages are thirty-year fixed rate mortgages and fifteen-year fixed rate mortgages. These mortgages are similar in that the cost of the home is spread out over thirty or fifteen years. Thus, the payments on these types of mortgages are easier to plan for as the payments are a fairly steady amount.
The main difference between the two, aside from the obvious time it takes to pay off each mortgage, is that in a fifteen year fixed mortgage, the homeowner pays higher payments but in the long run ends up paying much less in the way of interest.
Adjustable rate mortgages, on the other hand, generally allow for loans with a smaller down payment and an initially lower interest rate. While an ARM might seem like a good deal initially, remember that those going with an ARM are tied to the fluctuations of the housing market. As the housing market fluctuates, the adjustable portion of the mortgage comes in and the mortgage payment may increase, sometimes by a significant amount. Because of this, ARMs assume that the home owner is willing to take a bit of risk on the housing market to receive better mortgage rates early on in the loan’s lifetime.
Reverse mortgages are a special type of home loan for those over the age of 62. Essentially, this type of mortgage allows the homeowner to transfer some of his or her equity into a type of income. As baby boomers approach retirement age, this sort of mortgage is becoming more and more popular as it allows seniors to use the loan to pay for a variety of expenses.
What’s In a Mortgage Payment?
There are several parts to your monthly mortgage payment. All mortgage payments have at least two parts; the principle and the interest. The principle is simply the money you have borrowed, and the interest is the cost of borrowing the money. This makes up the basics of your home mortgage payment, but there are other factors as well.
Most of the time, property tax and homeowners insurance are also a portion of the mortgage payment. The specifics of property tax and homeowners insurance differ from state to state. Homeowner’s insurance is necessary so that the investor can recoup losses if something goes wrong with the home while it is being paid off.
If you don’t keep up the homeowners insurance on your property, it is legal and quite probable that your lender will obtain it for you. This is known as “force placed insurance” and it is often much more expensive than homeowners insurance you get on your own.
Private mortgage insurance, or PMI, can also add to your mortgage payment. This is normally required if the homeowner puts less than 20% of the home’s value down when first purchasing the home. Once the principle paid is at 80%, this type of insurance is generally no longer required. Check with your lender or servicer to make sure how it works. Some types of loans do not require PMI.
So, the total of your mortgage payment is actually the Principle and Interest (P&I), plus the Tax (T), plus the Insurance (I), plus the amount of PMI. Although lenders are often very good about disclosing the total cost of a mortgage payment, it doesn’t hurt to ask them if the price quoted includes all of the above factors before signing any paperwork for your home’s mortgage.
If you have any additional questions or would like information on obtaining financing for a home purchase, feel free to speak with our preferred Loan Officer Nathan Davis @ 239.898.8841 or email Nathan@nathandavis-mortgage.com