What Is A Mortgage?

Applying for a mortgage is perhaps the most difficult part of buying a house. If you are new to the mortgage process or just want to refresh your knowledge, there are plenty of resources available to help you. This is a critical part of owning your home.

What Exactly Is A Mortgage?

Your property and land secure the loan. Lenders can foreclose your home if you don't repay the loan. This doesn't mean that the bank will own the house unless you pay the loan off. They have a lien on your property. A lien allows someone to take possession of another's property until they pay off a debt. You are considered a homeowner even though you do not have a mortgage. You don't own a house with a lien.

Borrowing Limits With Mortgages

This was the thought a few decades ago. But, things didn't go as planned. A sub-prime loan is one where you borrow more than what you can pay. A lot of sub-prime mortgages were sold by banks to people who thought the housing market would rise like gangbusters. Their home values would rise to give them almost instant equity. Also, they could quickly refinance at a lower interest rate or sell the house for a quick profit. Because they were making the same wager, lenders sold these loan products. Interest rates on sub-prime loans are always higher. Lenders still stand to make a nice profit, even if some end up in foreclosure. This was a terrible bet for most people.

As the housing market is experiencing more upward mobility, it becomes tempting to borrow more money than you can afford. You need to be realistic about how much money you can afford. The mortgage payment should be affordable, even if it is a burden. The lender will evaluate your income, assets, and savings to determine your ability and capacity to repay a loan. This determines how much you are allowed to borrow but not necessarily how much you can pay back.

Is travel a passion? Do you enjoy dining out or other entertainment? Biannual vacations or a preference for fine dining at top-end restaurants won't be taken into account by the lender. It's easy to calculate your monthly payment and determine what your debts and income should allow you to afford. Even after the sub-prime mortgage crisis, there is a chance that a lender may offer you a higher mortgage than what you have in your budget. Only you know what you're willing to put aside each month for your mortgage payments.

How Do I Determine If I Will Be Eligible For A Mortgage Loan?

The most important factor is your debt-to-income ratio. This is your minimum monthly debt divided by your monthly income. But don't worry. It doesn't take much math to figure it out. There's a handy DTI calculator that will figure out for you and estimate how much you're likely to qualify for.

What Makes A Great Credit Rating?

You should also consider whether you are eligible to receive a government-backed loan. Conventional loans are not guaranteed by the government. These are just a few examples of loans that the government has backed.

FICO credit scores are between 300 and 850

Here's a quick guide that will help you determine your credit score:

Excellent Credit = 720 and higher

Good Credit = 660-719

Fair Credit = 620-659

Poor Credit = 619 and lower

The lower your score, the lower your interest rate. 35 percent of your credit score is based on credit history. Therefore, making monthly payments will make a big difference in your credit score.

Best Mortgage Option

This will depend on your goals and the price you are willing to pay. Are you going to be able to live there for the rest of your life? Are you looking to sell the house in five years? The length of your stay in a house will determine whether it is adjustable- or fixed rate mortgageable. You can also use this information to decide if you want to pay more attention to the interest rate or the points.

Which Is Better: Fixed Or Adjustable?

Fixed-rate loans will provide stability if you intend to remain in your home until the mortgage is paid off. A fixed-rate mortgage (ARM), on the other hand, has an interest rate that is slightly higher than an adjustable-rate one. However, it will not rise like an ARM. Your house payment will not change with time. Property taxes and insurance rates are the only things that can change.

If you're certain you'll be selling your home in the not too distant future, an ARM with a lower interest rate might make sense. Even if interest rates go up in a few years, it won't affect you. You can also choose a hybrid ARM which is fixed for a specific number of years (3 to 5, 7, or 10) and then adjusts annually for your loan's remaining term. A hybrid ARM comes with the risk of your payments going up if there is no sale. You may also lose the ability to refinance.

What Are Lender Points?

A point is 1 percent of your loan. A lender may offer to buy points in return for a lower rate of interest. One point does not mean a drop of a percentage interest rate. The lender will let you know how much a point will reduce the rate. You can typically buy points in quarters.

What is the best time to purchase points? It all depends on how long the mortgage is expected to last. Points may not be the best option if you intend to move in a few decades. You won't be able to recoup your initial investment.

Points may be an option if your intention is to remain in your home for the long term without refinancing. You will have to choose between paying lower interest rates over the term of the loan and paying no points upfront. Compare different offers to determine which one is the best.

A lender shouldn't be charged more than 1-1 1/2 points. A lender might charge you up to 2 percent of your situation is complicated, such as if you have poor credit or have a very high-interest rate.

What Is A Great Rate Of Interest?

Sometimes, rates that you see online for loans are not necessarily the ones you qualify for. It is important to research. The interest rates can change daily and vary depending on where you live. These rates can vary depending on your personal financial pictures, such as income, credit scores, and debts.

Why Is The Percentage Different Than The APR?

The annual percentage rate (APR) includes fees and points to arrive at an effective annual rate. Different lenders have different loan structures and fees, so the APR is a great way to compare each lender's offerings. Lender A could offer you a 2.0% interest rate which is far more than Lender B's 3 percent. Lender A includes points and other fees. Therefore, Lender A's APR or the amount you will pay could be higher than the interest rate. APR can help you compare apples to apples.

What Is Amortization, And What Should I Do About It?

Amortization means what you are actually paying each year towards your loan. A term can be as long as 10, 15, or even 30 years. Each month you pay, and the principal will decrease until it is paid off. While the monthly payments do not change, most of the interest payments will be made at the beginning of each term. The term ends, and the principal of the mortgage will be paid off.

An amortization calculator can help you determine how different loan terms will impact your payment schedule. It also shows how much interest you are charged depending on the term.

Pay half your house loan payment every two weeks, rather than one monthly. This will save you money. You'll end up paying 26 monthly payments, or one more per year than if your only payment was monthly. The principal will be paid more than the interest, and this is due to the re-amortized loan. The additional payments will be used to repay the principal.

Prepayment Penalties: Does This Really Exist?

If there are any prepayment penalties, paying off debt is always a good decision. Paying off your debt early can result in a penalty from some lenders. The penalties usually apply for a certain period of time, usually between one to three years after the loan is originated.

Why would anyone want to pay a prepayment penalty on loan? Lenders may offer very attractive (and tempting) interest rates in return. If borrowers have poor credit, they may agree to loan terms with penalties. A prepayment penalty is usually a financial decision. You may be able to save thousands of dollars by accepting a prepayment penalty for a loan.

What is the PMI?

It's short for private mortgage insurance. It is usually required if your down payment is less than 20%. The PMI protects the lender in cases of default. The PMI cost and methods to remove it once you have 20% equity in your home vary. FHA loans and VA loans are government-backed. PMI is not. On VA loans, there is no monthly mortgage coverage, but you will get monthly mortgage insurance if you apply for an FHA loan.