Whether you’re a first-time or experienced home buyer, unless you are paying cash for your purchase, it is crucial to understand what a mortgage is and how it works. Just as there are real estate professionals to help and guide you through your search and purchase, there are also mortgage brokers to do the same. However, the decisions are ultimately yours to make. This is a situation where the more you understand terms like fixed-rate mortgage, points on a mortgage, mortgage loan types, and private mortgage insurance, the better prepared you will be going to the closing table, possibly saving a considerable amount of money.
What is a mortgage?
There are many types of loans, and a mortgage is simply the type of loan you would take out to purchase real estate. Not only can you use a mortgage loan to make a new real estate purchase, but you can also borrow money on a home you already own. The Consumer Financial Protection Bureau lists several items to look for within a mortgage loan, starting with the size (the amount you are borrowing) and the term (the amount of time you have to repay the loan). The following are the essential details of a mortgage loan that may not be so easy to understand but can save or cost you tens of thousands of dollars over the life of your loan.
Mortgage loan types
Consumer Financial Protection Bureau also lists three mortgage loan types: conventional, FHA, and special programs. Each is determined and defined by the amount of the loan, the amount of the down payment, and the actual cost of the loan, which includes repayment of the amount borrowed plus interest and private mortgage insurance costs. The buyer’s credit report will also come into play when determining which type of loan is most suitable. Most mortgage loans fall into the conventional loan type because the cost of the loan is generally less. However, these loans can be more challenging to get approved. The FHA loans are more likely for those with a lower credit score and less of a down payment, and the special program loans target specific markets. For instance, VA loans are for veterans or their surviving spouses, and USDA loans target rural, lower-income borrowers.
Mortgage interest rates
Same as there are different types of mortgage loans, there are different types of interest rates on those loans: fixed-rate and adjustable. Both impact whether or not the interest rate or monthly payment can change, as well as the amount of interest paid over the term of the loan. With a fixed-rate mortgage loan, your monthly payments will likely not change but come with a higher interest rate. With an adjustable-rate mortgage loan (ARM), the interest rate starts out lower but can vary based on the market. In other words, it’s a gamble that can ultimately result in higher, or possibly lower, payments and costs over time.
While creditworthiness and financial wherewithal ultimately indicate what type of interest rates you may be offered, the Federal Reserve determines the baseline interest rate based on factors related to the economy. While interest rates were at record lows just about a year ago, they have recently begun increasing. Keep in mind that higher interest rates can make a fixed-rate mortgage more expensive, but it can also drive down the listing prices of homes, ultimately balancing out the monthly payment.
Points on a mortgage
Another way to lower interest rates is by buying points on a mortgage. Also known as discount points, U.S. News points out that you will only save money if you keep the property long enough to cover the initial expense. In other words, at closing, you pay your lender cash in exchange for a lower interest rate that will carry through the entire life of the mortgage loan. The cost of one point is 1% of the total loan amount, so if your loan is for $150,000, the cost of the one point would be $1,500. That one point will reduce your interest rate by .25%, which might not seem like much to begin with, but over 30 years, it will definitely add up.
The U.S. News article shows just how much purchasing points on a mortgage do add up by showing an example of purchasing two points on a $250,000 loan at $5,000. This can save close to $22,000 over the life of the loan just by lowering the interest rate by just .5%. It’s also important to remember that if you purchase points on an adjustable-rate loan, they will still be part of the annual percentage rate.
The U.S. News article shows just how much purchasing points on a mortgage do add up by showing an example of purchasing two points on a $250,000 loan at $5,000. This can save close to $22,000 over the life of the loan just by lowering the interest rate by just .5%. It’s also important to remember that if you purchase points on an adjustable-rate loan, they will still be part of the annual percentage rate.
Private mortgage insurance
Most simply explained, private mortgage insurance can help you get a loan you may not otherwise be approved for. It is intended to protect the lender if a borrower does not have a strong down payment or falls behind on payments during the course of the loan. While the insurance protects the lender, it will not protect the borrower. Your credit score will be negatively impacted, and you may still be at risk for foreclosure if you do not make your loan payments on time.
Partner with Levy Real Estate Group to find your future home
This crash course on what you need to know about mortgages will create a much less overwhelming and stressful experience when searching for a new home or refinancing an existing home. There is certainly more to learn. When it comes to real estate, who you hire matters, and understanding how mortgages work will also help determine the best professional partners for you. Contact Levy Real Estate Group for help buying or selling your home. With more than 20 years of Central Valley real estate experience, they are available to provide a smooth and efficient process and have strong, established relationships with mortgage professionals who can offer the same.
