Chances are pretty good you aren’t wealthy enough to pay the entire purchase price of your home up front. Instead, like the vast majority of people, you’ll get a mortgage loan to cover the balance of the cost of buying your home.
Before you apply for any type of credit, make certain you know your credit score. Take a few moments and get a sneak peek at how lenders will view your credit reputation by getting your free triple credit score from GoFreeCredit.com. If you aren’t sure about using this service, first read my review. If you discover that your credit isn’t what you hoped and has been damaged, consider contacting a reputable credit repair company or counseling agency to make a plan to get your credit score back in great shape so you can apply for the mortgage you want.
What to Look For in a Mortgage Lender
As you look for a lender, try to find one that offers the best combination of the following factors:
Work only with lenders who demonstrate an earnest commitment to helping you through the process. If it feels like a lender just wants your money, move on. Good follow-up is also key — avoid lenders who dodge your questions or fail to respond to your requests in a timely manner.
Nearly all lenders charge an origination fee (generally one half to one percent of the principal) to evaluate your credit and process your loan. Try to find a lender who charges NO origination points. Those fees may not sound like much, but you would be much better off in the long run by applying those funds to your down payment.
Don’t choose a lender based solely on its advertised rates since rates depend on your personal situation, the rates you receive will likely differ from these rates. Instead, choose a lender that offers realistic rates that are also competitive with other lenders you investigate.
Where to apply for a mortgage
There are a lot of options when it comes to applying for a mortgage. If I were shopping for a mortgage today, my first stop would be Quicken Loans. They are the Internet’s #1 online mortgage lender, mostly because of their extremely quick closings and because of their rate drop program. If rates drop over the next three years, Quicken Loans will help you take advantage of those lower rates.
Also, there are programs for investors! Refinancing your investment properties has never been easy but with Quicken Loans, you can easily refinance to take advantage of today’s low interest rates. If you decide to take some of your available equity off the table, those funds can then be used to further your budding real estate empire and purchase more homes … and you get to refinance without pre-payment penalties.
Components of a typical mortgage
- Down payment: The down payment is a percentage of the total purchase price of the home. It is paid by the home buyer.
- Loan: Lenders, such as a banks, mortgage companies or other financial institutions, agree to lend a home buyer an amount equal to the difference between the down payment and the full purchase price of the home. The amount of what is actually loaned is called the principal. If a home costs $300,000 and the buyer pays a 20 percent down payment of $60,000, the principal is $240,000. That’s the amount borrowed.
- Payment: The buyer must repay the lender over time through monthly mortgage payments. These payments typically pay down the principal plus interest. If the buyer fails to pay the mortgage, the lender can foreclose on the house, taking it back from the buyer.
Generally speaking, it’s best if your down payment covers at least 20 percent of the total purchase price. If you don’t have the cash on hand to pay 20 percent of the purchase price, you can usually still get a mortgage, but you’ll likely have to cover some additional costs each month. Some first-time buyers may qualify for FHA (Federal Housing Administration) programs that require down payments of just 1–3 percent. Talk with your lender about whether you might qualify for FHA programs.
The total monthly mortgage payment is often referred to as PITI, principal, interest, taxes, and insurance.
- Property taxes: Each monthly mortgage payment may include a prorated portion of the annual property taxes you owe. If your annual property taxes are $2,400, for example, each of your monthly payments may include $200 of property tax in addition to the principal and interest. In some jurisdictions property tax payments are made directly by the homeowner and aren’t part of the monthly payment.
- Insurance: Lenders will require home buyers to purchase homeowner’s insurance, which covers both the home and its contents in the event of a windstorm, fire, or other damage. Flood insurance is generally not part of a typical homeowner’s insurance policy … it must be purchased separately.
- Private mortgage insurance: Private mortgage insurance (PMI) is an insurance policy paid by the home buyer to insure the lender doesn’t lose in case of default. PMI is included in the monthly payment but may be removed once the principle balance falls below 80 percent of the home’s value. PMI can easily add $50–100 or more to the monthly mortgage bill.
Types of Mortgages
The two types of mortgages most commonly offered are fixed-rate and adjustable-rate.
Interest rates rise and fall over time. In the early 1980s, for instance, interest rates rose to almost 19 percent, whereas in 2006 they were at about 5 percent. A fixed-rate mortgage protects you from such fluctuations by locking you into a permanent rate when you take on the mortgage.
Primary Advantage of a Fixed-Rate Mortgage
Stability: The interest rate on a fixed-rate mortgage never changes, even if economic shifts cause interest rates to spike. That means your monthly mortgage payments will never change: if you’re paying $1,500 a month today, you’ll pay $1,500 a month a decade from now.
Primary Disadvantage of a Fixed-Rate Mortgage
Higher initial costs: Interest rates on fixed-rate mortgages are usually higher than the initial rates on riskier adjustable-rate mortgages. As a result, your monthly payments (at least during the first 3–10 years) will be higher with a fixed-rate mortgage.
Fixed-rate mortgages can cover terms of 15, 20, 30, or 40 years. The most common are the 15 and 30-year varieties.
Adjustable-Rate Mortgages (ARMs)
An adjustable-rate mortgage (ARM) has an interest rate that can change at certain points throughout the term of the loan. Most ARMs offer a fixed rate for a certain period of time (3, 5, 7, or 10 years), after which the rate adjusts to match the interest rates that the financial markets are offering at the time.
Primary Advantage of ARMs
Lower initial costs: During the initial fixed term of an ARM, interest rates are usually lower than the permanent rates on fixed-rate mortgages. This results in lower monthly payments during the fixed-term phase of an ARM.
Primary Disadvantage of ARMs
Risk: ARMs expose you to risk. Though your initial rates on an ARM will be lower than those for a fixed-rate mortgage, if rates rise when the fixed term ends, you’ll pay more.
Different ARMs adjust their interest rates in different ways. Some adjust only once, at the end of the fixed term, and then act like a fixed-rate mortgage at the new, adjusted rate. Other ARMs continue to adjust their rates every six or twelve months to match current rates. Like fixed-rate mortgages, ARMs usually come with 15- or 30-year terms.