When you’re buying a home, unless you’ve saved enough money for a cash purchase, you’ll need to obtain a home mortgage loan. A home mortgage loan is money you borrow from a bank or lending institution to pay for the property you’re buying. But getting a loan is not as simple as walking into a bank and applying for a mortgage.
There are various types of loans, terms, interest rates, and more — and each loan comes with a unique set of standards. Furthermore, the house you’re buying becomes collateral for the loan you’re borrowing. If you default on payments, the lender has the right to repossess the property.
Research & Compare
You have the right to research lenders, compare their rates and terms, and choose the lender that best suits your needs. Be cautious, though, about how many times you allow lenders to run your credit report as each credit check can ding your overall score. Shop lenders for the right terms, and only apply with the lender best suited to you.
When you make monthly mortgage payments, you’re not just paying for the house you bought. Your principal payment is applied directly to the cost of your home. However, you’re also paying for interest, which is a rate the lender charges you monthly for borrowing the money. Also included in your monthly payments is property tax, usually held in reserve to ensure payment.
Furthermore, you’ll pay for homeowners insurance to protect the property against things like fire and natural disasters. Insurance fees can go into holding in an escrow account. You may also need to obtain private mortgage insurance if your initial down payment for your home mortgage loan was less than the standard twenty percent.
Taxes and insurance payments usually stay in an escrow account until payment is due. You can think of an escrow account as a form of savings account, but one from which you cannot make withdrawals. Instead, those savings are applied to balance due on taxes and insurance.
Holdings for taxes and insurance in an escrow account may not always be required. Some lenders allow the buyer to pay these items independently. When funding separately, the homeowner is subject to large bills on an annual basis. Incorporating those costs into your mortgage payments prevents lump sum costs, but raises the monthly mortgage payment amount.
Interest rate terms may vary. You can select a fixed rate loan wherein the interest is higher per month but unchanging, or a variable rate loan, which is when your monthly payments may start low but increase as interest rates rise. There are also FHA loans where the government backs the loan which requires a lower down payment and less stringent guidelines. However, you must meet certain criteria to qualify for an FHA loan.
Life of the loan refers to the amount of time you have to pay back what you’ve borrowed. Standard mortgage life spans are either 30 years, or with higher payments monthly for a total of 15 years. Some home mortgage loans come with a pre-payment penalty, meaning you’ll be responsible for a lump sum fee if you pay the loan off before it reaches maturity.
Pre-Qualification & Pre-Approval
There’s a difference between pre-qualification and pre-approval for a home mortgage loan. Best practice suggests you obtain pre-approval. Pre-qualification is when the bank reviews your basic information such as debt-to-income ratio to provide an estimated loan amount of what you might be able to borrow without actually reviewing credit report or determining whether or not you’re qualified to borrow. Pre-approval can and often does disappoint buyers who later learn they are unable to borrow based on credit history and other factors. However, pre-qualification determines how much you can borrow, and that you’re able to obtain the loan. Pre-approval can be a tease whereas pre-qualification positions you as a serious buyer.
Buying a house is an exciting endeavor, but it’s not all fun and games. It’s imperative that you thoroughly understand the terms and conditions of your home mortgage loan. It’s also important that you are pre-qualified before you begin the house-hunt journey. Explore your lending options, determine whether you’ll choose fixed interest or variable interest rates, know whether you’ll commit to a 15-year or 30-year loan, examine whether or not you’ll need an escrow account for property taxes and insurance, and know ahead of time if there’s a pre-payment penalty.
Your real estate agent is the best source of information about the local community and real estate topics. Give Melissa Patton a call today at 864-923-7924 to learn more about local areas, discuss selling a house, or tour available homes for sale.