It’s finally time for you to purchase your very first home, and you’re absolutely buzzing with excitement. However, you’re not exactly sure what financing options are available or even where to begin. Figuring out how to pay for your first home is one of the first things you should do before making an offer on the house. Though some people are liquid enough to submit an all-cash offer for their home, most people choose to finance a house through a mortgage. We’ll explain the basics of mortgage lending so you can figure out which loan types and terms work best for your homebuying situation.
What is a mortgage?
A mortgage is a loan provided by a financial entity for either purchasing a home or borrowing money against your home’s current value. A mortgage can be used for commercial real estate, land, or personal residences. A mortgage payment consists of principal and interest payments, with principal referring to the original loan amount and interest being the lender’s fee for taking out the loan. You must meet certain requirements to qualify for a mortgage, which includes having the funds for a down payment. Borrowers agree when taking on a mortgage that, should they be unable to pay, the lender will assume ownership of the house and foreclose on the property.
Mortgage interest rates
The interest rate for your mortgage pays for the privilege of borrowing money from your lender. Market interest rates are determined by the state of the economy, and the rates a lender offers you are determined by the level of risk they would take on by offering you the loan. So, for example, if you have a large debt-to-income ratio, your interest rate may be higher than the market rate. Market mortgage rates change every day, so consult with your lender as early as possible to lock in the best and lowest rate possible.
Annual percentage rate (APR)
The APR reflects the total amount of interest and fees that must be paid yearly in addition to the principal cost of the loan. The fees include the origination fee, mortgage points, and other lender fees. The APR for your loan is something that is relayed to you before signing any mortgage agreement; this allows you to shop around for fair rates.
Commonly referred to as “discount points,” mortgage points are a way for borrowers to buy down their interest rate. Basically, it is a way to prepay interest charges on the loan so that the interest rate for the life of your loan is lower. Each mortgage point is equal to 1% of the total loan amount. Other points on a mortgage are origination points, which are closing cost fees made to the lender to process the loan. A single origination point, just like discount points, equals 1% of the total loan.
Qualifying and applying for a mortgage
Mortgage qualifications depend on the type of lender you choose to work with. Most loans have a minimum credit score requirement of 620 to qualify and the proper funds to make a down payment. Lenders will also review your debt-to-income (DTI) ratio, which is crucial for determining interest rates and the amount you can get approved for. Traditional loans have a maximum debt-to-income ratio of 45%, which can be calculated by adding up your current debt and projected monthly payment for your home and dividing it by your monthly income.
To apply for a mortgage, you have to do a bit of preparation first. It is necessary to look around for lenders that suit your needs and have a good idea of your credit score. Once you have found a few mortgage lenders, you can reach out to each institution for a letter of preapproval, which will entail a soft pull of your credit score along with calculating your DTI. This will allow you to see what lenders are willing to give you a loan, and it lets sellers know that you are a responsible and serious buyer. Once you have preapproval letters, you can continue the application process and choose a lender to commit to. At this time, the lender will review your income sources and other important documents. If all goes well, you’ll be cleared to close on the home you love.
Mortgage loan types
A fixed-rate mortgage means that the interest rate on your mortgage will not change for the life of the loan. It gives you a concrete idea of what you will spend on your home per month. Terms for these mortgages usually span from 10-30 years, with many borrowers choosing a 30-year loan.
An adjustable-rate mortgage is a home loan that does not have a set interest rate per month. Instead, the interest rate fluctuates depending on market conditions. The mortgages have an annual rate cap, so you won’t have to worry about your payments ballooning out of control. These loans are usually taken out by folks who do not plan on living in their house for a long time.
This mortgage is geared toward borrowers who are current homeowners and 62 and older. This allows borrowers to take out a loan against their home’s value and turn it into income. This is a good option for those who need extra cash flow and have a large amount of equity in their home. The loan amount is then due when the owner dies or moves out of the space. When the home is eventually sold, the lender will receive the total mortgage amount from the sale proceeds, and the remaining funds will go to the current owner or their estate.
It’s time to make homeownership a reality
Now that you have all the information you need to apply for and secure a mortgage, why wait to secure the home of your dreams? Working with a team of real estate professionals can help you put in an offer on your perfect home and settle down in no time. RE/MAX Destiny
is here to guide you through all the nuances of purchasing a home so you can feel confident and excited throughout the entire process. Choose RE/MAX Destiny
for your next homebuying partnership.