What you need to know about mortgages.

5 – MINUTE READ

Wanting to buy your first home is very different than being prepared to buy your first home. It’s  fun to browse home listings and dream about what you want. It’s even better to get an idea of what’s possible.

Put yourself in the best position to be approved for a mortgage and understand the home buying process before you jump straight into your home search.

 

 

Getting Ready To Buy Your First Home

Many renters assume that if their monthly rent is more than the cost of a mortgage payment, it’s a better idea to buy. Why toss money to a landlord when you could be putting that money into your own home, right? Yes, but it’s not quite that simple. There are a few other things first-time home buyers need to consider.

Saving For The Future

The largest cost associated with buying a home is the down payment and closing costs. A down payment is a percentage of your mortgage that you’re required to pay upfront to get your mortgage.

You may have heard that you need at least a 20% down payment before you even think about buying a home. A down payment of 20% or more does get you off the hook for mortgage insurance. It’s an extra fee added to your monthly mortgage payment that’s insurance for the lender if you default on your loan. It also decreases the size of your monthly payment. You can use our mortgage calculator to see how the size of your down payment impacts your monthly payment.

Luckily, it’s possible to get a mortgage with a much lower down payment. One example is the government-backed FHA loan, which you may be able to get with as little as 3.5% down. If you’re a veteran or serve in the military, you may qualify for a VA loan and not need a down payment at all; you’ll just need to save for closing costs. No matter what kind of loan you get, you can expect to pay between 3% and 6% of your total home loan in closing costs.

Getting ready to buy a home means saving for after you get a mortgage, too. Your lender may require you have enough funds to cover at least a few months of mortgage payments. Lenders also want to know you can afford your mortgage payments, so they look hard at your debt compared to your income before they give you a mortgage.

But it’s up to you to think about and be prepared for the inevitable expenses that come with homeownership, like that $3,000 furnace that breaks down in the middle of winter. It’s a good idea to have a solid emergency fund to fall back on before you purchase a home.

Decide What You Want In A Home

Unlike a car, you usually don’t get to try a home before you buy it, and yet it’s a much larger purchase. That’s why it’s important to spend time figuring out what you want. How close to public transportation do you want to be? How long of a drive are you willing to make to get to work every day?

If you have children or you’re ready to start a family, you’ll want to pay attention to the school district. How many bedrooms and bathrooms will you need? Is a large backyard a must-have?

A defined set of criteria will help make your house-hunt easier and more efficient. A good real estate agent can then help guide you to the homes that meet your needs.

 

What parties are involved when getting a house?

7-MINUTE READ

Are you wondering what to expect when you start the home buying process? Many first-time home buyers anticipate working with a real estate agent and a lender but aren’t sure who the other players are in the process.

We’ll introduce you to the different professionals who are likely to pop up during the buying journey and how they’ll prep you to get those keys in-hand.

 

 

The 9 Parties Involved In The Home Buying Process

Not all buying processes look the same, but in general, you can expect the same key people to play a role in the process. Some of these parties are mandated by your lender and the laws of your state, while others are optional but encouraged.

Here’s who may help you during your road to homeownership and when they’ll cross your path during the process.

Buyer’s Agent

Your real estate agent, also referred to as a buyer’s agent, is the most important person you’ll interact with during your home buying journey. Your real estate agent is a source of knowledge who will help you find the right home at the best price, negotiate on your behalf and walk you through the final steps to close on your home.

You’ll want to find a real estate agent as soon as you’re ready to begin the home buying process. It’s important to shop around for the right real estate agent who will best represent your needs.

There are many factors to consider as you look for a good buyer’s agent, but in general, you’ll want to find a professional with experience who knows the area and who is a good communicator. You can opt for areal estate agent, who will have passed licensing examinations to conduct business in your state. REALTORS®, on the other hand, are real estate agents who are members of the National Association of REALTORS®. They’re held to a strict code of ethics to protect the interests of clients, cooperation between brokers and more. REALTORS® must also hold a clean professional record.

Try to avoid using dual agents, or those who act on behalf of you, the buyer, and the seller in a transaction. Since a good buyer’s agent represents your best interests, an agent who works for both the buyer and the seller could lead to conflicts of interest.

Buyer’s agents also do not charge you commission (their fees are often paid by the seller), so if a buyer’s agent tries to charge you, consider it a red flag.

Mortgage Company

The next important party in the buying process is your mortgage company or lender. Deciding how to finance your home purchase is a huge decision, and partnering with the right mortgage company is crucial for your financial success.

You’ll want to start looking for a mortgage lender before you find your dream home. Getting preapproved will allow you to shop for a home with confidence because you’ll know how much house you can afford and the maximum loan amount you’d qualify for.

Be sure to consider what factors are most important to you as you look for a mortgage lender.

You’ll also want to be aware of your credit score and lenders’ median credit score requirements, which can vary depending on the type of mortgage you’re seeking.

Listing Agent

You may never actually meet the listing agent for the home you’re purchasing, but they’ll play a huge role in the buying process. Just as the buyer’s agent works on your behalf, the listing agent works for the seller and represents their interests.

Once you make an offer, your real estate agent will work with the listing agent to negotiate a fair price. The listing agent will also be involved in any post-inspection or repair request negotiations.

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Insurance Company

Your home will likely be your most valuable asset, so you’ll want to take your time searching for the right homeowners insurance company. First, search for the major companies in your area and request detailed quotes.

If you live in an area prone to weather-related damage, like flooding or hail, you might want to find a company that offers additional insurance packages – which could include flood, hail, rain, wind or even theft coverage. The type of insurance you’ll want to look for can be based on your home’s location, condition and age – do your research and compare quotes based on this information.

Title Company

Another party that stays in the background of the process is the title company. During the closing process, the title company will run a title search on your property to ensure there are no outstanding liens or mortgages against the it. This is done to protect your investment.

Once this is complete, a title insurance policy will be issued for both the owner and the lender. This insurance will protect both parties if someone claims to have rights to the property down the line.

Lenders often defer to title agents and companies they’ve used in the past, but as the buyer, you can choose your own title company. It’s a good idea to partner with a local title company that knows your area and market.

Appraiser

Your lender will generally require a home appraisal to confirm the value of the home prior to closing. This is done to protect your lender from financing more than the home is worth. The lender will select a third-party appraisal company, although you’ll ultimately be responsible for paying the appraiser.

Appraisers are typically local professionals who conduct research on your market and visit the home to assess its overall condition and value. Appraisers perform a general inspection and present their findings to cultivate an appraised value for the home.

The appraiser plays an important role in the closing process because they could uncover significant problems with the home that impact its value. If a home appraises for less than expected, your real estate agent might need to negotiate the price with the listing agent, or you might need to pull your offer if a deal can’t be made.

Home Inspector

The home inspector will also assess the condition of your home to determine if it’s a smart purchase. The home inspector is hired to help protect the buyer from purchasing a property with major problems.

Since the buyer is responsible for the home inspection, you’ll want to search for a credible inspection company. Your lender or real estate agent can likely make recommendations, but be sure to do your own research. Look for reviews online or ask companies for sample inspection reports so you can determine which company does the most comprehensive inspections.

Once hired, the home inspector will go through the house from top to bottom with you, pointing out any problems – from major foundational concerns to smaller, more easily repairable issues. From there, a home inspection report will be issued for you to review with your real estate agent to determine if further negotiating has to happen with the seller.

Real Estate Attorney

A real estate attorney may be involved in your closing process. Their job is to protect you from making a fraudulent purchase during the final stages of the buying journey. A real estate attorney is not involved in every home purchase, but are required in several states – Delaware, Massachusetts, New York, Georgia, North Carolina and South Carolina.

In some cases, the real estate attorney will handle the title search instead of the title company. Once they’re satisfied that there are no liens against a property, they’ll turn the results over to a title company to issue title insurance.

Your real estate attorney will also represent you during the closing, explain all legal paperwork to you and ensure that you have all of the knowledge and information you need to go through with the home purchase.

Let’s say you’re required to hire a real estate attorney, or you want additional legal protection during your purchase. Your real estate agent can help connect you with local real estate attorneys in your area.

Tax Advisor

A tax advisor might not be the first person who comes to mind when you think through the home-buying process, but they can be a very helpful asset when buying a home. There are several smart reasons to consult a tax advisor when buying a home, including:

  • Withdrawing funds from your 401(k) for a down payment
  • Purchasing an investment property
  • Using business funds to pay for a down payment
  • Purchasing a home with gifted funds

Your real estate agent can answer some of your tax questions, but it’s always best to seek professional legal advice. Do you already have a CPA or tax advisor you use for your personal or business taxes? They’re a great resource to start with. You can also ask your real estate agent or colleagues to recommend someone trustworthy.

 

Should you refinance your mortgage?

6-MINUTE READ

Your mortgage may be one of the biggest and most important investments you make in your entire life – and it can also help you reach your future financial goals. A refinance is a wonderful tool that can help you reach those goals sooner.

Refinancing can allow you to change the terms of your mortgage to secure a lower monthly payment, switch your loan terms, consolidate debt or even take some cash from your equity to put toward bills or renovations. Is it the right choice for you? Here’s a quick reference guide to help you decide.

 

 

Why Refinance?

You Need To Change Your Loan Term

Are you having trouble making monthly mortgage payments or are you unsatisfied with your current payment amount? A refinance can allow you to lengthen the term of your mortgage and at the same time lower your monthly payments. For example, you can refinance a 15-year mortgage to a 30-year loan to lengthen the term of your loan and make a lower payment each month.

When you lengthen your mortgage term, you get a slightly higher interest rate because lenders take inflation into account, and a longer mortgage term means you pay more in interest over time. If you know your current payment schedule isn’t realistic for your household income, a refinance can free up more cash so you can invest, build an emergency fund or spend it on other necessities.

You can also refinance your mortgage in the opposite direction, from a long term to a shorter term. When you switch from a longer-term mortgage to a shorter one, you enjoy lower interest rates and you’ll also own your home sooner. Switching to a shorter term also means that your monthly payments will increase, so make sure you have enough stable income to cover your new payments before you sign on for a shorter term.

You Need Cash To Pay Off Debts

If you’ve made payments on your mortgage, you have equity in your home. Equity is the difference between your home’s fair market value and the amount you still owe to your lender. You can gain equity in one of two ways: by paying off your loan principal or by waiting for your home to rise in value over time. If your loan is more than five years old, you’ve probably built a bit of equity in your investment just by making your regularly scheduled monthly payments.

A cash-out refinance allows you to take advantage of the equity you have in your home by replacing your current loan with a higher-value loan and taking out a portion of the equity you have.

For example, let’s say that you have a $200,000 mortgage and you have $50,000 worth of equity – this means that you still owe $150,000 on the loan. You might accept a new loan for $170,000 and your lender would give you the $20,000 difference in cash a few days after closing.

You might also seek a cash-out refinance because you need money to pay off other debt. If you have debts spread over multiple accounts, you can also use a cash-out refinance to consolidate your debts, pay off each account and transition to one monthly payment. Consolidation can help you keep a better record of what you owe and reduce instances of missed payments, late fees and overdraft charges.

You Want To Do Home Improvements Or Renovations

From a broken HVAC system to replacing the pink linoleum in the bathroom, you might need to invest in your home at some point or another. Using the equity in your home can be better than taking out a personal loan or putting charges on a credit card because cash-out refinances usually have lower interest rates than most credit cards.

The average mortgage rate is currently about 4-5% and the average low-interest credit card rate is more than 12%. If you choose a variable rate credit card or a store credit card, you’ll likely pay even more in interest. If you have enough equity in your home to do a cash-out refinance, you can complete your renovations or repairs without excessive interest charges.

Though you can do anything you want with the money you get from a cash-out refinance, it’s important to remember that your refinance is still a loan. It’s a good idea to get estimates from contractors or repair professionals before you close on your refinance. This will lessen the chance that you take out too much money – or you take out too little and have another bill after the job is finished.

You Want To Allocate More To Retirement Saving

One of the most powerful tools that you can take advantage of when it comes to saving for retirement is the principle of compounding interest. The earlier you start to invest and save, the more years you have to accumulate interest on your investments before you retire. If you have equity sitting in your home but you haven’t maxed out your annual retirement contribution limits, you can end up making more money over time by taking a cash-out refinance and investing the difference.

You can also use the money from a cash-out refinance to invest in your property. Whether you want to add a new bathroom, spruce up your paint or install a privacy fence, you’re only limited by your imagination. Upgrading your home can bring in more money over time by increasing your home’s value and curb appeal, both of which can help you secure a higher final closing price if you decide to sell.

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When You Should Refinance

Think you’re ready to refinance? Make sure you meet the requirements to refinance first – and don’t forget to consider home values and interest rates in your area. You might be ready to refinance if:

You Meet the Requirements

Most lenders have certain requirements that borrowers must meet before they can get a refinance approval. Some common lender requirements include:

A Credit Score Of At Least 580

Your credit score is a numerical representation of how reliable you are as a borrower. A high credit score tells lenders that you make your payments on time and you don’t borrow more than you can afford to pay back. A low credit score, on the other hand, communicates to lenders that you’re more likely to have trouble making your payments and you might even default on your loan.

The minimum credit score you need to refinance is 580 for a government-backed mortgage like an FHA loan, but some conventional lenders set their own higher minimum credit scores to refinance. If you don’t have a credit score of at least 580, you can’t refinance until you raise your score.

Debt-To-Income (DTI) Ratio Less Than 50%

Your DTI ratio refers to all of your monthly debts and payments divided by your total monthly income. For example, if you currently pay $1,500 in monthly bills and you earn $4,000 per month before taxes, your DTI ratio would be equal to $1,500 divided by $4,000, or 37.5%. Most lenders require that candidates have a DTI ratio of less than 50% before they approve a refinance.

Your Financial Documents

Just like when you apply for a mortgage, your lender will ask to see a number of financial documents before they approve your refinance. You usually need to have your last two W-2s, your two most recent pay stubs, a copy of your homeowners insurance agreement and your two most recent bank statements before your lender can underwrite your refinance. If you’re self-employed, your lender will probably also ask you for a few more documents to verify your income.

Low Interest Rates

You also want to make sure that you refinance when interest rates are lower. When you refinance, the rate you lock in is comparable to current market interest rates. Compare historic interest rates in your area with your current mortgage rate and talk with a lender about how interest rates will change in the upcoming months or years.

Home Value

If you’re taking cash out, make sure your home is worth more than what you bought it for. This allows you to maximize your equity and secure a lower interest rate. Before you refinance, it’s a good idea to talk to a real estate agent or other local expert or to research on how average property values are trending in your area before you commit to a refinance.

 

Is home insurance tax deductible?

7-MINUTE READ

Owning a home comes with its own set of expenses, from mortgage payments to home repairs. On the other hand, one of the perks of owning your own home is the tax breaks that come along with it.

Homeowners insurance is one of the main expenses you’ll pay as a homeowner. Homeowners insurance is typically not tax deductible, but there are other deductions you can claim as long as you keep track of your expenses and itemize your taxes each year. We’ve compiled what you need to know to help you save thousands throughout the year.

 

 

10 Tax Deductions For Homeowners

Here are the ten main deductions you should know about.

  1. Mortgage Points Deduction

Your mortgage debt may be the largest debt you’ll ever tackle. Consider purchasing mortgage points. These can be a great way to not only save money over the duration of your mortgage but also to write off some of the interest paid on your loan.

What Are Mortgage Points?

Mortgage points are often referred to as discount points and are bought up front, at the time you close on your mortgage. One point is equal to 1% of your total mortgage amount. For example, let’s say your home is $200,000 and you want to put down an additional $2,000 at closing. In this case, you’d purchase one mortgage point.

The purpose of mortgage points is to reduce your interest rate over the lifetime of your loan. Your interest rate decreases for each mortgage point you purchase. Let’s say the market rate is 4.5%. You can usually expect to get a .25% discount interest rate reduction for each point you buy. One mortgage point might decrease your rate to 4.25% and two points might decrease it to 4%. Talk to your agent and lender about your specific mortgage point eligibility and requirements.

How Do Tax Deductions Work For Mortgage Points?

You can typically claim the full amount on your taxes the same year you buy mortgage points. There are some stipulations you must meet to qualify, but most U.S. homeowners meet these standards. If your home loan amount is over $750,000, you’ll be limited to a specific amount you can claim on your taxes.

Use Form 1098 (provided by your mortgage lender) to claim the deduction and find the total number of mortgage points purchased. You’ll put this amount on line 10 of Form 1040 Schedule A. Your accountant or tax software can walk you through this step.

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  1. Mortgage Insurance Deduction

Let’s say you pay less than 20% on your down payment. Your lender will likely require that you pay private mortgage insurance (PMI), which is a type of insurance that protects the lender if you happen to default on your loan. You can deduct any payments made to the premium of your insurance from your taxes each year.

Your gross annual income should be less than $109,000 to qualify for this deduction. The residence on the mortgage will also have to be a primary or secondary residence and not a property you rent to tenants.

You can claim this deduction by referencing Form 1098 provided by your mortgage insurance provider. The amount paid toward the premium will need to be listed in box 4. You’ll also need to itemize your 1040 Schedule A form, where you can find this deduction listed on line 13.

  1. Mortgage Interest Deduction

You can also put a little money back into your own pocket with a mortgage interest tax break. This deduction allows you to claim the total amount paid toward your mortgage interest within one year.

Homeowners can deduct the interest paid on the first $750,000 of qualified personal residence debt on a primary or second home.

You can find the amount of mortgage interest paid per year on Form 1098 from your mortgage lender. You’ll report this amount on Schedule A of the 1040 form.

  1. Property Tax Deduction

Homeownership also requires you to pay property taxes. What you’ll pay in property taxes ranges depending on the state and county you live in as well as the overall value of your home. This covers things likeroad and highway construction, education and more.You can deduct the property tax payments you make each year if you itemize your taxes.

Let’s say you’re married and filing jointly. You can deduct up to $10,000 in property taxes per year when filing your taxes. On the other hand, if you’re single or filing separately, you can deduct up to $5,000 in property taxes. You’ll claim this deduction using Schedule A of the 1040 tax form.

  1. Rental Deductions

Did you know you’re eligible for a rental deduction if you rent out a part of your home such as a garage apartment, basement or spare bedroom? You’ll need to pay taxes on any rental income, but you can recoup some money through maintenance and repair costs, insurance, utilities and more.

Simply fill out Schedule E of the 1040 form and subtract any rental expenses from your rental income. Be sure to check with a tax professional to ensure you maximize this deduction.

  1. Home Office Deductions

In some cases, you can actually deduct business expenses from your taxes, particularly if you’re a self-employed homeowner. Your home office expenses qualify you for a tax break. You must be self-employed – not just a remote employee – to qualify for this deduction.

You can calculate the amount you’re able to deduct from your taxes in two ways. The first method involves calculating the actual expenses you spend operating your business from home. This could include maintenance, utilities, internet and other expenses. You’ll need to have documentation to back up your claims.

The second method is a simplified estimate that allows you to deduct $5 per square footage of office space. So, if your work area is a 10×20 space, or 200 square feet, you’d qualify for a $1,000 deduction.

  1. Home Improvement Deductions

Home improvement products can add tremendous value to your home both by improving your space and increasing your home’s worth. Another upside to home improvement projects is that many of them qualify for tax deductions.

Home improvements that improve your home’s value are called capital improvements. Types of qualified improvements include swimming pools, home additions, garages, a new roof, a new central air conditioning system, water heater upgrades, home security systems and more.

On the flip side, you can’t deduct these expenses in the year you pay for them, but you can deduct them all at once during the year you sell your house. It’s important to keep records of all major home improvements for this reason. A qualified accountant or tax specialist can help you work through all improvements to determine which ones are eligible for this tax break.

  1. Energy Efficiency Deductions

Energy-efficient homes are more popular than ever, and many homeowners are opting to make energy-saving upgrades. Transforming your home into an energy-efficient property can not only save you money on utility bills, but it can also help you save on your taxes.

The Residential Renewable Energy tax credit allows you to claim credits when you implement solar, wind, geothermal or fuel-cell systems. Energy-efficient upgrades that qualify for this tax credit include solar-powered water heaters, solar panels, wind turbines and geothermal heat pumps.

You can claim this credit for primary and secondary residences (excluding fuel-cell upgrades, which you can only claim for primary homes). Each credit is worth 30% of the expense of the upgrade and there are no limits placed on solar, wind or geothermal credits. Fuel-cell equipment credits are capped at $500 for each half kilowatt of power.

  1. Medical Home Improvement Deductions

You may make home improvements or upgrades for medical reasons. In that case, you may qualify for additional tax deductions. Medical home improvement could include adding ramps, installing elevators, widening doorways, installing handrails and more. The main requirement to qualify for this deduction is to be able to prove you have (or a member of your household has) a medical reason for requiring the upgrade.

You’ll need to itemize your taxes using Schedule A of the 1040 form to claim this deduction. You can only claim medical improvement expenses that surpass 10% of your adjusted gross income. If the improvement increases your home’s value, you’ll also have to subtract that value increase out of the amount you claim.

For instance, you might install ramps in your home and spend $20,000 doing so, but they may only increase your home’s value by $7,500. In this case, you can only deduct $12,500 ($20,000 minus $7,500). This deduction can get a little complicated, so talk to a qualified tax specialist to help you better understand which improvement qualifies for this tax break and how much you can claim for each improvement.

  1. Capital Gains Tax Exclusion

You might wonder if you’ll be responsible for paying capital gains tax when you sell your home. The good news is that when you decide to sell, you most likely won’t have to pay a cent of capital gains tax.

Thanks to the Taxpayer Relief Act of 1997, you may be exempt from paying capital gains as long as you meet the qualification criteria. You’ll need to have lived in and owned the home for 2 of the past 5 years and not have used this tax break within the last 2 years. You’re exempt from paying capital gains tax on home profits up to $500,000 if you file taxes jointly. You’re also exempt from paying this tax on home profits up to $250,000 if you’re an individual filer.

 

Pre-Approval Vs. Pre-Qualification.

5-MINUTE READ

As you prepare to apply for a mortgage, you’ll come across terms like “prequalification” and “preapproval”.

It’s important to understand what these terms mean – they’ll guide your home search and help you focus on homes you can afford. When the time comes, they can also help decide how much to offer and show the seller that you’re a serious buyer.

At the most basic level, prequalification and preapproval are types of mortgage approvals, and they refer to the steps a lender takes to verify that a client can afford a mortgage. In this article, we’ll review some common ways lenders use prequalification and preapproval.

 

 

But first, a couple points to remember:

  • Every lender handles mortgage approvals differently. The steps and words involved change from lender to lender. Many lenders use prequalification and preapproval interchangeably.
  • No matter what type of mortgage approval you get, it’s not a guarantee that you will close the loan.A prequalification or a preapproval is a way for a lender to help you and a seller estimate what you can afford. After you find a house and make an offer, the home will still need to be appraised by a third party and inspected for potential repairs before you can close the loan and buy the home.

 

What Is Mortgage Prequalification?

A prequalification generally means that a lender collects some basic financial information from you to estimate how much house you can afford.

It’s common for a prequalification to rely on self-reported information, instead of verifying by pulling your credit report or reviewing financial documents. This means a prequalification is typically a ballpark estimate. It also means it is less reliable than a preapproval, which usually involves your lender checking your credit score and reviewing bank statements and other documents.

As you begin searching for a home, real estate agents and sellers want to see you’ve been working with a mortgage lender so they know you can afford to buy a home. After you’ve been prequalified, you’ll usually receive a “prequalification letter” you can show to an agent or seller as proof you’re working with a lender. This is a good first step, but it typically won’t carry as much weight as a preapproval because a lender hasn’t yet verified your information. Going beyond a prequalification and getting preapproved is a critical step to showing you’re serious about buying a home.

What Is Mortgage Preapproval?

Preapproval generally includes some steps to verify the information you provided to get prequalified. Along with pulling your credit report, the lender will likely collect some financial documents from you, like your W-2s, pay stubs, tax returns and bank statements.

Just like with a prequalification, the lender uses this information to see if you’re eligible to get a mortgage. However, since the lender is now working with verified information, they can provide a more accurate picture of what type of a loan you can get and how much house you can afford.

After getting preapproved, it’s common for lenders to give you a “preapproval letter” you can present to real estate agents and sellers showing you can afford to buy a house. Different lenders will have different types of preapproval letters, but it’s common to list how much you’ll be able to borrow and what kind of loan you can get.

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Prequalification Vs. Preapproval: What’s The Difference?

Both prequalification and preapproval are early steps you can take toward getting a mortgage. They both estimate how much home you can afford, which is a great step to take before you look at houses.

The difference is typically how much of your information the lender verifies:

  • Preapproval generally involves the lender verifying your information by reviewing financial documents and your credit history.
  • Prequalification relies on information you provide verbally.

This means a preapproval is typically a stronger sign of what you can afford and adds more credibility to your offer than a prequalification.

However, check with your lender to be sure – many lenders use prequalification and preapproval interchangeably, and the process varies from lender to lender.

Why Is Getting Approved For A Mortgage Important?

Getting approval for your mortgage means that a lender has reviewed your financial situation and confirmed your ability to take on mortgage payments.

When you get a mortgage approval, your lender estimates how much you can afford to borrow, what your interest rate could be, and how much your mortgage payments could be. You and your real estate agent can use this information to focus on homes you can afford.

A mortgage approval also proves to sellers that you can afford the home they are selling. Without first securing approval from a lender, the seller might not trust your offer is genuine. Your offer might not be accepted – and even if it is, offering to buy a home without lender approval can slow down your mortgage application.

 

Mortgage basics for beginners.

7-MINUTE READ

For many, owning a home is part of the American dream. For most homeowners in America, getting a mortgage is just one of the steps it takes to get there.

If you’re contemplating homeownership and wondering how to get started, you’ve come to the right place. Here, we’ll cover all the mortgage basics, including loan types, mortgage lingo, the home buying process, and more.

 

 

First Things First: What’s A Mortgage?

First, what does the word “mortgage” even mean? A mortgage is simply a loan you use to buy a house. Mortgages are how most Americans buy homes, and they’ve been around since the 1930s.

When you get a mortgage, you agree to pay the lender interest in exchange for lending you the money. The amount the lender can give you varies depending on your income, how much money you have saved, and your credit history, which is a record of how well you’ve repaid your debts in the past.

Who Gets A Mortgage?

Most people who buy a home do so with a mortgage. A mortgage is a necessity if you can’t pay the full cost of a home out of pocket.

There are even some cases where it makes sense to have a mortgage on your home even though you have the money to pay it off. For example, investors sometimes mortgage properties to free up funds for other investments.

Different Types Of Mortgages

Not all mortgages are the same. There are different types of rates, different loan terms, and different loan products. Let’s take a look.

Rate Types

When you’re choosing your loan, you’ll need to figure out whether you want a fixed rate or an adjustable rate.

Most buyers opt for a fixed rate, which is simply an interest rate that doesn’t change over the life of the loan. If your interest rate is 4.5% when you close, then you’ll keep that 4.5% interest rate for the life of your loan. This means the principal and interest portion of your monthly payment won’t change. The fixed interest rate ensures your payment remains relatively stable until the loan is paid off.

Adjustable rates, on the other hand, are rates that change over the life of the loan. In most cases, your adjustable-rate mortgage (ARM) will have an initial fixed-rate period in which the rate won’t change. But once that fixed-rate period is up, your interest rate will adjust up or down, usually once per year, depending on the market. This means your payment will change as your interest rate changes.

ARMs might seem like a risky option, but they actually make a lot of sense for homeowners in certain situations. Interest rates for ARMs are generally lower, so if you know you won’t stay in the home for longer than the fixed-rate period, ARMs can be a great way to save on interest.

Terms

The phrase “loan term” refers to the period of time over which you’ll pay back the loan. In most cases, you’ll be able to choose the loan term.

The most popular loan term is 30 years. A longer loan term means a lower payment, since the payments are spread out over time, so a 30-year mortgage will usually give you the most affordable mortgage payment.

Another popular choice is a 15-year term. While your payment might be higher with a 15-year term, you’ll usually be able to save a lot of money on interest. Interest rates for 15-year loans are usually lower, and since you’re not making as many payments, you save on interest that way too.

Loan Products

There are many different types of loan products, and each has different benefits and requirements.

Conventional loans are a popular choice. A conventional loan is one that’s not backed by the government. Conventional loans can have a fixed or adjustable rate. In some cases, you can even qualify for a conventional loan with as little as 3% down. However, conventional loans have stricter credit requirements than some other loan types.

Many other loan types are backed by the government. The government backing usually means easier qualifications.

A popular government-backed loan is an FHA loan. This is a loan that’s backed by the Federal Housing Administration. Many people choose FHA loans because they have lower credit requirements and offer the ability to get a loan with as little as 3.5% down.

The downside of an FHA loan is that you’ll have to pay mortgage insurance. There’s an upfront mortgage insurance premium you’ll have to pay when you get the loan, as well as mortgage insurance costs that you’ll have to pay for either 11 years or the life of your loan, depending on the size of your down payment.

There are other loan products that are backed by the government that are specific to certain types of buyers. VA loans, for example, are only available to active-duty service members, veterans, and the surviving spouses of veterans. VA loans don’t require a down payment or mortgage insurance.

USDA loans are another example of a government-backed loan. USDA loans can only be used to purchase homes in qualifying rural areas, however, and are subject to income limits.