"The road to homeownership is a journey and you will make a lot of decisions along the way. You will find it helpful to understand how lenders evaluate you before approving your mortgage loan." - Fannie Mae
○ A type of loan that is secured by real estate (i.e., the home you purchase). Unless you are paying cash for the home, you'll need a mortgage.
○ You promise to pay back the lender (usually in monthly payments) in exchange for the money used to purchase the home. If you stop paying, you'll go into default, which means you've failed to meet the terms of the loan and the lender can take back the property (foreclosure).
Your mortgage payment typically includes "PITIA":
○ Principal – What you borrowed (also referred to as "amount financed");
○ Interest – What the lender charges you to borrow the money used to purchase or refinance the home;
○ Taxes – What you pay in property taxes to your local city/municipality and sometimes county; and
○ Insurance – What you pay to insure your home from damages (fire, natural disasters, etc.). There is also Private Mortgage Insurance (PMI) which is usually required on most loans when your down payment is less than 20%. PMI is paid monthly until you reach the 20% equity threshold.
○ In some cases, your monthly payment might also include the fees paid to a homeowner's association on your property (HOA fees).
Taxes and insurance are usually held in an escrow account and paid by the mortgage company when they are due (a portion of your monthly payment goes to fund the escrow account). This can be beneficial—especially for first-time buyers or buyers without significant savings—as you set aside a small amount each month instead of having a large, semi-annual or annual out-of-pocket expense. But, it does increase your mortgage payment and reduce your cash flow each month.
Some lenders require an escrow account and some let the homeowner pay their insurance and taxes directly. Always check with your lender to see what's covered in your monthly payment.
○ Fixed-rate mortgage – Interest rate remains the same for the life of the loan providing you with a stable and predictable monthly payment.
○ Adjustable-rate mortgage – Interest rate is flexible and subject to adjustments—either on specific dates (3-, 5-, 7-year adjustments) or based on market conditions. An adjustable rate mortgage may provide you with a lower rate in the beginning of the loan; however, the payment may increase over time.
○ Government guaranteed mortgages – Both the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) offer loans to help homeowners with income restrictions or those who are currently in the military or a veteran respectively. Typically these loans have lower down payment requirements and less restrictive qualifying guidelines, but they do require you to meet certain criteria. Always check with your loan officer for complete details.
Most homebuyers only think about the interest rate, but your lender will typically use APR (Annual Percentage Rate) when reviewing and quoting your financing. The interest rate is what the lender charges you to borrow money. The APR includes the interest rate as well as other fees that will be included over the life of the loan (closing costs, finance charges, etc) and shows your total annual cost of borrowing. As a result, the APR is higher than the simple interest of the mortgage. That’s why it’s always important when comparing lenders to look at the APRs quoted and not just the interest rate. In addition, all lenders, by federal law, have to follow the same rules when calculating the APR to ensure accuracy and consistency.
One point is equal to one percent of the total principal amount of your mortgage. For example, if your mortgage amount is going to be $125,000, then one point would equal $1,250 (or 1% of the amount financed). It's important to ask about the interest rate, APR, closing costs and points as these can all vary by lender. Lenders frequently charge points to cover loan closing costs—and the points are usually collected at the loan closing and may be paid by the borrower (homebuyer) or home seller, or may be split between the buyer and seller. This may depend on your local and state regulations as well as requirements by your lender. Be sure to ask if there are points on your loan, how much they are and who will pay the points.