Home buying and mortgage loans go hand in hand for most people as one is usually not possible without the aid of the other. As a product, mortgages are hugely profitable for banks and other kinds of lenders. But it is a competitive field – rates and conditions change according to a number of factors. Knowing the basics can help you find the best deal and potentially save you thousands of dollars over the lifetime of a loan.
❓ What is a mortgage?
According to the dictionary, a mortgage is “a legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt.”
📝 How and where to apply for one
You can’t obtain a mortgage automatically – an application process is required. This is seldom simple and different lenders require you to provide different documentation in order to calculate your eligibility and ability to pay back a sizeable loan. What is being assessed generally is the risk of extending you credit. You can apply at most financial institutions, but it may make most sense to work with the same bank you use for everyday banking or investing.
You’ll need to calculate how much house you can afford to buy based on your monthly income and expenses, your credit rating, the amount of cash you have available for a down payment and your accumulated debts. Going over this information with a loan officer can be a great first step to determining what kind of house (and mortgage) you can actually afford.
Depending on your personal circumstances, small or zero down payment mortgage loans may be available from the Federal Housing Administration (FHA) or Veteran’s Affairs, or through the USDA Rural Development Guaranteed Housing Loan Program.
If you fail to qualify for these types of mortgages for some reason (e.g. bad credit rating, large debt load, lack of stability in the workforce), your only recourse will be to approach a private lender.
📋 Different types, different terms
Most banks offer the same basic interest rates on mortgages (the prime lending rate plus a percentage), but there are other variables that may make it worth shopping around for a better deal. If you are able to provide a larger down payment in cash (20-30%), you may qualify for a better rate. Similarly, if you have a large and steady income, enjoy a great credit rating and have a manageable debt load, a bank will be eager to extend favorable terms for your conventional mortgage. Mortgages can be held for a short term for a lower interest rate (by those who expect that interest rates will be lower still when it comes time to renew), but most conventional mortgages are held for a longer term (up to 5 years) so that the repayment schedule is fixed and predictable for the period leading up to renewal.
💲 Variable versus fixed rates
A fixed rate mortgage offers an interest rate that remains the same for the term regardless of fluctuating prime lending rates or the economy. At the end of the term the lender will usually offer a new rate, which can again be fixed or variable. A variable rate mortgage offers interest rates that fluctuate alongside the bank or lender’s prime lending rate. Your monthly payment remains the same but the amount that is applied to your loan’s principal will vary. Or, with some lenders, your monthly payment will be adjusted accordingly. Be sure you understand clearly what kind of mortgage you are signing up for.
💡 Why pre-approval matters when home shopping
One way to show you are serious about buying a new home is to get pre-approved for a mortgage with your bank or lender. This will allow you to shop and make offers with confidence in a fast-paced market where delaying even a few days to arrange financing might cost you the chance to buy your dream home. Pre-approval requires you to supply financial information to your bank and secures their commitment to provide a specific amount in loan funds when you make an offer to purchase a home. Going through this application process can be onerous, but you will have to do anyway if you want to get a mortgage loan. Doing it ahead of time will insure you can move quickly when the right home appears on the market. And it will make your offer more attractive to the vendor, who will likely not want any financing complications to potentially sully the sale.
Your real estate agent is the best source of information about the local community and real estate topics. Give Chris Kostopoulos Group a call today at 617-751-4111 or email him at Chris@Isellmass.com at to learn more about local areas, discuss selling a house, or tour available homes for sale.