Mortgage Basics
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What exactly is a mortgage? What type of mortgage is right for me? How do I get a mortgage?
You've got lots of questions. Fortunately, we've got lots of answers! Read below for basic information that can help guide you through the mortgage process.
What Makes Up a Mortgage?
A mortgage is simply a loan to finance the purchase of your home. It is one of the largest and most important investments that you'll ever make. Here's how it works: |
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Your home serves as the collateral for the loan that you agree to pay back over then next 15 to 30 years. Monthly payments typically include:
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- Principal: The portion of the house price financed by your community bank.
- Interest: The percentage the bank receives for lending you the money.
- Property Tax: The local government tax fee, based on a percentage of the assessed value of your home.
- Mortgage Insurance: (Applicable only when your down payment is less than 20% of the purchase price of your home.) Insurance coverage designed to protect the bank against home purchasers who do not make their mortgage payments.
- Homeowner's (Hazard) Insurance: Required coverage that protects your home investment in case of fire, burglary, etc. by funding the rebuilding or replacement of damaged or stolen property.
What Loan Type is Right for You?
There are many types of home mortgages. Fixed rate. Adjustable rate. Interest only. The list goes on and on. There is no "good" or "bad" type of loan. Instead, each loan is designed to meet specific financial and timeline needs for the borrowers. To decide which one is right for you, work with your local community bank.
- Adjustable Rate Mortgages (ARMs).
Searching for the lowest rates? An ARM may be your answer. However, the interest rate will change periodically, sometimes as soon as 6 months into your loan. Make sure to research the limit, or cap, on how high your ARM can adjust. Long-term ARMs (5+ years) may be good choice if you have a fixed or declining income, and short-term ARMs (3 years or less) if your income is increasing.
- Fixed-Rate Mortgages.
Planning on living in your house for more than 5 years and want the lowest monthly payment? A fixed-rate mortgage might be your solution. A 15-year fixed rated mortgage will allow you to amass your equity more quickly than a 30-year fixed-rate mortgage, but will produce higher payments.
- Balloon Mortgages.
Planning on living in your house fewer than 5 years? A balloon mortgage might make good sense for you. It will allow you to pay shorter payments for a certain amount of time and one large payment for the remainder of the loan after a specified number of years.
- FHA/VA Mortgages.
Are you a single parent or unable to afford a down payment? You may want to consider a FHA/VA loan. Once you get pre-approved, ask your community bank about these loan types. Click here to begin this process.
- Jumbo Mortgages.
Do you need to borrow a higher loan amount? Jumbo loans will allow you to borrow more than $417,000, but typically carry a higher interest rate.
How Much Mortgage Can You Afford?
By doing the following things, you'll have a much better handle on how much house you can afford. This knowledge will save you time and help you find a home that is perfect for you, your family, and your budget!
Establish Your Financial Profile
The first step is to get a copy of your credit report. Your local bank can do this for you. They can also teach you about the value of credit scores and the various ways to fix any problems that may exist in your credit history.
Develop a Realistic Household Budget
Figure out how much money you earn and how you spend it. Add up the money you have left at the end of the month after paying bills and emergency funds, plus what you are paying in rent. These combined figures can give you an idea of how big a house payment you can comfortably afford. Using this payment figure, you can work backward to determine how much house you can buy with that payment. For more help with this, click here to use our helpful mortgage calculator.
How Do I Get a Mortgage?
The best way to start the mortgage process is to schedule a visit with your local banker. Let them know you would like to discuss the possibility of obtaining a new home loan. They can help you "take it from there."
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