Types Of Loans
When you are considering a home loan, you will see that there are two main types of home loans. You have both fixed rate mortgages and adjustable rate mortgages. There are also some other infrequently used loan types such as interest only loans but these are not a good idea for most people.
Fixed Rate Mortgages
This is by far the most common type of mortgage these days. With a fixed rate mortgage, as the name implies, the interest rate is fixed. This has a great advantage of stability. The payment will stay the same, more or less, over the course of the loan. I say more or less because the loan may change a bit due to changes in property tax and the cost of home insurance.
The downside to choosing a fixed rate mortgage is that the initial interest rate will be higher than that of an adjustable rate loan. You have to decide if the security of knowing your rate for the life of the loan is worth the tradeoff of paying slightly higher interest, initially at least. For most people, fixed rate will be the way to go.
Adjustable Rate Mortgages
With the adjustable mortgage, the rate can change over the course of time. After your initial term expires, it will either move up or down. At the beginning of the loan however, your interest will be lower than that of a fixed rate mortgage. This can be a big money saver for you.
The downside to this mortgage is that you do not know what the rate and your payment will be in the future. When your initial loan term expires, your rate could either go up or down. If you are a planner and want to know what you will have to budget for the future, this loan may not be for you. People have gotten burned and lost their homes because of adjustable rate mortgages.
Getting Your Loan Started
If you are planning on going home shopping, you will need to know the difference between being pre-qualified and pre-approved. There is a big difference.
Your first step is to get qualified for your loan. This will tell you how much of a home that you can afford so that you can start planning. To get pre-qualified, you will need to provide a mortgage company with some basic information like your income, savings balances and any assets that you might have. They will take this basic information and give you an estimate of how big of a loan you can qualify for. You can then take this information to a realtor so that they can begin showing you houses that fit into your price range.
Getting a pre-approval is a much bigger deal. To achieve this status, you will need to provide your mortgage company with all of your financial information. You will need W’2’s, paycheck stubs, tax returns and bank account statements for up to a year. This information will get carefully analyzed so that you can get pre-approved for a mortgage. When you reach this level, you become much more attractive to a home seller. They would much rather accept an offer from someone who has been approved for a loan rather than someone who has just been qualified. This can mean the difference between having your offer accepted or not, especially if a seller has ever been burned by a buyer before.
A big decision that you need to make is what kind of loan term that you want to have. Generally, the longer your loan term, the higher your interest will be and the more overall you will pay to finance the home. Loan terms can be anywhere from 15 years to 40 years and come in 5 year increments. 15 and 30 year terms are most common.
Deciding on Your Term
The term that you choose will usually be dictated by your budget. Most people will elect to take on a 30 year loan because of the lower required monthly payment and the negligibly higher interest rate. Keep in mind that even if you choose a 30 year term, you do not have to pay on your loan for 30 years. You can make additional payments to shorten the length of your loan. Paying a little extra on the principal of your loan once or twice a year can make a very big difference, especially if done earlier int he loan term. Consider a loan with a 5% rate. If you pay down an extra $1000 near the beginning of the loan, that is money that would have been collecting interest otherwise for close to 30 years.
APR & Interest
The Annual Percentage Rate is more than just the interest rate of your loan. It is a way for you to accurately see the true cost of your loan. It takes into account your interest and the fees that you pay to get your loan. The APR let’s you compare different loans on equal ground so that you can decide which one is the better deal.
Purchasing Discount Points
Points allow you to reduce the interest rate that you pay. A point will, in general, lower your interest rate by about .25%. This can make a large difference long term on a loan. The cost of a point is 1% of the amount being financed. So, on a $200,000 house, the cost of a point would be $2000. On a $300,000 home, the cost would be $3000 and so on and so on.
Whether buying points is worth it depends on how long you plan to keep a home. The longer that you are in your home, the more beneficial points become. To determine whether a point is worth buying, you need to calculate the cost savings in interest every month and multiply that by the months that you expect to be in your home. If you are only going to be in your home for a year or two, points will probably not be worth buying. If this is your dream home and you plan to retire in it, points will probably be worth it to you.
Locking Your Interest Rate
The home loan process can take from 30 to 60 days to complete and in that time, interest rates can change. Many borrowers choose to lock in the interest rate at the beginning of the process so that they will not be surprised by increases in interest. If you expect the interest rates to go up in the near future, it is a good idea to lock in your rate at the begin of the purchase process.
Some borrowers also choose to not lock in their rate. If you think that interest rates will go down in the near future, this is a good idea. It is a bit like rolling the dice though. If you choose not to lock in your rate and interest goes up, so will your mortgage payment.
Cost Of A Loan
The loan process will take 45 days on average although your situation may differ. When it is completed, you will need to come to the table with closing costs and you will get your Mortgage Payment.
Closing costs will generally be paid at the inception of the loan although, sometimes, fees may be able to be added to the loan. Typical closing costs will include, among other things, lender fees, title company fees and appraisal fees. Fees can cost more than 2% of the amount of the loan.
Your Mortgage Payment
There are a lot of things that go into calculating your mortgage payment. It will, of course, include interest and payments that go towards your principal. It will also include payments to an escrow account. The money in this account will go towards paying things like home owners insurance, property taxes and mortgage insurance. This is why your loan might fluctuate a bit over the course of the loan. While the interest and principal payments will stay the same, if you have a fixed rate mortgage, the other things can change. Insurance goes up over time, as does property taxes as your home gains value.