Mortgage Basics

Contact a Mortgage Lender

Your first step is to contact a mortgage broker or lender to determine how much you can afford to spend on a home.   Your lender will ask for your income, expenses, and how much you would like your down payment to be. Your lender will also advise you about which type of loan is right for you. 

You can also go to a mortgage calculator to see what your principal & interest payment will be based on various loan amounts and interest rates.

Most buyers obtain mortgages from a mortgage company, mortgage broker, credit union, or local bank / savings & loan association. The qualifying guidelines and required down payment vary with different types of loans so you will need to talk with a qualified lender to obtain the most current information at the time of purchase.

Ask for a Good Faith Estimate of Closing Costs from each lender you visit and for each loan option they are offering so you can more easily compare your choices.   

Make sure to talk to at least 2 or 3 lenders to determine who might be the best fit, in terms of the types of loan products they offer and their responsiveness and professionalism.  Talk to your friends and see if they can recommend anyone and ask those friends if they closed on time and how they felt about the customer service they received.  Here are some lenders we like.

MORTGAGE TYPES                                                                         

Conventional

These are the most common types of loans.  They are offered by banks and lenders, and the property is held as security for the loan. 

FHA (Federal Housing Administration)

The FHA will insure the loan for the lender in case the buyer cannot make payments.  It requires the buyer to pay mortgage insurance through the FHA. The FHA offers loans with as little as a 3.5% down payment.

VA (Veterans Administration)

The VA will guarantee mortgages offered by private lenders to members of the armed forces, active military personnel, veterans, or their widows/widowers.  

RATE TYPES                                                                                      

Fixed Rate Mortgage 

The interest rate stays the same for as long as you hold your mortgage, no matter how interest rates change in the marketplace.  Most fixed-rate mortgages are for 15 or 30 years.  With this type of mortgage, you will know exactly what your principal and interest payment will be for the term of the loan (note that taxes and homeowner’s insurance rates may change from year to year which will change your payment amount).

Adjustable Rate Mortgage (ARM) 

The interest rate on an ARM is usually tied to an index, such as the prime rate.  The rate can go up or down at specified intervals.  For example, a 3/1 ARM is fixed for the first 3 years, then adjusts every year based on an index. Make sure you find out how often the rate can be adjusted and if there is a cap (limit) on the adjustments. 

Balloon Mortgage

These mortgages are offered for a shorter time period such as 5 or 7 years, but the payments made are based on what you would pay for a 15 or 30-year loan.  They have a final, large payment at the end of the term so you will either need to sell your home before the payment is due or refinance the loan.  Some balloon mortgages allow you to extend the mortgage based on rates at the end of the loan term.

Interest-Only Mortgage

A mortgage is “interest only” if the scheduled monthly mortgage payment consists of interest only. The option to pay interest only lasts for a specified period, usually 5 to 10 years. Borrowers have the right to pay more than interest if they want to.  

Your payments will be much lower than other types of mortgages, but your debt will never be paid off.  Many interest-only mortgages require you to start paying both principal and interest after a certain amount of time.  This means that your payments will now be much higher than if you had been paying both principal and interest all along. 

*This type of loan is extremely risky and should be used only in special circumstances.

ADDITIONAL MONTHLY COSTS TO CONSIDER:                                                                            

Be sure to include estimates of homeowner’s insurance, property taxes, and other monthly costs in the calculation of your monthly payments.

Homeowner’s Insurance usually costs about $3 for every $1,000 of the cost of the home ($600/year for a $200,000 home).

Property Taxes tend to range from 1.2 percent to 2 percent of the cost of the home ($2400 to $4000 for a $200,000 home).

Flood Insurance: If you live in a flood-prone area, your lender will usually require you to carry a flood insurance policy.

Mortgage Insurance: Generally required if you are put down less than a 20% down payment, unless you are taking out a 2^nd mortgage to cover your down payment (called a piggyback or 80/20 loan).  The amount of insurance required depends on your credit score, amount you put down, and the price of the house.

*PITI Payments - may hear the term PITI, which refers to the monthly amount due to your mortgage lender and includes payment toward your Principle (and any mortgage insurance your lender requires), Interest, Taxes (property taxes) and Insurance (homeowners or hazard insurance). 

Homeowner Association Dues: Most subdivisions and planned neighborhoods have homeowners associations (HOAs) that manage the common interests of the residents.  Monthly HOA dues are paid by residents to cover the costs to maintain the common areas and amenities, like pools, tennis courts, sidewalks and green space.

If you are buying a townhome or condo, be sure to include the monthly dues when calculating your payment amounts. These usually range from $100-$200/month.

Many single-family detached home neighborhoods also have dues to cover maintenance of common interest. These generally range anywhere from $10/month to $100/month, depending on the services and amenities provided.