Fixed Versus Variable Rate Mortgage Loans Explained

Buying a home: what an exciting time! It might be simpler if mortgages were one size fits all. It would be nice if you knew you would get approved, that you would get the best interest and repayment terms because there was only one type. Like, you know ahead of time that you will go in and apply, get approved for a 15 year mortgage at 3% interest, and so on. You know what you are getting into, you know the common words that are thrown around with mortgages, you know exactly what your contracts mean and all so there is absolutely no confusion.

Yes, I know, it would be wonderful. Unfortunately, it just is not real. There are so many different terms and factors and rates and everything when it comes to mortgages, and interest rates is a major thing that changes depending on so many factors. That, my friends, is going to be our discussion for today. Among other important mortgage information, we are going to have a talk about fixed versus variable rate mortgages. Why? The one you choose can have a major impact on every other part of your mortgage. Choosing the best one for your bank account and lifestyle is beyond important.

Fixed Versus Variable Rate Mortgage: The Basics

Of course, in order to talk about these different types of mortages, we need to make sure you know the basics. In the next couple of sections, I’ll define fixed and variable rate mortgages, compare them and talk about pros and cons of each. So here we go.

Fixed Rate Mortgage

A fixed rate mortgage means that the interest rate will stay the same throughout the entire mortgage term. This means that if your rate is for example 5%, it will stay like that forever. You will see the change in the payment every month, but not because the interest rate changed. It is because the principle amount owed decreases over time. Let’s see an example of a so called amortization. means that each mortgage payment you make puts some towards the interest and some towards the principle. In the beginning, your monthly payments pay a high amount of interest with little going on the principle. However, as the principle decreases, so does the interest, meaning that with every payment pays more to the principle than the last payment.


Month1:

Payment= $536.82

To Interest $416.67

To Principle= $120.15

Month 2:

Payment= $536.82

To Interest= $416.17

To Principle= $120.66

Month 3:

Payment= $536.82

To Interest= $415.66

To Principle= $121.16

Month 6: (Skipping Ahead)

Payment= $536.82

To Interest=$414.14

To Principle= $122.68

Month 9 (Skipping Ahead)

Payment= $536.82

To Interest= $412.60

To Principle= $124.22

Month 12: (Skipping Ahead)

Payment= $536.82

To Interest= $411.04

To Principle= $125.78


As you can see, your payment stays the same, but how it is split changes. The amount will continue to shift until your very last payment. It is important to note that the interest rate remains at 5% the entire term.

Variable Rate Mortgage

In most cases, if you try to look up what a variable rate mortgage is, your head will start to swim. The explanations can get crazy, which is crazy in itself. It is not really that bad. Like a fixed rate mortgage, a variable rate mortgage has set payments. To keep everything simple, we are going to use the same payment information as in the amortization example above, making the monthly payment $536.82.

The difference is that the interest varies according to market fluctuations. You are still paying the same $536.82 every month, but the amount of that which is put towards the principle depends on the market. Where the fixed rate mortgage meant the interest was determined according to the fixed 5% interest rate and the amount of principal you owe, it can get a little crazier with the variable rate.

Let’s put it like this: With a variable rate mortgage, if the market interest rate is only 2%, then more of your monthly payment is going to your principal. If the market interest rate goes to 6%, less of your monthly payment goes to your principal.

How Come The Interest Rates Can Change?

If you are wondering how do banks set the rate at which they give loans, here it is. The interest rates depend on the Federal funds rate. The Federal Reserve determines the periods where they either tighten or ease the Federal funds rate. So naturally, when you are looking to buy a home and get a mortgage, timing is everything. If you are looking for a fixed rate mortgage, it is crucial that you get the mortgage during the period where the Federal funds rate is low. Because once you set the rate, it stays like that forever. However, if you are looking to take out a variable rate mortgage, it will change according to what we just mentioned.

Variable Rate Mortgages and Adjustable Rate Mortgages are Not the Same

As if fixed versus variable rate mortgages are not confusing enough, there is another term to throw into the mix. Let’s go ahead and get it out of the way: Variable rate mortgages and adjustable rate mortgages are two separate things. An adjustable rate mortgage is a type of variable rate mortgage, but the terms are not mean to be interchangeable. Adjustable rate mortgages mean that the borrowers payment fluctuates according to the market interest rate.

A variable interest rate mortgage- unless specified otherwise- keeps the payment the same. Sometimes, though, depending on the contract, the payment with a variable rate mortgage only keeps the payment the same for a certain number of years, so be sure you know what you are signing up for.

Fixed Versus Variable Rate: Pros and Cons

So what are the clear cut differences between a fixed versus variable rate mortgage? Now that we have gone over all of this information, let’s see if we can tie it all together with a nice little bow.

When it comes to choosing between fixed versus variable rate mortgage, there is one thing to know: you have to consider the pros and cons according to your life and make up your own mind.

Variable Rate is Historically More Beneficial

Up to this point, variable rate mortgages have charged less interest over the life of the loan. This tends to make new borrowers decide to go with variable rates, but it is important to note that history does not decide the future. Just because it has charged less in the past does not necessarily mean that it will charge less in the future.

Another pro is that this type of mortgage is much more flexible. You can decide to pay more every month, or even pay the mortgage off earlier, but you don’t have to worry about the penalties as with other types of mortgage.

Fixed Rate Mortgages are More Predictable

With a fixed rate mortgage, you know how much interest and how much principle you will be paying every month. In fact, your lender might have even printed you off a schedule. You know when your last payment will be and you can literally count down until that moment. And you can even much more easily make a plan to pay your mortgage off early. You can determine how much faster you can pay it off if you pay just an extra $5 per month.

This is not so easy with variable rate mortgages. Sure, you can take a look at current market rates each month and decide what to do, but you cannot make a progressive plan ahead of time. With all of the fluctuation in the market, the best you could probably do is a month to month plan, but that might not even be foolproof considering that daily mortgage rates change.

Consider the Cons As Well

We talked about the pros, but there are also cons. With a variable rate mortgage, you never know what could happen. Yes, the rate just might go down, but there is a chance that it goes up as well. This is a very important thing you should be aware of. You can benefit greatly from a variable rate, but you might also have less luck during your 20/30-year term.

On the other hand, a fixed rate mortgage rate does not change, but if the rates drop, you have no way of benefiting from that. Your rate is fixed, and it stays the same no matter what happens. It is also pretty difficult to increase the amount you pay every month without any penalties. So if you think you will somehow get a larger amount of money in the future, you would want to leave the option of repaying your mortgage earlier open (or at least paying more each month).

The fact of the matter is that if you wish to make any type of plan for the future, it is best to choose a fixed versus variable rate mortgage. If you are okay going with the flow, a variable rate may be the better choice.

Choosing Between Fixed and Variable Rate Mortgage

As with most financially related stuff, there is not a single answer to this question. It largely depends on several factors. You should ask yourself whether you appreciate stability and predictability more than potentially paying less in interest over time if it drops. But you should also ask yourself whether you will be able to handle increasing of rates if you choose a variable rate.

Some other things to consider are whether you will want to pay off the mortgage earlier if you get the chance, or maybe increase your payments. These two things are more difficult to do with a fixed rate mortgage. You can also think about whether you love the terms of a fixed mortgage and if you will be able to stick to them, then this may be the right option for you. Finally, if you are considering to switch mortgage one day, you should definitely look into a variable rate one, since it not possible or very expensive when you have a fixed rate mortgage.

The Mortgage Process Including Fixed vs Variable Rate

Have you ever applied for a mortgage? If you have not, you may be surprised to know the entire process of applying, getting approved, and closing the deal can take months. The average, when everything goes at least somewhat according to plan, is three to five months. I say this not to burst any excitement bubbles, but for three reasons:

  • To set proper expectations.
  • To make sure you know that you have time to step back and really make sure you are making good choices with your mortgage loan shopping.
  • Also to let you know to take your time and do your part as well as possible to prevent adding extra time to this timeline.

Now that you know what fixed and variable rate mortgages are, their similarities and differences, let’s describe the mortgage process so you know what to expect.

Step 1: Get Ready for a Mortgage

Really….if you are buying a home with a mortgage, you need to prepare for it. This should start with a look at your credit report. What type of rates will your credit get you? Of course, you will not know this until for certain until you get offers, but you can get an idea. The best rates usually go to those with a credit score of at least 750.

Sometimes, you can find good terms for lower scores, but it takes some real rate shopping to find them, so take a good look around and do not settle for the first mortgage lender you locate. In fact, getting preapprovals from a few lenders is a really good move to compare.

This is the moment where you should decide whether you want a fixed, or a variable rate mortgage.  Take a dive into your financial situation and decide what seems best for you and your family. If your kids will be moving out in ten years and you and your spouse plan on downsizing at that time, a variable rate mortgage that you can pay off earlier may be a good fit for you.

After you have an answer solidified on that, consider your down payment. How much can you put down to help lower your mortgage? Really think about this. If you must, find a way to increase your down payment. Remember- the less you borrow, the less you pay interest on, which should always be a goal. Whether the interest is fixed or variable, it is always best to borrow as little as you can.

Now, you can start looking into mortgage lenders a little deeper and put in official applications. You will get either a rejection or preapproval. The good thing, though, is that if you are rejected, you can ask what you can do to get approved. Often, lenders can give you some pretty good and clear suggestions since they have actually taken a look at your credit. Hopefully, though, you will be approved and get to move to the next step.

Step 2: Find Your Home

Sorry, the work is not over- it has just begun. You now have to find a home that meets your needs and wants within your loan amount and price range. This is done more easily with a real estate agent, but do remember that there may be extra fees included with hiring a real estate agent. Most often, they will be included in all of your home buying negotiations/closing costs, so nothing should be coming out of pocket. When you find the right home, you make an offer.

Step 3: Get the Mortgage

If the seller accepts your offer, it is time to get to the nitty-gritty. It is time to finalize the mortgage and all the details it involves- including but not limited to choosing between a fixed versus variable rate mortgage- get the home inspected and appraised (the costs of which are usually included in the closing costs), negotiating, and anything else that may need to be done.

In this step, Loanry maybe can help you to make all process a little bit easier. All you need to do is to enter your information and see whether you could be paired up with lenders which may make you an offer within next couple of minutes. You can start here:


Step 4: Wait

You are pretty much done, but you have to wait on the lender to finish its process, which means the underwriting process. They will verify everything, ask you for any additional documents, and so on. When they have finalized their approval, you finish signatures and make your down payment and close the deal. Whew! It took a lot of work, but you are now in your new home. All you need to do now is enjoy it and make your mortgage payments, which is why choosing the right mortgage and interest rate is so important. You do not want the wrong choice to cause you to lose the home you worked so hard for.

Conclusion

I hope that this guide has helped you get a good understanding of common mortgage terms and what it means to choose between fixed versus variable rate. When you do get your hands on your dream home, I want you to be able to hang onto it. Look through this guide as often as you need to feel confident in your decisions and, of course, do not forget to consult your financial advisor if you need to discuss your situation specifically. Be sure you take your time with all of your rate shopping and decisions. This is a commitment, so do not rush until you feel confident about your decision.

 

What Credit Score Does a Mortgage Lender Require?

When thinking about purchasing a new house or refinancing your mortgage, you need to think about the credit score required by mortgage lender. The credit score required by mortgage lender can make or break your loan approval and will carry the most weight when it comes to determining your mortgage rate.

Lenders will rely on credit scores to measure your payment default risk. Other actors include down payment, assets, income, and property tax. Credit scores aren’t a perfect indicator but these scores do tell lenders a lot about you. The higher your score, the lower the interest rate, and the more loan options you will have.

What Credit Score Do Mortgage Lenders Use?

Mortgage lenders will use FICO scores, just like many other finance companies, as the credit score required by mortgage lender. While they use the FICO score, lenders will pull one version from each of the three major credit bureaus (TransUnion, Experian, and Equifax), in order to create what is called a tri-merge credit report. The mid score is used for qualifying and mortgage rates.

For example, if the credit scores from the report are 650, 680, and 720, then the lender would use the 680 score. If you only have two scores then the lender will only use the lower of the two for qualification purposes. If you only have one score then the lender will use that one. However, not all lenders will approve a borrower with just a single credit score since this means there is limited credit history.

FICO Score Factors

Why Know Your Credit Score before Applying for a Mortgage?

You should check your credit score three to six months before you apply for a mortgage to know exactly where you stand. During this time, you can also keep an eye on daily mortgage rates. This can give you time to fix any problems or errors that may come up and get to the minimum credit score required by mortgage lender.

It also helps to know the credit score range so you know what you need to do before you apply for a mortgage.

  • A 740 or higher is considered a great score
  • A score between 680 and 739 is an average score
  • Between 620 and 679 is a fair score
  • A score between 580 and 619 is a poor score
  • Anything below a 579 is considered a bad credit score

What Does a Low Credit Score Mean?

The credit score required by mortgage lender differs. However, a lower score can mean a few things. A lower credit score will mean higher mortgage rates. This means you will pay more each month. This is because of risk. The lower your credit score, then statistics say the higher chance you will default on the mortgage. Many lenders may not want your business if your credit score is too low. If you do get approved with a sub-par credit score then you will have a much higher mortgage payment and could be throwing money out the window.

FHA loans require a score as low as 500 but you will need to have at least a 10% down payment when your score is that low. You are able to qualify with just a 5.4% down payment with a 580 score or higher.

If you are choosing to go with a conventional mortgage than a score below 620 is typically considered subprime. This means that you can have a harder time qualifying for a mortgage and if you do, you will have higher rates.

What Is a Subprime Mortgage?

Subprime mortgages will refer to loans extended to a borrower with a higher risk than those that are referred to as prime. A prime borrower has little risk. A subprime borrower may have a lower credit score, a lower income, or higher debt load. There are two instances where a borrower may be considered subprime. This can be poor credit or no established credit.

Subprime Mortgage Loans For Bad Credit Borrowers

What Credit Score Required by Mortgage Lender Is Considered Good?

A credit score of 720 used to be good enough for a house mortgage but now a score between 740 and 760 is needed in order to secure the lowest pricing and to ensure that you qualify for the home loans that are available. FICO scores can go as high as 850 so a score within this range isn’t considered perfect. Even though credit scoring is just one of the factors that are used to judge borrowing capacity, it can impact how much you borrow and the max loan-to-value ratio. Therefore, good credit can get you better mortgage terms and conditions. 

How Your Credit Score Affects Your Interest Rates

Even if you have the credit score required by mortgage lender and can get approved for a mortgage, you need to know how your credit score will affect your interest rate.

A score of 579 or lower will mean that you will likely have an interest rate that is 2% higher than the current lowest rate. If your score is poor, you can expect an interest rate that is 1% higher than the lowest rate available. If you have a fair credit score then your interest is likely only going to be slightly affected and rates could be about .5% higher than the lowest rates. For the average credit score, rates won’t be affected too much. If you have a great credit score then you will be offered the best rates a mortgage company has to offer.

One of the easiest ways to see how your credit score affects your interest rates is with a real-world example. Take the average sale price of $366,000 with 20% down and a 30-year mortgage. There are two interest rates to use for this example: 5.76% and 4.17%. When your interest rate is 5.76%, your monthly payment will be $1,711 and the amount you will pay over the life of the loan is $615,802. If your interest rate is 4.17% then your monthly payment drops to $1,427 with a savings of $284 a month. The amount you pay over the life of the loan drops to $513,619 and you save $102,183 over the same time period. As you can see, there is a huge difference and there are plenty of things you can do with those savings.

Different Types of Loans

The credit score required by the mortgage lender will depend on different types of loans.

FHA Loan

For many first time homebuyers, they think they can’t qualify for a mortgage. But you may be able to qualify for a FHA loan. The Federal Housing Administration backs these loans. While the FHA doesn’t issue the loans, they will insure them in case the borrower defaults on the loan. This will reduce the risk of the lender, allowing them to reduce the credit score needed. You only need a 580 score or higher. A score lower may be possible but it can be unlikely.

VA Loans

VA loans are for veterans. Like FHA loans, the VA doesn’t act as a lender but will guarantee the loans. The biggest benefit of a VA loan is that there isn’t a down payment required and PMI is not required. Since there isn’t a down payment requirement and no minimum credit score needed, it offers many veterans with poor credit the opportunity to be a homeowner.

USDA Loans

These loans typically require a credit score of 620 or higher. These loans have some other basic eligibility requirements, which cover income, property usage, and home location.

Conventional Loans

This is a common loan type and you have probably heard of this before. A conventional loan is any mortgage that is offered by a private lender and isn’t guaranteed by a government agency. These are the most popular type of mortgage used today. Many conventional loan lenders will require a minimum score of 620 to 640. A higher credit score is even better. Conventional loans do usually require a higher down payment than most loans that are government-backed. Many lenders will require at least 5% down.

What Else Does Your Credit Score Affect?

Your credit score directly affects your loan eligibility but it can also affect the size of your down payment. With an FHA loan, you may be able to qualify for a lower down payment if your credit score is higher. If your score falls between 500 and 579 then you may have to put up 10% as long as you can even find a lender that approves your application. If your credit score affects your interest rate then you can expect a higher monthly payment. A higher monthly payment means that you may not have enough money in your budget every month in order to spend on other things. If you don’t have 20% down and your lender requires private mortgage insurance then your PMI premium can also be affected by your credit score. Lower scores will pay more in premiums.

Other Factors Lenders Consider

The credit score required by the mortgage lender is just one of the factors that lenders consider when applying for a residential mortgageThere are other factors to consider when taking out a mortgage.

Loan-to-Value Ratio

This ratio is about the relationship between the value of the property and the size of the loan against it. If you want to purchase a home that costs $240,000 and it appraises at $300,000 then the loan-to-value ratio would be 80%. A larger down payment can result in a lower LTV ratio. The lower the ratio, the better when looking at it from a lender’s perspective.

Down Payment Size

Many loans require a down payment. If you are able to put up a larger down payment, this may mean a lower interest rate.

Debt-to-Income Ratio

This ratio measure how much of your income is being used to pay debts each month. Lenders will calculate this by adding up monthly debt payments and then divide these payments by your total gross monthly income. The more money you have to pay out each month means that you may be more likely to default on the mortgage.

Employment History and Income

In order to qualify for a house mortgage, you need to have a stable income and steady job and you need to be able to provide proof. Lenders will review pay stubs, bank statements, and tax returns in order to assess your level of risk. Your current income will also be a key factor in determining how much home you can afford.

How to Improve Your Credit Score

Since you need a good credit score required by the mortgage lender, it is important to know ways to improve your score.

When you are beginning the process of improving your credit score, remember that it’s a marathon and not a sprint. However, improving your credit score will be worth the effort.

Make Sure Reports Are Accurate

The first step in improving your credit score is checking credit reports. Everyone will have three credit reports or one from each major credit bureau. Credit reports can have mistakes on them. Since the score is based on data that is in the report, it’s important that the reports have accurate data. You are entitled to a free copy once a year of all three of your credit reports so make sure that you use them. Is your personal information accurate? Are all your accounts being reported? Or, are there missing or late payments reported that you remember making? Are there applications or accounts you don’t recognize? Is there information from decades ago that still shows on the report? A credit report from one agency may have an error but another report might not so it helps to go through each one with a highlighter.

Figure Out What You Need to Improve

Just having an error on your credit report may not necessarily mean you have bad credit. So you will need to figure out what you can improve. If your credit report is accurate and you have a bad score then it’s important to understand why. There are different factors that impact your score. This includes payment history, amount of debt, the age of accounts, account mix, and history of credit.

Create a Plan

Once you know what you have done wrong, you can work on a plan to improve the score. In order to begin improving the score, aim to keep any credit card balances on the low end, along with other types of revolving credit you have. Start paying down debt instead of just moving it around. However, don’t close any unused credit cards as a quick fix. Don’t open new accounts or apply for a loan to increase the available credit you already have.

Fix Late Payments

Closing an account won’t make any late payments disappear. You have to get yourself back on track. Be sure to set up payment due date alerts so you can get organized. Check your payment due dates in relation to your paycheck schedule and change any that need it.

Build a Strong Credit Age

If you have a shorter credit history then there isn’t much that you can do to improve your credit. You can piggyback on a family member’s credit card if they have a good, long history of on-time payments. Be added as an authorized user in order to do this. However, if you don’t have anyone then wait it out and don’t close any of your accounts. A good age of credit history is five years or more.

Clear up Any Collections

Start paying off your debt instead of just transferring it to a new account. Contact the debt collector that is listed on the credit report to see if they would be willing to stop reporting the debt in exchange for any full payment.

Get a Credit Card

If you haven’t had a credit card before then your score can be suffering because of the account mix factor. When you do have a credit card, make sure your payments are on time. Late payments will likely hurt you more than anything. If you already have a good credit score and are looking to improve it then there could be many credit card options out there for you. If you have a poor credit, you can get a secured card. A secured credit card is one where you make a deposit into a checking account that will secure the line of credit you get.

Limit Any Credit Applications

The 10% discount that you get when you sign up for a store credit card may seem worth it but your credit score can take a hit when you apply, whether or not you get approved. A hard inquiry can impact your score for a full year, although it will start improving quickly. While the hit is small, if you apply for a few credit cards or are on the edge of two credit score tiers then it can be a lot more significant. Keep in mind that soft inquiries won’t affect your credit score. They are done when a lender is looking to give you a higher credit line or someone is checking your report as part of a background check. A soft inquiry can happen without your permission so it doesn’t affect your credit.

Work on Fixing Your Credit Utilization Ratio

If your credit card balance is 30% or more of your credit limit each month then your score is suffering. This affects your score even if you are paying off balances each month by your payment due date. It’s the statement balance that is being reported to the credit bureaus. So keep an eye out for balances and consider pre-paying a balance if you know you will be close to that mark. There is a difference between the credit utilization ratio and debt-to-income ratio. The credit utilization ratio is the thing that affects your credit score. The debt-to-income ratio can be used by lenders and can be a factor when deciding whether or not you get a loan or credit.

Conclusion

The credit score required by mortgage lender will vary depending on the lender and the type of loan you are applying for. Lenders use FICO credit scores, so it’s a good idea to check your score before you apply for a mortgage. This will help you know where you stand on the scale. Your credit score affects a lot of different things as it relates to mortgages. If you know the credit score required by a mortgage lender, you can start doing different things to improve your credit score so you can meet those minimums.

Shopping for mortgage loans for your credit score will save you a lot of time, effort, and inquiries on your credit report. Make sure you only take into account reputable lenders. You can enter your information below and you may get an offer from a lender whose criteria you meet:


3 Mortgage Terms to Know: Principle, Interest, Down Payment

A mortgage is a loan that you take out to buy a home. When you get a mortgage, the home you are going to be purchasing will generally be used as collateral. If you fall behind on your repayments, the lending institution will have the right to take your house. There are different mortgage terms that can help you understand the process. These terms are principle, interest and down payment.

What Are Principle, Interest and Down Payment?

Principle, interest and down payment are different parts of the mortgage that you will be responsible for paying.

What Is Principle?

The first of the mortgage terms you need to know of principle, interest and down payment is principle. The principle of your payment is what goes to the actual price of the home. Principle refers to the initial size of a loan and it also means the amount still owed on a loan. For example, if you take out a $100,000 mortgage then the principal is $100,000. If you pay off $30,000 of the principle then the $70,000 is also called the principle.

At first, when you are making monthly payments on your loan, your payments will likely go toward interest. Then the remainder applies to your principle. When you pay down the principle of a loan then you can also reduce the amount of interest you pay each month.

Besides making your mortgage payment on time, there can also be other methods in order to reduce your mortgage principle, provided that you are allowed to prepay or your mortgage permits additional payments. For example, if you make one additional payment per year then you can reduce the principle enough to pay off the mortgage sooner, five years sooner actually and can save additional money in interest.

What Is the Interest Rate?

Out of the principle, interest and down payment, one of the main concerns that many soon-to-be-homeowners have is about interest rates.

What Will Impact Mortgage Interest Rates?

There are different things that will impact mortgage interest rates. You may think that daily mortgage rates don’t matter all that much but they do. It matters what the rate is today and what it might be tomorrow or next week. However, you aren’t able to control what the market does or what could be impacting the housing market. What can you do is be educated on interest rates and focus on the things you can control, such as your credit score and down payment.

Your Credit Score

One of the biggest factors for the interest rate you get on your mortgage is your credit score. Lenders will use your credit score as an indicator of how likely you are to pay back your loan. If you have difficulty paying back a loan and your credit score reflects that then you are more likely to have trouble with paying down bigger debts like a mortgage.

Your Down Payment

If your credit score isn’t that high then one thing you can do to lower the interest rate is make a more sizable down payment. This works to show the lender you are capable of saving and it will lower the amount you are then getting from the lender.

Your Loan Term

Many mortgage loans are either 15-year or 20-year loans. Many homeowners will choose a 30-year option but shorter loan terms can be eligible for better interest rates. There are two reasons for this. The bank will recoup the investment faster with a shorter-term loan. The lender is also going to be getting a higher payment from you every month. If you are going this route to lower your interest rate then you need to make sure you can handle the higher payment.

The Interest Rate Type

There are two types of interest rates that homeowners will need to be aware of.

An adjustable-rate loan will still start off with a lower introductory interest rate. After a set period of time, the rates will adjust to being more in line with the current market interest rates. At this time, your monthly payments change accordingly.

Fixed rates can be higher than adjustable ones but they stay the same over the entire length of the loan and ensure that you have the same payment each month. You can decide whether you get a fixed or adjustable rate but if you choose the adjustable-rate option you need to be prepared that your payment can go up.

Of course, every option has its disadvantages. It’s important that you know them before you decide. Unfortunately, here it all comes down to picking between two not so great things. Either you’re going to pay extra if you choose the fixed-rate option, since there are additional years when you pay interest. Or your going to risk paying much higher interest than initially, if you choose the adjusted-rate option.

What Is the Down Payment?

The last thing you need to know about the main mortgage terms of principle, interest and down payment is what a down payment is. The down payment is the upfront payment you make when you purchase a home. The down payment is the portion of the purchase price that you pay for yourself out of pocket instead of borrowing. In most cases, the money will typically come from your personal savings and you can pay with an electronic payment, credit card, or check.

Down payments are usually not part of a loan. However, you may see zero down offers where no down payment is required. Even if you don’t have to have a down payment, there are benefits of having one. The down payment will cover a meaningful part of the total purchase price. For example, if you are buying a home for $200,000 and have saved $40,000 as the down payment then you only have to mortgage $160,000.

There are debates about how big of a down payment you should have. You can often choose how large the down payment should be but the decision isn’t always that easy. Some people believe that a larger down payment is better, while others think that it’s best to keep the down payment as small as possible.

What Are the Benefits of a Bigger Down Payment?

A larger down payment will help you borrow less. The more you pay upfront, then the smaller your loan will be. This means you will have a smaller principle but larger interest costs over the life of the loan. You could benefit from lower payments.

Lower Rates

You may qualify for lower interest rates if you put more down. Lenders will usually like to see a larger down payment since they can easily get more of the money back if you default. When you reduce your lender’s risk then you can also reduce your interest charges.

Avoid Mortgage Insurance

When you are purchasing a home, you can avoid private mortgage insurance and other fees with a larger upfront payment. On FHA loans, mortgage insurance costs will decrease with a larger down payment. You may be stuck with private insurance throughout the life of the loan unless you refinance at some later time when you have paid more on the home.

Smaller Monthly Burden

A lower monthly payment can make it easier for you. If your income changes due to a job change or loss then a lower payment can give you more wiggle room, which is always helpful. You can also save more for an emergency fund or other improvements to the home.

Future Borrowing Power

A lower payment makes it easier to qualify for additional loans in the future. Lenders will want to see that you have more than enough income to meet monthly obligations and will evaluate finances with what is called a debt-to-income ratio.

Potential Equity

Occasionally you can borrow against an asset such as your home and use the asset as collateral. If you put down more than 20% of the home you can enjoy price appreciation and may be able to pull funds out of a home equity loan.

What Are the Benefits of a Smaller Down Payment? Ð ÐµÐ·ÑƒÐ»Ñ‚ат слика за small down payment mortgage infographic

A smaller down payment appeals to a lot of people because you don’t have to come up with as much money.

Allows You to Buy Sooner

When you are trying to save 20% for a home purchase it can take a while. For some, this can take even decades and this may not work in your situation.

Emergency Reserves

If you are able to save up a significant amount then it can be scary to part with all that money. You may be wondering what you will do if something happens, such as health problems or if your car breaks down. Putting all your free cash into the house means your money is tied up in something that can be hard to sell.

Resources for Improvements

When you have a smaller down payment, you get to use the cash you keep to help with inevitable improvements and repairs.

Opportunity Cost

You may want to use the funds for other purposes, such as growing your business or retirement savings.

The decision about whether or not you choose to go with a larger or smaller down payment will depend on different factors. The best scenario is you have a solid emergency fund to deal with any surprises and you aren’t robbing this fund to make your down payment.

What about Lender Requirements for a Down Payment?

Lenders can set minimum requirements for down payments but you can always choose to go with a larger down payment. Remember that a larger down payment will reduce the risk for the lender.

Down payments can also have a psychological impact. A larger down payment shows lenders that you have more skin in the game because you have more of your own money at stake. This means you may be more likely to keep making payments. For home purchases, 20% is a significant number. When you pay at least 20%, you can avoid paying for mortgage insurance.

How Does a Mortgage Work?

Besides knowing about principle, interest and down payment, it also helps to know how a mortgage works.

Finding a Lender

When you are searching for a mortgage and rate shopping as a first-time homebuyer, you should look around and compare different lenders before you start to look at houses. It’s recommended to get a pre-approval letter and find out how much banks are willing to lend you and determine how much you will be able to afford. This way, when you find a house you have the ducks in a row to submit the offer.

Many new buyers will rely on their real estate agent for information about the mortgage process since few people will go through the home buying process more than once or twice in their lives. The realtor’s priorities are to get fast approval and not to negotiate the best interest rate. If you want to minimize your mortgage payments then it’s recommended that you shop for a mortgage and compare rates from at least three different lenders.

Loanry is the tool you need. We connect you to reputable lenders who may be willing to give you a loan. You can find out more and get offers by filling the form below:

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Your Guide to Understanding the Mortgage Process

Advantages and Disadvantages of a Mortgage

A mortgage will allow you to purchase a home without paying the full purchase price. Without a mortgage, not many people would be able to afford to buy a home. Having a mortgage in good standing on your credit score can actually improve your credit score and help you get better interest rates for other credit lines. There are also tax benefits to homeownership. You could be eligible to deduct the interest paid on your mortgage or more.

There are some risks with a mortgage. Since your home is collateral for the mortgage, you risk losing your home and the lender can take the home if you stop making payments. If the lender does take the home in a foreclosure then you also lose the money you have paid up to that point on the home. It is possible to lose everything you’ve built up if you go into foreclosure.

What to Do before Shopping for a Mortgage

Your knowledge about principle, interest and down payment can help with rate shopping for a mortgage but there are some things you will need to do before you begin.

Check Your Credit Score

Since this is one of the most important factors in getting approved for a mortgage, you need to check your credit score. The better your score, the lower the rate will likely be. Don’t forget you are entitled to a free credit report.

How Much You Can Afford

Your principle, interest, and down payment will likely take up a large chunk of your income so you need to know what you can comfortably afford. You can use an affordability calculator or finance calculator and add in your principle, interest, and down payment to see what your payments will be and make sure that you can comfortably add this to your budget.

What Are Some Common Mortgage Myths?

There are some mortgage myths you need to be aware of when shopping for a home.

You Need Perfect Credit to Get a Home

While your credit score is one key factor lenders will use when you apply for a mortgage, bad credit won’t always prevent you from getting a mortgage. A lower credit score may mean a higher principle, interest and down payment but it doesn’t mean that you can’t get a mortgage.

You Need to Have a 20% Down Payment

Conventional wisdom says you need to put 20% down when you purchase a home. A larger down payment can make it easier to get a home but there are many options for homeowners who have a smaller down payment.

If You Prequalify, You Will Get the Loan

The qualification process can give you an idea of how much lenders may give you based on your credit score, income and debt. However, this doesn’t mean that you will get the loan. Once you find a home and make an offer, the lender will request additional documentation, which can include tax returns and more. This process will then determine whether your loan will get approved. If you do have concerns that you may not get approved and want to know more before you start looking at houses, ask the loan officer whether or not you can get full credit approval.

Should You Refinance Your Mortgage?

Knowing about the principle, interest and down payment can also help you know about whether or not it’s time to refinance. Refinancing your mortgage means replacing your existing one with a new one. There are different reasons why you may want to refinance your mortgage, depending on your current principle, interest and down payment.

Getting a Lower Interest Rate

One of the best ways to refinance is to lower your interest rate on your existing loan. The rule of thumb is that refinancing can be a good idea if you can reduce your interest rate by 2%. However, some lenders will say that saving 1% gives enough incentive to refinance. Reducing the interest rate will not only help save you money but it can also increase the rate at which you build equity in the home and can decrease the size of the monthly payment.

Shortening the Loan Term

When you get a lower interest rate, homeowners can refinance the existing loan for not much change in the monthly payment and also have a shorter term.

Converting to a Fixed-Rate or Adjustable-Rate Mortgage

While an adjustable-rate mortgage can have a lower rate, the periodic adjustments can result in rate increases that are higher than those of a fixed-rate mortgage. When this happens, converting to a fixed-rate mortgage can offer you lower interest and also eliminate the chances that your rates increase again.

Converting to an adjustable-rate mortgage can also be a good financial strategy if interest rates are falling. If rates continue to fall then you can have smaller mortgage payments and it will eliminate your need to refinance every time rates drop further. However, if mortgage rates are rising then this may not be a good strategy. Converting to an adjustable-rate mortgage can be a good idea if you don’t plan on staying in the home for more than a few years. You won’t have to worry about future rates that are higher because you won’t live in the home long enough.

Tap Equity or Consolidate Debt

Homeowners may want to access the equity in the home to cover any major expenses, such as paying for college tuition or home remodeling. It can be easy to justify the cost of refinancing because things like remodeling can add value to the house and the interest rate on the loan can be less than getting a loan from somewhere else.

Other homeowners refinance to consolidate debt. Replacing high-interest debt with a low-interest mortgage can be a good idea. You should only refinance to consolidate debt if you know you are able to resist the temptation to spend extra while refinancing relieves you from your debt.

There are times when it doesn’t make sense to refinance your mortgage and it’s not always about principle, interest and down payment. Remember that a no-cost mortgage loan doesn’t exist. This prospect can be enticing to borrowers but you will still pay for applicable fees and closing costs. If these fees are added on to the cost of the loan then your principle increases. You may think that you can refinance for lower monthly payments in order to save for a new home. There isn’t a problem with this decision but borrowers will need to calculate how much refinancing will cost them and how much they will be able to save every month in order to make the decision worth it.

What Are Some Mortgage Tips?

There is a lot to learn about the principle, interest and down payment. However, there are also some mortgage tips to keep in mind.

The Value of Your Home on Paper May Be Secondary to the True Value of Your Home

When you have already committed to a mortgage then the goal is to pay it every month and be sure to take care of the new house. Watching for signs that the home has gone up or down in value will only impact property taxes. This is unless you plan on selling. Don’t be so hung up on the paper value as you pay off your mortgage unless you plan on turning your home into paper money. If you want to refinish the deck in the back because that’s what is best for your family then do so and don’t worry about trying to raise the resale value.

When Mortgage Interest Rates Are Low, Housing Prices Rise

Housing prices and interest rates do vary from market to market and even month to month. Since many people will base what you can afford on monthly payments, you are likely to take on more debt if the interest rate is good as long as you keep payments under control. Supply and demand say if people are paying more for housing then the housing prices go up.

Remember That You Don’t Need Perfect Credit to Apply

There may be no perfect time to get a mortgage and while you should spend some time to work on improving your credit score, this isn’t always possible. Loans for lower credit scores also exist. Lenders can take more into consideration than just the credit score.

You Won’t Know What Is Available Unless You Apply or Ask

Many mortgage loan statistics aren’t specific to you. You will still need to mortgage shop and think about what principle, interest and down payment are right for you. There are plenty of online lenders that want to earn your business and if you don’t like the level of service or the terms, those lenders likely won’t stay in business long.

Have Some Extra Cash in Reserves

Lenders will like to see a couple of months of mortgage payments in reserves since a lender doesn’t want to give a mortgage to someone who is depleting their savings and may not be able to pay the loan back. These savings can make it easier to qualify for a mortgage and the large amount in reserves could even make up for a bad credit score. The lender wants you to use these reserves to make sure you pay off the mortgage but you can also use the reserves to make home repairs or furnish your home after you receive the keys.

Don’t Forget Quotes from Multiple Lenders

If you aren’t shopping around, you are doing yourself a disservice. Even if you are sure on the lender, getting quotes from others can help you negotiate a better deal.

Conclusion

The principle, interest, and down payment are three very important mortgage terms that you will need to know when mortgage shopping. All three items affect each other. The larger the down payment, the smaller your interest rates may be and the smaller your interest rates then the less you will be paying each month. The principle, interest and down payment will also affect your choices if you want to refinance your home. Knowing how a mortgage works can help you make the best decision about shopping around and knowing when it’s the right time to apply for a mortgage.

When Is The Right Time to Refinance Your Mortgage?

Buying a home is one of the most important decisions that people make during their lifetime. However, the process makes for an expensive investment, making it necessary to ensure proper financial planning before making the purchase. With property prices going up by the day, a good number of people turn to mortgages to help them acquire the home of their dreams.

While taking out a mortgage is a great way to start the homeownership journey and pay for the property over time, there comes a time that homeowners may choose to refinance their mortgage. This step is always accompanied by significant financial implications. This is why any mortgagor should ensure that refinancing is done for the right reasons and at the right time. Here are a few things to know to help you make an informed decision when the right time to refinance your mortgage comes.

Mortgage and Mortgage Refinancing

A mortgage is a loan that is taken to buy a house, with the money being paid back over time along with a specified interest rate. One of the features that differentiate a mortgage from a simple loan is that the home to be purchased is used as collateral. This means that the lender will have the right to take the house in the event that the borrower falls behind on their payments.

This also means that the borrower will not fully own the property until such a time that they have made the last payment. Since the property is used as collateral, interest rates are usually moderated. However, rate shopping will still help borrowers to identify the right lender and go for the most affordable mortgage.

More and more people are refinancing their homes in order to solve their financial problems. Simply put, refinancing a mortgage is repaying off an existing loan and replacing it with a new one. This is mostly done in cases where the loan is either too expensive or too risky to handle. The details of the new mortgage loan are based on mutual agreement by both the lender and the borrower and can be customized to meet the needs of the borrower. In order to benefit from the exercise, it is important to know the right time to refinance your mortgage.

How to Increase Your Chances of Being Approved For a Refinance

Once a borrower has submitted their application, it can be very frustrating if it gets rejected. By this time, most homebuyers will have made numerous plans and will be excited at the prospect of owning a home. When it is finally the right time to refinance your mortgage, you will want to do everything to ensure that your loan is approved. Here are a few steps you can take to help increase your chances of being approved.

Improve Your Credit

Once borrowers have checked their credit score, they should take time to establish whether the credit report has any errors or inconsistencies. Any errors and inconsistencies should be reported to the credit reporting agency. Borrowers should also pay their bills and outstanding debts on time if they are to improve their credit score. As you know, having a better credit score saves a ton on the interest you pay. Getting a mortgage with good credit is always the best route.

Getting a Mortgage with Good Credit: Interest Approved

Increase Your Income

Increasing income is one of the easiest ways to ensure you will afford the mortgage loan you intend to borrow. Borrowers who have been at their jobs for a while can consider requesting a raise. Some of the other options include obtaining a part-time job to supplement the current earnings or to start freelancing.

Use a Cosigner

Using a cosigner can help boost the creditworthiness of the borrower, effectively increasing their chances of getting approved. It is important to choose a cosigner with good credit and sufficient income. Borrowers should also evaluate whether they will be in a position to make all the payments in time.

Put Up Collateral

In case lenders think that there are high chances a borrower will default on the loan, they are less likely to offer the mortgage. However, putting up collateral will provide a guarantee that the borrower will repay the loan. Some of the tangible assets that can be used include vehicles, land, stock, and bonds.

Even as borrowers work out various ways to increase the chances of being approved, they should always be mindful of how daily mortgage rates will impact them. This will help them to determine the best time to apply for the loans.

When to Refinance Your Mortgage

Knowing the right time to refinance your mortgage will go a long way in helping you to make other decisions. Here are some of the reasons why people choose mortgage refinance.

To Secure a Lower Interest Rate

This is one of the most common reasons why people choose to refinance their mortgage. By replacing a high-interest mortgage with a low interest one, borrowers are able to save a significant amount of money. This decision will be influenced greatly by the prevailing daily mortgage rates.

To Shorten or Increase the Loan Term

Negotiating a new loan term will have a direct impact on both interest and monthly payments. While a shorter loan term will reduce interest and increase monthly payments, a longer term will have the opposite effect.

To Lower the Monthly Payment

In case borrowers experience a cash flow crisis, they may consider refinancing their mortgage so as to lower the monthly payments. This helps them to repay the loan without straining and avoid the possibility of the lender selling their home due to defaulting.

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To Tap Equity or Consolidate Debt

Although this can be a slippery slope to never-ending debt, it is still a common reason why people refinance their mortgage. It is possible to access the equity in your home to cover major expenses such as home remodeling or college education. Some homeowners refinance their mortgage to consolidate other debts, making it easier to pay them off.

To Switch Your Mortgage Type

There are different types of mortgages that borrowers can apply for. In case a borrower finds a mortgage type that meets their needs more effectively or their financial situation changes, they can refinance their mortgage to take advantage of the new opportunities.

Smart Money Tip!

There are many more reasons why homeowners choose to refinance their mortgages. Before taking this step, it is important to ensure that the reason for doing so makes economic sense. This will help borrowers to avoid sinking deeper into debt and to protect their investment.

Bad Reasons to Refinance Your Mortgage

Just like there are good reasons to refinance a mortgage, there are also bad reasons for making this move. While it may be the right time to refinance your mortgage, a borrower may end up in financial trouble if they do it for the wrong reasons.

  • To take advantage of no-cost finance: generally, a no-cost mortgage loan does not exist. While the prospect may be exciting, borrowers will still end up paying for closing costs and the applicable fees. If these are wrapped into the loan, the size of the principal will increase.
  • To take cash out: there are times when borrowers will experience cash flow issues, making it necessary to cash out. However, the purpose to which this money will be put will determine whether taking cash out was a wise decision. Considering that the home is used as collateral when taking out a mortgage, it is important to take the associated financial obligations seriously.
  • To save money for a new home: some people will choose to go for low monthly payments in order to save money for a new home. While there is no problem with making such a decision, borrowers should calculate how much a refinance will cost and how much it will save them every month.

Types of Mortgages

Before mortgage loan shopping, it would be important to familiarize yourself with the different forms of mortgages. This will help you ask the right questions to potential lenders and make the most appropriate decision as you do mortgage loan shopping.

Fixed-rate Mortgage

This type of mortgage keeps the same interest rate over the term of the loan. This means that the monthly mortgage payments that borrowers make will stay the same throughout the life of the loan. Some of the adjustments to the payments may be due to changes in taxes or insurance.

Adjustable-rate Mortgage

Adjustable rate mortgages have fluctuating interest rates, going up and down depending on market conditions. In some cases, these mortgages start off with the borrower committing to a lower initial interest rate for a specified period of time before allowing market forces to take effect.

Balloon Mortgage

A Balloon mortgage is not very common. For a given period of time, the borrower pays very little. At the end of the period set out by the terms of the loan, the full balance becomes due.

Interest-only Mortgage

Under this type of mortgage, borrowers will pay only interest for a predetermined period of time, before they start paying back the principal as well. These are a great option for first-time homebuyers who are starting their careers.

The type of mortgage you take out will influence your decision when it is finally the right time to refinance your mortgage. In addition to finding out whether you will be required to pay a down payment, you should also keep abreast of daily mortgage rates.

Other Payment Factors

Some of the factors borrowers have to keep in mind in order to determine the cost of a loan are the principal and interest. In fact, this is why most borrowers will do rate shopping before taking out a mortgage. However, insurance and taxes are the other important factors that are usually packaged with the mortgage.

Since the home serves as collateral for the loan, most lenders will require borrowers to purchase insurance to cover the cost of the property in the event of a fire, floods, or other risks. Lenders will also want to protect themselves by ensuring borrowers can pay the property taxes relating to the home. These will not only affect how much you pay monthly but also influence when the right time to refinance your mortgage would be.

Mortgage Loans and Credit Scores

One of the advantages of mortgages is that borrowers do not have to wait until they earn perfect credit or save the money to buy a home outright. Bad credit mortgage loans can come in handy in case of poor credit scores. However, it may take more planning and additional time to secure funding.

A subprime mortgage loan is a type of loan that is offered to borrowers considered to pose a higher risk to lenders. Some of the factors that lenders consider in order to categorize a borrower as a subprime borrower are the credit score, the amount of debt load and income. Subprime mortgages are usually extended to people with no credit or poor credit.

Even as you think about the right time to refinance your mortgage, you should understand how subprime status affects interest rates. Generally, subprime mortgages will have higher interest rates, meaning that the loan will cost more. The loans are also likely to have higher fees for applying and prepayment penalties. It is important to compare the interest rates charged by your preferred lender with the daily mortgage rates to determine whether taking out a subprime mortgage will help you meet your goals without unnecessary financial constraints.

What to Know About Interest Rates

The importance of rate shopping when seeking to take out a mortgage cannot be denied. Similarly, it is clear that credit score has a direct impact on the interest rate that a borrower receives. Generally, the better the credit score, the lower the interest rates that a borrower will enjoy. This is why it is important for borrowers to take the necessary steps to improve or maintain their credit score. In the end, a poor credit score can prevent you from getting the home of your dreams or result in a mortgage with high-interest rates that you cannot afford to pay.

Understanding the relationship between credit score and interest rate is not enough. Homebuyers who want to take out a mortgage have to know how interest rates impact them. Since interest is what is paid back in addition to the principal loan amount, it will determine the total amount you will pay back to the lender.

Regardless of the term of the loan, the interest will also impact how much you pay back as monthly installments. By looking at this figure, it will be easy to determine whether you will be able to repay back the loan based on your income and other outstanding debts. When looking to determine the right time to refinance your mortgage, you should be mindful of the interest rate on your current loan.

Bad Credit Mortgage Alternatives

Government Mortgage Loan TypeMortgage loan shopping helps borrowers to identify the various options available to them and make comparisons. Apart from taking out a subprime mortgage loan when they have poor credit, borrowers who can manage a small down payment can explore these options.

  • Federal Housing Administration (FHA) loans: The FHA provides loans to people with a credit score of below 620 and can make a down payment of three percent.
  • Veterans Administration (VA) loans: VA loans are low-cost mortgage loans that may not require any down payment.
  • 2/28 Adjustable Rate Mortgage (ARM) loans: these loans offer a low-interest rate for the first two years before the rate rises sharply. Since this will affect the monthly installments, the two-year point would be the right time to refinance your mortgage.
  • Bad credit loans: There are times when borrowers will have no option but to take out a bad credit loan. There are several factors that will determine whether you will need to apply for this type of loan.

While there are loans available for people with bad credit, they attract high-interest rates and take longer to get approved. The best way to avoid such frustrations would be to improve your credit score before applying for a mortgage loan. Those with excellent credit score should also strive to maintain it. This will ensure you enjoy affordable interest rates on the loan, a factor that will minimize the need to refinance your mortgage at some point.

Fees Involved In Buying a House

It costs a lot of money to buy a house. Apart from the purchase price, those who want to buy through a mortgage may end up paying several fees. The good news is that having a good credit score can help to cut down the home-buying costs significantly. Here are some of the extras that prospective homebuyers can expect.

Additional Fees

Some of the basics of mortgage loans are that you will have to pay back both the principal loan amount plus the accrued interest. In case the money you have borrowed is more than 80 percent of the value of the property, you may have to buy primary mortgage insurance. In addition, the lender may want you to have homeowners insurance and pay the applicable property taxes. Depending on the neighborhood, the homeowners association may also have monthly or annual fees.

Upfront Fees

There are certain fees that property buyers will be required to pay at closing. It is important to understand these fees in order to have a seamless purchasing experience and avoid frustrations. The origination fee is charged by the lender for handling your loan. The fee covers administration costs such as application fee, processing fee, underwriting fees, and other relevant charges.

Third-party Costs

Some of the other expenses you will incur are third-party costs. In case an appraiser or title insurance was involved in helping you with the mortgage, you may have to pay the fees they charge. However, you can negotiate to pay the fees at a later date as opposed to at closing. Homebuyers should not be surprised in case they are required to pay taxes on the real estate transaction.

Considering the costs involved in buying a house, it is clear that refinancing a mortgage is a major decision. When looking to determine the right time to refinance your mortgage, you can talk to a financial expert to help you make the right decision.

How to Know You Are Ready to Buy a House

Although buying a house is a big milestone, it is not something that should be taken lightly. It is critical that prospective home buyers ensure they can afford the house they intend to buy. In case you plan to take out a mortgage, it is important to establish whether you will be able to repay the loan every month.

Here are some of the indicators that you are ready to embark on the journey that is home ownership.

Are You Living Paycheck to Paycheck?

There is no doubt that owning a home is bound to be costly. Some of the expenses you will have to be ready to include the down payment and other added expenses. While some are one-off payments, others will have to be paid periodically. You should also consider putting aside some money for unexpected expenses.

Are you ready for stability?

Buying a home is an investment that will require you to stay in the home for a while. While you do not have to spend the rest of your life living there, you may have to spend at least five years in that area. You will have to consider this carefully before purchasing the property.

Do you know what you want?

With the huge investment that goes into acquiring property, you should ensure that the home you buy will meet your lifestyle needs and offer you the satisfaction you seek. Take time to think about the size of your family as well as whether you plan to raise your family here or sell it in the future.

Mortgage loan shopping can be complicated and confusing. Without the expertise and experience required to choose the right loan for your needs, you may end up making a number of mistakes. The good news is that mortgage refinance gives you an opportunity to make the necessary adjustments. However, you will have to know the right time to refinance your mortgage.

Shopping For a Mortgage

Although mortgage loan shopping can take up a considerable amount of time, the information available today can help make the process faster and easier. Before the exercise can begin, borrowers should start by finding out their credit score and determine how much they wish to borrow. This should then be followed by how much they have for the down payment and the amount they can afford to repay. Once these have been determined, borrowers can proceed to look for a lender that meets their needs.

Rate shopping will be an important step at this stage. One of the most common ways of shopping for a mortgage is to approach traditional lenders such as banks. However, some people may opt to work with a mortgage broker in order to save time as well as avoid the hassle of doing the work on their own.

Over the past few years, a majority of homebuyers have been doing mortgage loan shopping online. This method allows consumers to see rates from mortgage rate tables, a factor that helps to simplify the process. We make it easy for borrowers to find the lender that will meet their unique needs through our platform. We also ensure that consumers work only with reliable lenders to avoid falling victim to common online scams. When you feel it is the right time to refinance your mortgage, work with us to enjoy a great and hassle-free borrowing experience.

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Key Considerations Before Refinancing Your Mortgage

Like many other financial transactions, mortgage refinancing is an important process that requires homeowners to do due diligence. Once you have determined that it is the right time to refinance your mortgage, you should ensure that you are aware of several factors. These include your home’s equity, your credit score, your debt-to-income ratio, the cost of refinancing, and the refinancing points. If you are to make the process hassle-free, you should also know your private mortgage insurance as well as your taxes. The last step would be to do rate shopping to ensure you do not end up paying significantly more in interest.

When done right, mortgage refinancing can offer borrowers numerous benefits. With the important role that credit scores play, this step can help to ensure that you repay your mortgage loan more comfortably, moving you closer to your financial goals. However, in addition to identifying the right lender, you have to know the right time to refinance your mortgage.

The last consideration you will need to keep in mind is the daily mortgage rates. With the numerous lenders willing to offer mortgage loans, it will help if borrowers can identify reliable ones. We make it easy for consumers to find lenders who offer mortgage loans at affordable rates. As a third party that is not involved in the loan business, we also make it possible for borrowers to work with reliable and professional loan companies.

Getting a Mortgage with Good Credit: Interest Approved

Buying a house is an exciting time in your life. It is the beginning of the journey to owning something of incredible value. Perhaps it becomes your first real asset. It can also be an incredibly scary time, especially if this is your first house. There are so many things to consider. You probably have no idea where to begin.

You may not even know what buying a house entails. I know that while you are excited, you are also nervous. You do not want to make any mistakes, or miss something. Do not worry, I am going to provide you with all the mortgage tips you need. I will also tell you how to get a mortgage with good credit. So, let’s get started.

How Do I Know If I Am Ready To Buy A House?

Buying a house is a big deal. It is really important that you know you are ready. This is not something you should take on lightly. You want to make sure you can really afford the house you can buy. Often times, when getting a mortgage with good credit, mortgage companies approve you for a mortgage that you may struggle to pay every month. It is important to make sure you can pay the mortgage every month. There are some important indicators that help you realize you are ready to make the plunge into home ownership.

  • Are you living paycheck to paycheck? You should realize that owning a home can be costly. Not only do you need some type of down payment, in most cases, but you need to be prepared for added expenses. Before you consider buying a house, you should have some money saved for unexpected expenses.
  • Are you ready for stability? Buying a home is an investment. This means you need to be ready to stay in that home for a while. You do not have to plan to spend the rest of your life in that house, or that area. You should plan to be there for at least five years so you can see some growth on your investment.
  • Do you know what you want? Is this a house you plan to settle down in and raise a family? Is this a house that you plan to sell and buy a bigger home? These are important questions to answer before you begin your house search.

What Is A Mortgage?

In an effort to make sure you have all the information you need, I am going to start with the basics. Consumer Financial Protection Bureau (CFPB) defines a mortgage as an agreement between you and a lender. The lender gives you the money to pay for the home and property and you make a promise to repay each money for the length of the mortgage. If you do not pay back the mortgage, the lender has the right to take your home.

There are different types of mortgages, which I will discuss a little further down. When you borrow money for a mortgage, you are borrowing the money for the house, in addition to interest on that money. Obtaining a mortgage with good credit allows you to get a better interest rate.

As I mentioned above, a lender may qualify you for $400,000, but according to your budget, you can only afford $350,000. In this case, do not buy a house that is $400,000 because a bank gave you the money. You should find a house that is under $350,000 because you know that is what you can afford. You do not want to put yourself in a position of buying a house that you cannot afford. That only sets you up for failure because there is a chance you will make late payments or miss them. This negatively impacts your credit and may cause you to lose your house. Once you have made the investment to buy a house, you want to do everything you can to protect it.

Why Does My Credit Matter?

Your credit score directly impacts the interest rate you receive. Let’s talk a little bit about credit scores for a few moments. Credit scores are numbers that no one ever wants to talk about, but it needs to be done. You have to know your number and you have to understand it. Only

Credit Score Good

when you know it, can you actively do something to improve it, or maintain it. In this case, it could prevent you from getting the home of your dreams. If your credit score is bad enough, you might not be approved for a mortgage. Or, if you are, it may be so high, you cannot afford to pay it.

Your credit score is a three digit number that appears on your credit report. It is important to know the difference between the two. Your credit report is a detailed listing of all of your activities involving credit. It shows your payment history, how much debt you have and how you use it. Also, it shows the age of your credit. It shows all of your late or missed payments. It even shows loans on which you have defaulted. Your credit score is also highlighted on your credit report. Your credit score is built over time and it gives lenders an indication of your credit worthiness. It is much easier to get a mortgage with good credit.

Smart Credit Info!

Credit Score Management
CLICK IMAGE: Check Your Credit Score

Typical credit scores range from 300 to 850. I am sure you know that the higher that number, the better your credit is and the more likely you are to get a good interest rate. Most people have a credit score somewhere between 600 to 750. Good credit falls somewhere between 70o to 850. Anything below 570 falls into the danger zone of bad credit.

What Do I Really Need To Know About Interest Rates?

One of the most important things you can understand when thinking about purchasing a home is the interest rate. Forbes has a short article about how interest rates impact your mortgage, and how your credit impacts your interest rate. I am going to provide you with a basic understanding of interest rates and their impact on you. Every mortgage has an interest rate attached to it.

Generally speaking, when it comes to mortgages, credit score has a big impact on your interest rate. You can save more than 1.25% from a 620 to 740 credit score as illustrated in the chart below. The graphic is based on advertised Zillow rates for $400,000 mortgage with an 80% loan to value ration for fixed mortgage over 30 years.

Mortgage Rates Good Credit

You will not find a mortgage that has 0 percent interest. Interest is what the lender charges you for borrowing money from them. The amount of the loan you borrow is considered the principal amount. The lender adds an interest rate to that. It is often used in combination with an annual percentage rate (APR). The APR is the additional annual cost of your loan. This can include things such as mortgage insurance and extra fees. Generally speaking

The good news is that the better your credit score often that means lower rates.

The interest rate a lender gives you is in direct relation to your credit. When obtaining a mortgage with good credit, you will get a lower interest rate. This means you pay less money per month for your mortgage. There are several factors that impact the Interest rates, which changes on a frequent basis. The Federal Reserve issues a benchmark rate, which is what banks charge to each other to borrow money.

This is the daily interest rate. This impacts the daily mortgage rates. Banks attempt to make interest rates competitive with each other. They want to make the most money they can as a return on loans and deposits, but they know they must keep their interest rates at a comparable level. So they have to keep it high enough for those with investments to allow them the best return on their money. They also have to keep it low enough for those that borrow money.

How Do Interest Rates Impact Me?

Now that you have a little bit of knowledge about interest rates, you should understand how they impact you. As mentioned above, interest is what is added to your principal loan amount. A lender determines what interest rate to charge you based on your credit score. Obtaining a mortgage with good credit is the best way to get the lowest interest rate. These easiest way to show you how credit impacts your interest is to show you.

Now let’s take a different example from from myFICO.com loan calculator, where the interest might be a little higher possible because there is no equity in the house. So, it’s a purchase loan versus a refinance loan. Also, this individual has good income and assets to show. Let’s look at the difference in what you might pay all because of your credit score.


Credit Score Impact on Payment


In this example above a credit score above 760 would save you about $193 each month for a 30-year, $200,000 mortgage versus scores from around 620 to 639. Now on a 30 year loan that is a lot of money…It’s around $69,751 in just interest over that loan’s life.

Here is Another Example:

You have good credit, so your interest rate is 5% because your income isn’t as strong as the above example. You want to purchase a home that will cost $400,000. Also, you are putting down 10 percent of the cost for a down payment, which is $40,000. That leaves the amount you need to borrow as 360,000. You have to pay a PMI of 0.625 percent. If you get a mortgage for 30 years, your mortgage payment may be $2120.39. This does not include home owners insurance or taxes.

Let me show you that same mortgage but with a higher interest rate. Let’s say the interest rate increases to just 6.5 percent. That increases your monthly mortgage payment to $2462.94. That may not seem like a huge difference initially, but it is $342.55 per month. That totals up to $123,318 over the life of a 30 year mortgage. The only difference was an increased interest payment.

Since you are putting less than 20 percent down, you have to pay PMI. This is insurance that protects the bank, if you default on the loan. Remember the house you buy becomes collateral for the lender. If you default, they can take ownership of your house. When you put 20 percent down, you have already paid for 20 percent of the house. If you default, the bank sells the house to recoup their money. For them to get their money back the house has to sell for what you owe.

What’s the Conclusion?

The more you have paid into the house, the less you owe and the less money the bank has to attempt to get back. One of the easiest ways for you to determine how much your monthly mortgage payment will be is to use a mortgage calculator. It does all the work for you.

What Is A Fixed Rate Mortgage?

I have told you a little bit about interest rates and how they impact your regular monthly payment. Now, it is time for you to learn about the different mortgage options available to you. There are probably more than you think. Keep in mind a mortgage with good credit will draw a lower interest rate and a lower monthly payment. That being said, I am going to start with fixed mortgages.

Mortgage Loans
(See Mortgage Rates)

The simple definition of a fixed mortgage is one that has an interest rate that does not change. It is “fixed” and your mortgage payment does not change based on an interest rate change. Even though, the prime interest rate changes every day, it does not impact your interest, or your mortgage payment. A fixed rate mortgage can have terms of 15, 20 or 30 years. A fixed rate mortgage gives you stability and a sense of knowing exactly how much money you pay each month. Keep in mind that your homeowners insurance and property taxes are rolled into your mortgage payment. Those two increase and when they do, your mortgage increases.

Are There Other Types Of Mortgages?

While a fixed rate mortgage is the most common and the best mortgage with good credit, there are some other types of mortgages. Ultimately, you have to decide which is the best mortgage option for you. I will get right to it. Another type of mortgage is an adjustable rate mortgage (ARM), which is a rate that changes. There are a different types of ARMs. The first is the traditional ARM, which has changing rates throughout the life of the loan. Typically, your mortgage rate adjusts every six month, or some other set schedule.

Often, a lender has a maximum amount of interest you pay. So, they may cap it at 8 percent. However, this type of mortgage can lead to high mortgage payments. There is a hybrid ARM, which has a period of a fixed rate before you are hit with adjustable rates. Basically, you may have a fixed rate for three or five years, then you will have adjustable rates for the rest of the period of your loans.

Balloon Mortgage

Another type of mortgage is a balloon mortgage. With this type of mortgage, you would have a short term mortgage, possibly ten years. During this short term, you have a low monthly payment, possibly interest only. When the term is over, at the end of the ten years, you have to pay the balance in full and immediately. There is a high amount of risk associated with this type of mortgage. You have to find a large amount of money to pay the lender. Possibly, you could save that much money, or you could take out another loan to pay the loan.

Interest Only Mortgage

An interest only mortgage is a mortgage where you pay only the interest on your mortgage for a set period of time. This helps keep your monthly payment low. After that set period of time, you begin to pay more money that you would with a traditional mortgage to catch up on the principal you were paying.

Do I Need To Be Pre-Approved For A Mortgage?

You may hear the terms pre-approval and pre-qualified used interchangeably. It is not quite right to use them in that way. They are slightly different. Let me explain the difference between the two. After you understand the difference, you can better understand why getting a pre-approval is a good idea.

6 First-Time Home Buyer Mistakes you Should Avoid

A pre-qualification is considered a basic step in looking for a mortgage. It does not indicate to the seller that you are a serious buyer. A pre-qualification is intended to be informational and not a binding contract. It can indicate how much money you might be approved to borrow. A pre-approval indicates to the seller that you are serious about buying a house. It also signals that any offer you make should be taken seriously. When you have a pre-approval, you are considered a qualified buyer. It can also lock in your interest rate for about 30 days. This also helps guide you to know how much your monthly mortgage payment may be depending on the cost of the house in which you are interested.

Remember it is easier to obtain a mortgage with good credit. If you have bad credit, it may be harder for you to get a pre-approval. The only downside to a pre-approval is the hit to your credit report. However, if you are serious about moving forward with buying a house, the benefits to a pre-approval far outweigh the hit to your credit report. It really is in your best interest to obtain a pre-approval before you begin looking for a house.

Do I Need A Down Payment?

The dirty truth is a lender sees a down payment as your investment in the house. It significantly impacts that amount of money you need to borrow. Obviously, the higher your down payment, the less money you need to borrow. It also determines if you need private mortgage insurance (PMI). Usually, if you are not putting down a 20 percent deposit, the lender requires PMI. A lender does not like to loan more than 80 percent of the value of the house.

The PMI helps protect them. The higher down payment you have for a house, the lower your interest rate may be. If you have not noticed, there are many factors to help ensure you get a low interest rate. As I have stated before, it is much easier to get a reasonable mortgage with good credit. You should always try to put some money down on a house. There are ways to buy a house with no money down, but many lenders require anywhere from 5 to 20 percent.

How Much Should I Borrow?

Saving money for a down payment is not an easy task. Many people can afford the mortgage payments, but they just cannot save 20 percent. The more expensive the house and that dollar amount increases quickly. When it comes to deciding how much money you should borrow, you need to take a good look at your budget. The question should be how much can I afford to borrow. Here is the thing, you should not borrow more money than you can pay back. That is setting yourself up for failure.

Good to Know!
Collateral

Next, you know that lenders typically do not like to lend more than 80 percent of the value of the house. They will lend it to you, especially if you are looking for a mortgage with good credit. However, even good credit cannot save you from PMI. If you are not putting 20 percent down, expect to pay PMI. It will be hard for you to find. You should do some mortgage loan shopping to find lenders that are willing to provide you a mortgage with less than 20 percent down.

Some lenders tell you upfront how much of a down payment they want you to have. From there, figure out how much you can afford to pay in a mortgage and that should lead you to how much you should borrow. Try not to get swept up in the magic of house hunting and start looking at houses outside of your price range. You are setting yourself up for failure that way. Be realistic and stay in the range that you can afford.

What Fees And Costs Are Involved With Buying A House?

It sure seems like buying a house costs a lot of money. I have not even told you about all the fees, closing costs and regular payments associated with a mortgage. I hope you know by know obtaining a mortgage with good credit will drastically cut down your home buying costs. So, let’s talk a little bit about those extras that you should expect.

Additional Fees

As a reminder, there are additional fees worked into your regular monthly mortgage payment. You have the principal, which is the actual amount of money you want to borrow. Then you have the interest, which is the ‘fee’ the bank charges you for borrowing money from them. If you have borrowed more than 80 percent of the value of the house, you have primary mortgage insurance. You also have homeowners insurance and property taxes.

Your lender requires you to have homeowners insurance. Again, they want to protect their investment, too. Until you own the house in full, it is their investment also. Some houses are in neighborhoods with home owners associations. They have fees, also. It could be a monthly fee, or an annual one.

Upfront Fees

In addition to those monthly fees, you have some upfront fees to bring with you to closing. This is where it gets really fun for you, the buyer. Make sure you understand these fees. You have an origination fee. This is charged by the lender for handling your loan. This covers all their administrative costs, such as application fee, underwriting fee, processing fee, and any other administrative fee they would like to add. You may have points. Sometimes you can negotiate points with the lender.

Smart Money Tip!

By paying points up front at closing, you can reduce your interest payment, which makes your mortgage payment lower. However, you have to come up with the cash to pay the points. The amount of the points and how much they save you in the long term depends on the loan amount and your agreement with the lender.

Third Party Costs

Some other fees are third party costs. If a third party, such as an appraiser or title insurance, was involved in helping with your mortgage they have fees that you have to pay at closing. Sometimes, you can negotiate payment and you can pay another time and not at closing. Either way, you still have to pay for it. You should not be surprised that you have to pay taxes. You have to pay taxes on the real estate transaction.

How Do I Shop For A Mortgage?

I have shared a lot of information with you about obtaining a mortgage with good credit. Now, you are probably wondering where to start. There is so much information available these days, it can be overwhelming. First, find out your credit score. Then look at your budget and know what you can really afford. Realistically determine how much money you have for a down payment. With those parameters, start looking for a mortgage company that can meet your needs. A quick search can give you some lenders.

Once you have a few in mind, dig a little further to see who might be the best fit. You can also contact a mortgage broker, who will do all that work for you. That will be another fee added on at closing, but it saves you the hassle of doing some of this work. Looking for a mortgage with good credit, or any type of credit really can be time consuming and overwhelming.

Most mortgage loan shopping these days is done online. You can see rates from mortgage rate tables that seem to be all over the web. We’ve made it simple to shop for a mortgage through our money tools. Or, you can do it right here. Just put your information below and you may get offers that suit your needs best:


Conclusion

I am sure I have made that point that it is much easier to get a mortgage with good credit. However, it is not impossible to get a mortgage with bad credit. It just required more work. Before you begin down the mortgage path, you need to be honest with yourself. What can you afford to pay in a mortgage payment?

Check out Loanry’s budget website to get some helpful information on how to understand your budget. You should understand your income and your expenses and make an honest decision. Doing anything else puts you in danger of getting in over your head when it comes to a mortgage. Getting a mortgage with good credit is great, as long as you can afford it. If you cannot afford it, you will miss payments, or have late payments. This will cause your good credit to slip to bad credit really quickly.

Mortgage Loan Basics Spelled Out: Lending 101

Let’s talk about mortgage loan basics.

Although they are often the largest debt an individual will experience in their lifetime, mortgages are a wonderful creation. Imagine if you had to pay cash up front for any home you wished to purchase. How many bedrooms would you have in that scenario? How many square feet? If it were me, I’d probably have to forego having a roof for the first year or two until I could save up for such luxuries.

Mortgages also keep interest rates moderated. Because the property acts as natural collateral for the loan, lenders are able to be somewhat flexible with their terms. It’s not that they want to take your home, but it does give them a safety net of sorts so that they can reasonably take the risk of loaning you funds to begin with.

Get Introduce Yourself With Mortage Loan Basics

A mortgage is a loan on the property – for example, your home – which is paid back over time to the lender along with an agreed upon interest rate. What makes it different than a simple “loan” is that the lender has the right to take over the property if payments are not made. This is sometimes called having a “lien on the property.” In other words, you don’t fully own the property until the last payment is made. That’s called “paying off your mortgage.”

How Does A Mortgage Work?

Because we’re talking mortgage loan basics, let’s assume we’re talking about a home mortgage – the most common type of mortgage.

You find a home you wish to purchase. Let’s say you have $20,000 in savings, but the home is $140,000. You do some mortgage loan shopping and decide on Morty’s Mortgages. Morty is willing to loan you the full $140,000, but in return, you essentially “pledge” your house to Morty. If you miss too many payments, Morty can take your house and sell it to someone else to recoup his losses. Since you have every intention of making your payments, you decide to finance through Morty.

The thing is, you’ll be paying back more than $140,000 to Morty. How much more depends on several factors, the biggest of which is the interest rate. There are two basic types of interest on mortgages – “fixed-rate” and “adjustable rate.” Understanding the difference is Mortgage Loan Basics 101.

Fixed-rate Mortgage

A fixed-rate mortgage is one in which your interest rate remains the same for the life of the loan. The monthly payments stay pretty much the same (there are other costs besides interest, but we’ll get to those) from your first payment to your last. These are the most typical type of mortgage and sometimes simply referred to as a “traditional mortgage.” The payments are generally structured so that your early payments go towards the interest on the loan. Over time, your payments apply more and more towards the principal of the loan – the actual money you borrowed to buy your house.

You’ll sometimes hear the term “amortization” used to describe this system. I wouldn’t get too sidetracked by it; it’s pretty much the universal way things are done when it comes to mortgages. The important thing is that the amount of your monthly payment devoted to principal plus interest stays the same, even if how much of each payment goes where evolves over the life of the loan.

Awesome! But What Are the Down-side?

The only down-side to a fixed-rate (“traditional”) mortgage is that market interest rates change regularly. Daily mortgage rates fluctuate naturally, and over time they can rise or fall considerably. Either way, you’re committed to whatever it was when you first took out the home loan. If the difference is significant enough, some homeowners elect to refinance their mortgage – to essentially start from scratch, treating the balance on the mortgage as if it were a brand new home loan. Because there are other costs associated with the process, this only makes sense if the difference in what you’ll pay is substantial over time. We should cover a few more mortgage loan basics before we address refinancing.

The other type of home loan is an adjustable-rate mortgage. An adjustable-rate mortgage fluctuates with market interest rates. What determines daily mortgage rates gets a bit hairy, but basically they’re the result of three interwoven factors:

The rate set by the Federal Reserve (often simply referred to as “The Fed”).

You hear about this in the news from time to time depending on what’s going on with politics and the economy at the moment.

Investor demand for Treasury Bonds and related low-risk, low-interest investments offered and backed by the U.S. Federal Government.

When big-money individuals or institutions don’t feel good about playing the stock market or whatever else they might normally do to grow their wealth, they invest in these.

How good the banking industry is feeling at the moment.

OK, not how they’re feeling, exactly, but what they perceive to be their current risk and potential reward. This is the closest element to what we were taught in high school about “supply and demand” and the “free market” and all that.

If you really want to dive in more to these factors and how they shape mortgage rates, be my guest. I’ll be honest and tell you that the details make my head hurt and my eyes glaze over a bit, so forgive me if we move on.

Some lenders offer a “hybrid” of fixed and adjustable-rate mortgages. You’ll agree to a low, fixed interest rate for a specified length of time – say, the first five years of the loan. After that, the rate is adjustable based on market rates. The idea is that new homebuyers lock in a “grace period” of sorts at a lower rate than would be possible with a traditional fixed-rate mortgage. If you’re new to the adult world or just starting a family, the assumption is that a few years down the road you’ll be in a better position to tackle a higher house payment in exchange for that initial period of smaller payments.

Did you know?

The average US mortgage in 2017 was $202,00. Compare that to a nearly 10% increase from 2007, which was $184,000.

Other Payment Factors

Either way it’s figured, interest plus principal is the bulk of your payment each month. Those are fundamental mortgage loan basics. But they’re not all of it. Remember those other factors in the cost of the loan we mentioned above? The two most common elements packaged with your mortgage payment are insurance and taxes.

Most lenders will expect you to purchase enough insurance to cover the cost of the home in case of fire, flood, meteor shower, etc. Remember – your home is collateral for the loan, and it’s not unreasonable for the lender to expect their interests to be protected. Depending on the details of your coverage, your monthly payment can go up (or down) over time based on changing insurance rates.

The other way lenders protect themselves is by making sure you’re able to pay any property taxes associated with your home. If you don’t pay your taxes, the government might take your home and then both you and the lender are out of luck. Lenders guard against this by estimating the annual property taxes and dividing that amount by 12 months, then simply adding it to your required mortgage payment.

But Here’s the Trick:

The folks doing the estimating and the folks determining your actual property taxes each year aren’t the same folks. Besides, property taxes go up and down depending on any number of factors. That’s where your “escrow account” comes in. As you make your monthly payments, they take the amount set aside for taxes and put it into “escrow” to be paid to the government come tax time. If your escrow has too much, you’ll get a small refund. If there’s too little, you’ll get a bill asking you to add a bit. Depending on the details of your mortgage, this might increase (or decrease) your monthly payments as adjustments are made to cover those taxes.

If all of this seems a bit overwhelming, don’t panic. Many people live long, happy lives without all the big words and complex financial computations. Our goal for now is to have a better general understanding of mortgage loan basics. Honestly, just by having read this far, you already know more than most.

Whether that’s frightening or reassuring I will leave up to you.

How Can I Learn About Mortgages?

You’re off to a good start by reading this right now. You’ve probably noticed the links embedded throughout. They’ll take you to articles going into greater detail about various aspects of the mortgage process and what goes into it. You should also feel free to ask as many questions as necessary of any banks, credit unions, or online lenders you consider while mortgage loan shopping. Mortgages are what they do. If they want you as a customer, they should be willing to explain their product.

Understanding the Mortgage Process

Now that we’ve talked about some of the technical stuff, let’s step back and walk through the most likely scenario in which you’ll be utilizing your new mastery of mortgage loan basics – buying a new home.

Home Buying Step 1 – Find a Lender

I know, I know – house shopping is the fun part. Imagining what you’d do to this kitchen or how you’d utilize that den, just like on all those TV shows. But the right mortgage and mortgage provider is essential to a positive home-buying experience. Shop your options first, before you’re all giddy over the closet space. It’s easier to pay attention to things like interest rates and closing costs that way.

Home Buying Step 2 – Get Pre-Approved

You get two mortgage shopping tips on this one. First, pre-approved financing is pretty much required when buying a house. Some realtors won’t even start showing you properties until you’ve got the money lined up. And a pre-approved mortgage makes it much easier to move quickly on a home you really want. Your mortgage provider will even give you an official letter showing how much you’ve been approved for just to keep things official. This isn’t unexpected – it’s mortgage loan basics.

Second, the “pre” in “pre-approved” here doesn’t mean the financial stuff is settled and over. It merely means you have a solid indication of how much you can spend and that your lender is reasonably certain you’ll qualify to borrow that amount from them if you choose to buy a house. That’s when the real paperwork begins.

Home Buying Step 3– Look At Homes

Finally, the fun part! Don’t be that person who finds something wrong with every house, but neither should you jump at every opportunity. Make a short list of must haves, wants, dislikes, and must avoid, and do that part well ahead of time before you’re caught up in the moment. Then, refer to it as you go. Even if you modify it along the way, it will help you keep focused and remember your priorities.

Home Buying Step 4– Make An Offer

This is where a good real estate agent is so important. They can help you figure out a reasonable starting offer based on activity in the market, the area, the home itself, etc. If homes are selling quickly, it may be pointless to make an offer below asking price. At the same time, there’s usually no harm done by a little cautious negotiating. It doesn’t have to be all about the asking price, either – sometimes sellers will agree to leave the washer and dryer or replace that weird section of carpet instead of lowering their asking price.

Home Buying Step 5 – Brace Yourself (Now The Real Paperwork Begins)

If your offer is accepted, the lender will require you to complete a mortgage loan application and to submit documentation related to your income and financial history – pay stubs, W-2s, bank statements, tax returns, etc. These will be evaluated by an underwriter, whose primary function is to study the documentation provided and verify that everything is in order. There are lender requirements to be met and government guidelines to be followed and the whole thing can make your head spin a bit if you let it.

If it makes you feel any better, the underwriter is also measuring the value of the property in question and making sure it meets all sorts of requirements and guidelines as well. They may order a value assessment or other inspections if there are questions. These are all mortgage loan basics; it doesn’t mean there’s a problem.

During the underwriting process, you may be asked about events in your financial past. Where did this deposit come from? Why was this debt written off? What happened in such-and-such year that caused this change? None of this is personal – it’s just tedious. Answer as completely and honestly as you can, and keep taking deep, slow breaths. On the other hand, you may not be asked anything at all. That’s normal as well.

Once the underwriter approves everything, you are “clear to close.” Everything is sent to a title company chosen by the lender (because there haven’t been enough people involved in the process yet).

Home Buying Step 6 – The Closing

Let’s talk good news and bad news here.

The good news is that you’re almost through the paperwork/financing/questions/approval part of the home-buying process. This is the last stage of small print and legal details.

The bad news is that if this is your first closing, there’s simply no way to be prepared for the volume of papers you’re about to be asked to sign or initial. Your next lesson in mortgage loan basics? Warm up your writing hand.

While you should always pay attention to anything you’re signing, nothing presented at this stage requires major decision-making or new action on your part. The representative from the title company will explain as you go and let you know which parts you should care about. While this part is tedious, it’s not hard. Traditionally, you’ll get the keys to your new home at the end of this part. Congratulations!

Oh – one last critical detail. You will be expected to bring a certified check or something comparable with you to cover your down payment and closing costs. These often include an initial escrow deposit and various fees to pay all the different people involved in the process up to this point. Your realtor will be able to let you know exactly how much this needs to be and what’s covered, so it won’t be a surprise. They’re not the same in every situation, and sometimes the seller agrees to take on part of these expenses as part of the negotiations. All that has been settled by this point, however, and it’s time to hand over your first check and get those keys.

Home Buying Step 7– Move In

This isn’t technically part of the mortgage process, but it’s sometimes helpful to remember why you’re putting yourself through all of this. Why are you dragging yourself through mortgage loan basics? It’s all been for this moment. Try to enjoy it.

Types of Mortgages

These aren’t entirely distinct forms of mortgages so much as variations you may encounter as you begin the process. A given mortgage arrangement can involve several of these factors together, or prove so straightforward that most of this terminology never even comes up. Still, knowing some terms common in mortgage loan basics might help you ask better questions of potential lenders.

Different Interest Rates or Loan Structures:

Mortgage Loans
(See Mortgage Rates)
Fixed-Rate Mortgages

We talked about these above. With a fixed-rate mortgage, your monthly payment stays largely the same throughout the life of the loan (other than small adjustments based on changes to your taxes or insurance).

Adjustable-Rate Mortgages.

You probably remember this one as well. Most adjustable-rate mortgages start off as “hybrids” in which you commit to a lower initial interest rate for a fixed amount of time before throwing yourself on the mercies of the market.

Balloon Mortgages

Ballon Mortgages are fairly uncommon. For most of the term of the loan, you’d pay very little. Then, at the end of the time specified by the terms of the loan, the full balance would come due. This sort of mortgage only makes sense if you have unusual circumstances involving guaranteed funds down the road.

Interest-Only Mortgages

These are similar to the balloon structure above, but are structured so that the increase in payments over time is more gradual. Borrowers pay only on interest for a predetermined amount of time, then begin paying on the principal as well. These are sometimes a decent option for some first-time homebuyers just starting their careers.

Conventional vs. Government-Insured Home Loans

Conventional Loans

Those are any loans not backed by a government program like those listed below. The term doesn’t say much about the details of the loan itself; it merely indicates that you’re the one responsible for everything along the way.

Federal Housing Administration Mortgages

FHA mortgages are backed up by the government, protecting lenders in case of default. This allows lenders to offer lower down payments and better terms, although you’ll have to provide proof of appropriate insurance.

The U.S. Department of Agriculture (USDA)

It has several options for rural homebuyers who meet their requirements. They’re looking for borrowers with limited resources but who can demonstrate a predictable income, however modest. The mortgage process is handled by the Rural Housing Service (RHS), a subdivision of the USDA.

The U.S. Department of Veterans Affairs (VA)

It provides mortgage assistance to veterans or active military members and their families. As with FHA loans, the government guarantees payment to lenders in order to secure the best possible terms for borrowers. There’s also an option for no down payment, which is more common than it used to be but still unusual.

Other Government-backed Mortgages

They vary from state to state, or even region to region. There are programs to help those with Native American ancestry purchase a home, or to promote the revitalization of certain cities or parts of some states. Ask your realtor what might be available.

These are only a few of the most common variations you may encounter. Pay attention to the details. What does each mortgage option mean in terms of the total you’ll pay for your home? What does it mean for your monthly payments now, and in five years, and in fifteen years? Not to forget, what obligations are you taking on, and what can you reasonably expect from other interested parties?

It can be a bit intimidating at first, but let me offer a few mortgage shopping tips. Remember that you are the customer. In the end, you’re the person everyone else should want to be happy. Just keep your eyes open and mind focused, and don’t shy away from asking for clarification of anything you’re not quite sure about. It’s their job to make sure you know what’s going on; it’s your job to be as prepared and as upfront as possible. Know your mortgage loan basics and breathe.

Tips for Paying Off a Mortgage Faster

The first thing to do if you’re hoping to pay off your mortgage ahead of schedule is to check with your lender and make sure you understand any rules or limitations they have about such things. While you might assume any lender would be happy to have you pay more than required, or more often than required, that’s not always the case. Assuming you’ve done this, here are a few tips from homeowners who’ve done so successfully:

Figure Out Where the Extra Money is Coming From

How much could you save by taking your lunch to work instead of eating out? By cutting back on entertainment expenses and watching more movies at home? If you can’t save enough to make a dent in your house payment, try paying off credit cards or other debts at an accelerated rate. Once those are taken care of, you can apply what you’d be paying on those towards your mortgage.

Pay Biweekly Instead of Monthly

Even if you pay exactly half the amount due each month, this shaves interest over time as well as effectively paying an additional half-month’s payment each calendar year.

Pay Extra on Your Monthly Payments

Then you could request the additional amount be applied to the principal. This of course relies on the cooperation of your lender, but even a few extra hundred dollars a month on the principal of the loan can save thousands in interest over time.

Treat tax refunds, Christmas Bonuses From Work, or Any Other Unexpected Income as House Money

Apply it to your mortgage instead of using it for other things. Even if these are relatively small amounts a few times a year, the cumulative effect is substantial.

Of Course, the Best Way to Pay Off  Your Mortgage Promptly

It is to be practical about how much you spend, to begin with. If you can manage a 20-year mortgage instead of 30-years, do. If you can manage to shave that to 15-years, all the better. The best way to pay down mortgage debt is not to have as much debt!

Do you know the 2019 amount of mortgage debt in America?

The mortgage industry actually took a dip between 2008 and 2015. Then outstanding mortgages increase yet again. In January 2019, Supermoney states “American households owed a total of $9.12 trillion in mortgage debt. If you include mortgage debt from all sources, including for-profit businesses and financial institutions the total mortgage debt is $15.12 trillion.”

What is the Difference Between Mortgage Refinancing and Purchasing?

The key difference is that in one situation you already have your home and are simply restructuring how you pay for whatever’s left on the balance; in the other, you really want a house. (I know – but it’s called Mortgage Loan Basics for a reason, right?)

The Real Question is When Should You Refinance? There are Several Good Reasons:

  • Interest rates are so much lower than it’s worth the time and costs to secure the lower rates for the remainder of the loan.
  • You want to shorten the length of the mortgage so that your home will be paid more quickly.
  • It’s advantageous to change from an adjustable-rate mortgage to a fixed-rate mortgage, or the other way around.
  • You’re using your home as equity to finance a major purchase.
  • You’re consolidating your total debt and refinancing is part of that consolidation.

Refinancing isn’t free, so make sure the amount you’ll save in the long run makes the process worth it. If you’re still considering refinancing your mortgage, check out these mortgage calculators for more details to consider.

How is Mortgage Calculated?

If you’ve read this far, you have all of the pieces to your mortgage calculation. Now it’s just a matter of putting them together and seeing how altering each element changes the overall mortgage. The easiest way to do that is to take advantage of an online mortgage calculator.

Where to Shop for a Mortgage?

We thought you’d never ask.

There’s no harm trying traditional sources – your local bank or credit union or other favorite financial institution. But in the 21st century, you have numerous online options as well. That’s where we come in. We’re not trying to sell you anything or tell you what to do about your mortgage. That’s not our business. What we’re good at is connecting you to quality lender options based on the information you share with us about your needs and background. The rest is between you and them.

So, give it a try. Enter your information below and see what comes out. Maybe you will find an offer that suits your situation best.


Just between you and me, though, we’re pretty good at this. It gives us a warm fuzzy feeling of how often it works out really well for everyone concerned. It’s easy to get started and there’s no “gotcha” or hidden obligations. If you still have questions, you know where to find us.

Happy mortgage – hunting!