Your Guide to Understanding the Different Types of Mortgages

When you are buying a home, it’s likely that you will need a residential mortgage. There are different types of mortgages that you may need to consider based on your unique situation. It is important to shop around and make an informed decision. Also, remember, you are not alone in this. You surely have a lot of people around you who can tell you about taking out a mortgage loan from personal experience. Listen to them, but also educate yourself. This will help you make the best choice for your situation.

Statistic: Value of mortgage debt outstanding in the United States from 2001 to 2018 (in trillion U.S. dollars) | Statista

Basic Types of Mortgages

There are different types of mortgages available to everyone based on your credit score and then there are some that are only available to certain groups of people.

Conventional Fixed-Rate Mortgage

Резултат слика за fixed rate mortgage infographic

These mortgages have a fixed rate so they are considered a safe bet due to consistency. The monthly payments won’t change over time and this is the standard mortgage you will likely to be offered if you are a typical candidate. A conventional fixed rate mortgage is available in 10, 15, 20, 30, and 40-year terms. The ones that are the most common are 15 and 30-year terms. For this type of mortgage, you will be required to put down 20% of the home price. If you put down less than this then the lender can require you to have private mortgage insurance (PMI).

There are a lot of pros of these mortgages. These mortgages can be used for a primary or secondary home, along with an investment property. The overall borrowing costs will tend to be lower than with other types of mortgages, even if the interest rate you get is slightly higher. When you have 20% equity in the house, you can ask the lender to stop your PMI. The cons of these loans are that a high credit score is required and there are significant documentation needs in order to establish your employment, assets, and income.

These mortgages are good for a borrower who has an employment history, a stable income, and a strong credit profile. While 20% is required to avoid PMI, as long as you can still put down 3% and have a high credit score you can qualify.

Interest-only Mortgage

When you get an interest only mortgage, you have the option to only pay the interest portion of the payment during the first five to 10 years. You aren’t required to do this because it can slow down your repayment time but this can be useful. After this time period, the rest of the mortgage will be paid off like a conventional fixed rate mortgage.

Adjustable-rate Mortgage

There are many different types of these mortgages. These work with the idea that the interest rate will change over time throughout the life of the loan. The interest rate changes based on the economy and the current cost of borrowing money. A common type of this mortgage is a 5/1 loan. With this option, the interest rate stays the same for the first five years, and then the interest rate will change for the remaining 25 years.

You can enjoy a lower fixed rate for the first few years of homeownership, which saves you a lot of money on interest payments. However, monthly payments can be unaffordable if the interest rates go up higher than you expect. This can result in loan default. Home values can also fall, which will make it harder to sell or refinance your home before the loan resets.

You need to be comfortable with a certain level of risk before you get this type of mortgage. If you don’t plan on staying in your home beyond the first few years then this can be a good way to save on your interest payments. However, if you plan to make this home a more long-term investment you need to think about the future.

FHA Loans

These are different types of mortgages that are backed and guaranteed by the Federal Housing Administration. Since they come with built-in mortgage insurance to protect against the possibility of you not being able to repay the loan, those without the best credit scores and who can only have a smaller down payment can qualify.

A government-backed loan can help you finance a home when you wouldn’t qualify for other options and the credit requirements are more relaxed. The first time and repeat buyers can use these loans. The mortgage insurance premiums may not be able to be canceled on some loans once you reach a certain point of equity.

An FHA loan works with flexible underwriting standards that allow borrowers to not have high incomes or the best credit. Mortgage insurance can still be required. It’s usually required when a borrower puts less than 20% down. There are different types of FHA loans since the FHA will also insure other loan programs that are offered by private lenders.

FHA 203(k) loans will allow a homebuyer to purchase a home and renovate it with a single mortgage. A current homeowner can also use this program to refinance their current mortgage and add the remodeling projects into the new loan. The FHA Energy Efficient Mortgage program allows a homebuyer to purchase a home that is already energy efficient. They can also buy and remodel an older home to be energy efficient and the costs of the updates will roll into the loan without the need for a bigger down payment.

An FHA Section 245(a) Loan is geared toward a borrower whose income will increase over time. With this loan, you will start with smaller monthly payments and then those payments go up over time. There are different plans available with different increasing payments amount. In order to find an FHA loan, you get it from FHA approved lenders. The FHA doesn’t give out loans and instead just insures them.

VA Loans

These loans are for veterans of the U.S. armed forces and occasionally their spouses to buy homes. Many of these loans don’t require a down payment since the Department of Veteran Affairs guarantees them.

VA Loans will usually offer the best terms and flexibility when it comes to the loan options offered to military buyers.

USDA Loans

These different types of mortgages are backed by the U.S. Department of Agriculture and can help rural home buyers with low to moderate incomes qualify. Some of the USDA loan limits are based on the family size and local market conditions. Loans can be used for regular, modular. or manufactured homes that are no more than 2,000 square feet in size.

Piggyback/Combo

If you can’t afford a 20% down payment, you will have to get private mortgage insurance. People try to avoid paying for this insurance by getting a piggyback or combo loan. This means you take out two loans of any type at the same time.

Balloon

With this type of mortgage, you only pay interest for a certain period of time and then the total principal amount will be due after this time period.

Jumbo

A jumbo mortgage refers to one that is too big for the federal government to guarantee. The limit is currently set at $700,000. This means that the borrower is likely not going to get the lower interest rates that are available on smaller loans. These loans are generally more common in higher-cost areas and do require more in-depth documentation to qualify.

A jumbo mortgage means that you can borrow more money to buy a home in an expensive area. The interest rates are still comparable with other types of loans. However, you will need a higher down payment and a high credit score. Many require a score of 700 or higher but you may qualify with a score of 660. You need to have a low debt-to-income ratio and you will need significant assets.

Second Mortgage

If you already have a mortgage and have some equity built up then you are able to take out a home equity loan or a second mortgage. This is another loan that is secured by the equity in the home. These loans can have a higher interest rate than your first mortgage but can be used for funding a home renovation and other necessary expenses. It can make sense to take out a second mortgage when there are low-interest rates available.

Subprime Loan

A subprime loan refers to a loan given to a borrower with a higher risk than those who are referred to as prime. These are bad credit mortgage loans. Prime borrowers offer the lowest risk. A prime borrower has a lower risk because he or she has a high credit score, low debt, and a good income. A subprime borrower can have characteristics such as a lower credit score, higher debt load, and lower-income. There are two different situations where borrowers can be considered subprime. Subprime borrowers will usually have no credit or poor credit.

A person with no credit has never borrowed money before. Borrowing money is the only way to build credit. Those with poor credit may have had problems with repaying debt in the past or have too many loans. Income may also be insufficient to cover any outstanding loans. Subprime loans will affect interest rates. A subprime rate is a higher interest rate for those with bad credit. If you are a bad credit borrower you can expect this.

Understanding Mortgage Terms

To understand the different types of mortgages, it also helps to have an understanding of the terms that come along with them. While there are many mortgage terms, there are some that will be used no matter what type of mortgages you seek.

APR

This abbreviation stands for annual percentage rate and it’s the total effect cost of the extension of credit. This will include the loan interest rate and upfront cost.

Appraisal

This is the written estimate for the current market value of the property. A professional appraiser prepares it.

Points

This is an optional prepaid charge that a borrower can pay in order to lower the interest rate on the loan. These points will affect the cost of the loan. A single point will equal one percent of the interest. These can also be referred to as discounts points.

Closing

This is the meeting at which the involved parties will sign the final loan documents. These documents include the deed, mortgage, statements, and more. The settlement agent, who is usually an attorney, will collect the buyer’s funds from them and pay the transaction fees, including approval fees and document recording fees. The agent will also pay the seller for the net proceeds of the sale. At the time of the closing, the purchase paperwork is recorded. During the closing, there will be closing costs. This is a catchall term that refers to the cost of servicing the loan. It can include the costs of processing and closing the loan. Some fees include attorney fees, credit report fees, termite inspections, and title insurance. The closing cost will apply whether or not a home was financed.

Underwriting

This is the process of either approving or denying a home loan based on the evaluation of the property and the ability of the borrower to pay back the loan.

Qualifying For a Mortgage

Each of the different types of mortgages will have their own requirements for credit scores, debt-to-income ratio, qualifying income, and down payment requirements.

One of the biggest factors in determining whether or not you qualify for a mortgage will be your credit score. If you have good credit then you don’t really have to worry. However, if your credit isn’t that great then it can be more difficult to get approved for a home loan. There will be a set of minimum requirements for credit scores for each loan program. However, lenders don’t necessarily have to follow these requirements and can set their own credit score guidelines.

In order to qualify for a mortgage, not only are there requirements for a credit score but there are also income guidelines. To qualify, you will need to prove your income is consistent and sufficient. If you have a salary then this is easy. If you are self-employed or have a commission-based job, this can be more challenging. You will need to have at least two years of income documentation from the same employer or in the same industry. If you get commissions, you will need to average your income from the last two years of tax returns. Qualifying income can include your salary, income from part-time jobs, income from a second job, bonuses and overtime seasonal jobs, and child support and alimony.

If you want to find out for which loans you are qualified with your credit score, you can fill out the form below and see suggestions from Loanry.


In order to help with the qualification process, you need several documents. It will help to start getting these documents ready for the loan officer. These documents include W2 forms from the past two years, three months worth of pay stubs, bank statements for the last three months, the previous two years of tax returns, a list of assets and debts, and any additional income documentation.

Steps to Getting a Mortgage

With so many factors for qualifying for the different types of mortgages, there are some steps you can take in order to better qualify.

Repair Credit and Increase Your Score

Since the credit score is one of the most important factors, it helps to start paying attention to your score and work on increasing it. Different mortgage lenders require different credit scores but do not think about it. Just think about improving it as much as you can. Things you can do to improve your score quickly include paying down revolving debt, such as auto loans or credit card, using a debit card instead of credit cards for future purchases to stay out of debt, and paying bills on time. You should also correct any errors you see on your credit report.

When you are hoping to qualify for a mortgage, don’t open any new credit accounts. Applying for any new credit will temporarily lower your credit score. Lenders will be afraid that if you have a lot of available credit you will take advantage of it and then it can affect your ability to make your mortgage payments on time.

Get a Higher Paying Job

If your income is what is holding you back from getting a mortgage then you may need to find a higher paying job. Search for a new job in your existing line of work that will allow you to earn more money. Since lenders will want to see a steady employment history, you will need to stay in the same line of work in order to make this work. This can be hard for many borrowers since switching professions may give the best chances for a salary increase.

If switching companies isn’t enough to get you a raise, see what you can do to make yourself more valuable to employers. Is there continuing education you can complete? Getting a part-time job along with your full-time job may not provide what lenders can consider qualifying income. Lenders can view a part-time job as temporary and they want long-term income.

Save As much As You Can

No matter the different types of mortgages you are interested in, saving is important. During the time you are fixing credit scores, work on saving as much as possible. The larger your down payment, the smaller loan you will need. The lower loan-to-value ratio will mean that you are less risky to lenders. This can help you qualify for a better loan. While you may not need to save 20% for a down payment, the more you can put down, the better. If you aren’t using the money you have saved for a down payment, you can use it to make repairs for the home or to furnish it.

Don’t Pay More than the Appraised Value

The bank or a lender won’t lend you more than the property is worth because they will be on the losing end of the deal if you enter foreclosure. A 20% down payment isn’t as valuable if the home is worth 20% less than the purchase price. The collateral value is an important factor for lenders so you need to keep this in mind when making an offer to purchase a home.

Reduce Debt

To different lenders, what will constitute debt isn’t a set number. It’s a total monthly debt number that will be too high for you to be able to afford the monthly mortgage payments you want. When deciding how much of a loan you qualify for, lenders look at the front-end ratio. This is the percentage of your gross monthly income that the home payment takes up. The back-end ratio is the percentage of gross monthly income that will be taken up by other monthly obligations, such as car payments and credit card debt.

The more debt you will need to pay off each month will lower the monthly housing payment a lender will decide you can afford. It doesn’t matter if it is good debt, such as a student loan, or bad debt, such as a credit card. The lender just calculates the total debt number. If you want to be able to afford more home then you will need to decrease your debt.

Your Guide to Understanding the Mortgage Process

Conclusion

There are many different types of mortgages that borrowers need to be aware of when deciding to purchase a home. Some mortgage types will determine how you pay your interest. They also determine how much interest you will be paying over the life of the loan. Other mortgage types make it easier for borrowers with poor credit scores.

In order to improve your credit score, it’s important to pay bills on time and reduce as much debt as you can. There are different mortgage terms you should learn in order to make mortgage loan shopping an easier process. Qualifying for the different types of mortgages will depend on the lender use choose. But it helps to reduce debt as much as possible, save as much as you can, and work to improve your credit score.

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:


Common Home Mortgage Terms and Definitions


You want buying a house to be simple. It is not. You might end up lucky and only need to view a handful of homes. More likely though, you’ll look at least ten houses. Some will have the right price. More than likely, you’ll settle on a home that comes close to the price and size you want while requiring little work. When the process of buying starts, knowing mortgage terms and definitions comes in handy.

Then begins your miasma of time with the bank or credit union. You’ll wallow in paperwork, beginning with your application and traipsing right on through to the closing documents. Within this pile of paperwork, you’ll read a plethora of business and financial terms. While your bank will not take the time to explain each mortgage term, we here at Loanry will. We’re here to help you with the mortgage terms and definitions you need to understand before you ever apply for your residential mortgage.

Common Home Mortgage Terms and Definitions To Know

To help you understand all these mortgage terms and definitions more easily, we divided them intro to several categories. We also recommend that you pay attention to each individual category since all these terms will be important during the process.

Mortgage Terms and Definitions: General Terminology

The mortgage terms and definitions that the real estate and financial industries consider general terms, you probably don’t.

Acceleration Clause

This is a contractual clause in a mortgage that allows the lender to demand repayment of the entire loan balance if the borrower violates any clause in the note.

Accrued Interest

Earned interest that is not paid and adds to the owed amount. It is also called negative amortization.

Adjustment Interval

The interval of time between interest rate or monthly payment changes in an adjustable-rate mortgage. This is typically displayed in x/y format with “x” representing the period of time before the first adjustment and “y” representing the following adjustment period.

Agency

A legal term referring to the fiduciary obligation one party has to the to the other.

Agreement of Sale

A  legal and binding contract signed by both the buyer and seller describing the conditions and terms under which the described property will be sold.

Alt-A

A mortgage risk category also known as “A minus.” It describes the grey areas between prime and sub-prime credit risk.

Alternative Documentation

A banking term that refers to an expedited method of verifying the applicant’s financial situation. Rather than verifying employment with the applicant’s employer, the bank accepts paycheck stubs and W-2s. Instead of verifying bank deposits with the applicant’s bank, the financial institution verifies using the borrower’s original bank statements. Although it provides an alternative, it still qualifies as “full documentation.”

Amortized Loan

An amortized loan need not be a mortgage. The term refers to any loan paid off in equal installments within the loan term.

Amortization

Amortization is the process of scheduled payments of principal plus interest. The payments must exceed the interest due otherwise the balance rises, creating negative amortization.

Amortization schedule

The monthly schedule of interest and loan principal. It may also include tax and insurance payments if the lending institution made them.

Amount financed

This term refers to the loan amount once the prepaid finance charges, a closing fee, have been paid.

Annual percentage rate (APR)

The total effective cost of the extension of credit. This gross cost disclosure calculation includes the loan interest rate and the upfront costs.

Application

A loan request form completed with potential borrower information as well as property information and requested loan amount. This is a standardized application form known as the “1003.”

Application fee

The fee to submit the loan application. It may cover the property appraisal, credit report or other costs. Some lenders refund it if they decline the loan.

Appraisal

The written estimated current market value of a property as prepared by a professional appraiser.

Closing

A business meeting at which the involved parties sign the final loan documents including the deed, mortgage, note, statements, etc. The settlement agent – typically an attorney or title insurance company – collects the buyer’s funds from them or the lending institution, pays the transaction fees such as appraisal fees, realtor’s commission and document recording fees. They also pay the seller for the net proceeds of the sale. At the close of the closing meeting, the purchase paperwork is recorded at the county courthouse. This meeting is also referred to as the settlement or close of escrow.

Closing Costs

A catchall term referring to the costs of servicing a loan. It includes the costs of processing, approving and closing a loan which may include appraisal and credit report fees, attorney fees, recording fees, survey fees, termite inspections and title insurance. Closing costs apply whether the home was financed or not.

Cost of funds index (COFI)

An interest rate index used to determine interest rate adjustments on an ARM.

Down Payment

This term refers to the cash amount paid at closing by the buyer which reflects the difference between the sales price of the home and the loan amount.

Good Faith Estimate

This estimate of closing costs, typically given to the borrower when they apply for the loan.

Interest Rate

The fee, expressed as a percentage, charged by the lending institution on a loan amount. It is typically calculated on an annual basis and may be tax-deductible.

Loan-to-Value Ratio (LTV)

A ratio expressing the loan amount to the value/sales price of a property. If the LTV ratios exceeds 80 percent, the lender typically requires loan insurance and may charge a higher interest rate.

Mortgage Insurance Premiums (MIP)

The insurance premiums paid on an Federal Housing Administration (FHA) mortgage loan.

Origination Fee

A lending institution charged one-time fee covering overhead costs of making a loan. It represents a fee of the closing costs. The lender may waive it for certain loan types.

Points

An optional prepaid finance charge the borrower can pay to lower the loan’s interest rate. These affect the total cost of the loan. A single point equals one percent of the loan’s interest rate. A point is deductible interest for income tax calculation. The financial community also refers to these as discount points.

Private Mortgage Insurance (PMI)

Lending institutions require this insurance on conventional loans that represent 80 percent or greater of the property value. This insurance insures the lending institution against financial loss if the borrower defaults.

Underwriting

In mortgage lending, the process of approving or denying a loan based on an evaluation of the property as collateral and the ability and willingness of the borrower to repay the loan.

Mortgage Loan Basics Spelled Out: Lending 101

Mortgage Terms and Definitions: Mortgage Types

If this is your first time buying a home, you might go into it thinking “A mortgage is a mortgage.” That’s not so. Numerous types of loans exist within mortgages. Not all of them are offered by a bank or credit union either.
Beyond conventional loans offered through standard financial institutions, some federal agencies also offer mortgage loans.

The Federal Housing Administration (FHA) and Veteran’s Affairs (VA) Administration offer mortgages to special groups. The FHA specializes in those who are first-time homebuyers while the VA offers loans only to veterans of the US armed forces. You can find a lot of information about mortgages if you know where to look.

Within the range of conventional mortgage loans, you also will not likely qualify for each type. Adjustable rate and assumable mortgage loans are probably the toughest for which to qualify.

Adjustable Rate Mortgage (ARM)

A type of loan that varies the interest rate and payments according to a specific schedule and pre-set limits. An ARM typically begins with a below-market interest rate. In the US, these are indexed, but abroad they’re flexible with the interest rate set at the discretion of bank.

Assumable mortgage

A loan contract that lets the seller transfer the loan to a creditworthy buyer thus potentially saving money on the interest rate and avoiding closing costs.

Balloon mortgage

A type of mortgage with smaller principal and interest installments during the loan term that does not fully repay the loan, but requires a lump-sum payment, also known as a balloon payment, at the end of the loan term.

Conventional Loan

A mortgage loan offered by the private financial sector, typically using the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) guidelines.

Federal Housing Administration (FHA) Loan

A loan insured by the Federal Housing Administration with simple qualifying terms which provide first-time buyers a small down-payment requirement. It does require MIP.

Fixed-rate Mortgage

A type of loan in which the interest rate remains unchanged for the loan term.

Home Equity Loan

A type of loan that leverages the borrower’s residence as collateral. The loan functions as line of credit against which funds can be drawn, up to a pre-arranged amount.

Peer-to-Peer Loan

A type of loan that crowdfunds the loan amount from individuals.

Subprime Loan

A type of loan extended to a borrower whose credit score and history does not qualify them for the lowest interest rates. A subprime loan comes with a higher interest rate and may include greater fees.

Veteran’s Affairs (VA) Loan

A type of loan guaranteed by the Department of Veteran’s Affairs which only veterans may take out that requires no down payment.

Mortgage Terms and Definitions: Parties Involved

Going into the house-hunting process you might think that you and the home seller and bank are the only parties involved in the sale. In actual fact, a plethora of individuals and institutions take part in the process of a home loan.
The mortgage process begins when you look at the first home and meet the realtor. If you phone the real estate agency with questions, you’ll find a large staff provides administrative support. The following list of mortgage participants, while not comprehensive, does cover the most common individuals and institutions.

Appraiser

A professional individual selected by the lending institution who has extensive real estate market knowledge and skills in property appraisal.

Borrower

The individual or group who takes out the loan. This can include a signer and a co-signer which refers to the main individual requesting the loan and the person who agrees to partner with them in applying for it, thereby offering their credit worthiness to bolster the signer’s credit worthiness.

Buyer

The individual or group of individuals who purchase the home. Their names will appear on the deed.

Mortgage Broker

An individual licensed as a lending professional and who works with several different lenders to offer more loan options than a credit union or bank.

Seller

The individual offering the home for sale. The current owner of the home.

Underwriter

An Underwriter is a position in both financial institutions and insurance companies. The underwriter analyzes risk, may modify the loan terms the borrower requested and can add conditions to meet before or at the loan closing.

Title Insurance Company

A representative of the title insurance company often acts as the settlement agent who collects the buyer’s funds from them or the lending institution, pays the transaction fees such as appraisal fees, realtor’s commission and document recording fees at the closing.

Mortgage Terms and Definitions: Credit Terms

One of the first steps to purchasing a home is the credit check that precedes your loan application approval. During the process of checking your credit, improving it, and then applying for your mortgage loan will expose you to numerous new mortgage terms and definitions. These definitions present the most commonly used terminology.

A-Credit

Consumers with the highest credit rating are referred to as A-credit or prime borrowers. Typically they have a FICO score above 720 on a scale of 300 to 900.

Affordability

A consumer’s capacity to afford to purchase a house. A lending institution typically expresses this in terms of the maximum home cost a consumer could pay. This amount is also the amount for which the consumer could obtain a mortgage.

FICO score

A three-digit number that expresses a consumer’s credit worthiness and risk level. These scores range from 300 to 900.

Mortgage Loan Shopping: Use Loanry

If you think learning the terminology of mortgage terms and definitions seems exhausting, wait until you begin looking for a lending institution. Mortgage loan shopping can be a tiring process. Your best course of action is to start with Loanry.com to shop mortgage lenders.

Loanry does not offer loans nor does it represent any lending institutions. It offers no lending whatsoever.

Instead, Loanry runs a loan mall. It is like a shopping mall for loans. Rather than searching Charlotte Russe or Dillard’s for jeans, you shop for a loan among many lenders.

Loanry provides you with a way that may help you find a financial lender. The participating institutions offer a cornucopia of loan types. You may even find mortgage loans designed for those with bad credit or no credit. To use the services that Loanry provides, here’s what you need to do.

    1. Visit Loanry.com.
    2. Choose the kind of loan you need at the top of the screen.
    3. Complete the short form with your basic information.
    4. Loanry sorts through its database of financial institutions.
    5. Loanry may find a lender.
    6. You complete each lender’s long application.
    7. Each lender responds to you directly.
Keep in Mind: Loanry Does Not Make Loans

It just rents space to financial institutions just as a shopping mall rents retail space. Your loan, therefore, does not come from Loanry, but from a financial lender.

Loanry cannot promise you that a lender will give you a loan. We have no control over whether the financial institutions agree to loan you money. Our service simply might help you determine which lenders best suit you by organizing them all in one place. By putting your information below, you can see whether you qualify for any of the loans with selected lenders:

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Why Use Loanry

Using the loan mall pre-application causes only a soft hit on your credit report and reduces the number of hard hits on your credit report. These hard hits happen every time you apply for credit, no matter what type. Each request lowers your credit score just a little, so rather than reduce your credit score, you can simplify your application process and salvage your credit score.

While Loanry is not a financial lending institution, it does offer free financial educational articles like this one on mortgage terms and definitions. We want to help you make better decisions about money.

Mortgage Terms and Definitions: Bolstering Credit Worthiness

Now that you know the difference between A+ and A- and what a FICO score describes, you are ready to get started improving your credit score before you apply for a loan. Put those mortgage terms and definitions to work. You need to strengthen your credit score as much as possible before applying for any type of loan so you can get the best interest rate and fees.

To you, bad credit probably means an individual with a score of 300. That’s the lowest score you can get and that exceeds the financial institution’s definition of bad credit.

What’s Considered Bad Credit

You also might consider your score of 540 pretty good, but banks still see that as poor credit. Financial institutions recognize that it means probably do not manage money really well. Many people of normal means have high credit scores, but they do not take out much credit or loans and they always make their payments on time. So, when a financial lending institution sees lower credit scores, they see a person who doesn’t manage money well. Change their perception by learning to manage money better using Creditry.

You simply need to implement common sense advice to raise your credit score. You’ve probably heard it all before, but you may not have put it into action yet. You can improve your credit by learning what lenders look for and doing that.

1. Obtain a Copy of Your Credit Report

Read your credit report once as yourself and once as a lender would. You can get a free copy of the report once each year from each of the three major credit reporting agencies.

Reading as yourself, check each credit report for errors and inconsistencies. Each agency has different data. Some of them collect more data. For instance, Experian lets individuals opt to allow the collection of data from their cell phone and utility payments. The credit reporting agency includes this additional data in the calculation of its score, but the other two credit agencies do not get the same data. That means your score will typically be higher with Experian, but there’s no guarantee that the lender you apply to will use Experian as the agency of request.

As soon as you spot errors or inconsistency, report this to the credit reporting agency and provide documentation that proves the correct information. This may include bank statements, credit card statements and payment receipts that show the payment dates and accounts. It will take a few weeks for the agency to correct the data, but once they do, your score gets recalculated.

2. Make Timely Payments

We realize how basic that sounds, but the key to having awesome credit is to pay your bills on time. Heck, make your payments early. Just six months of making your payments on time can increase your credit score. It works that quickly.

Consolidate your loans using a non-profit agency such as CareOne, or by taking out a consolidation loan. A consolidation agency will contact each creditor for you and negotiate a restructured debt. After the negotiations, the agency combines the many creditors’ payments into a single payment you’ll make to the non-profit each month.

The non-profit organization then distributes the newly negotiated payment to each creditor. This lets you quickly reduce your overall debt, plus unless you miss a payment to the non-profit, your payments are never late. That factor, plus the reduced debt, quickly raise your credit score.

A consolidation loan will ding your credit with a hard hit when the lending institution runs your credit, but otherwise, this option will help improve your credit quickly. It will enable you to pay off all of your credit cards and loans at once. At the point of taking out the consolidation loan, you’ll reduce your score slightly. It will quickly rebound as long as you do not close any of your credit cards.

What do you get

By paying off all of your loans, you make the ultimate timely payment. You have eradicated all outstanding debt. By leaving the credit cards open, you improve your debt to credit ratio. One of the items credit agencies look at is how much of your credit you’re using. If you have five lines of credit, but only use one and have the others open and available, you actually increase your credit score.

Like the consolidation agency, this lets you make only one payment per month. You’ll pay the lending institution who provided the consolidation loan.

3. Start a Side Hustle for More Income

Save money by hustling harder. No, that’s not one of the industry’s mortgage terms and definitions. But, hustling harder can help you get a better loan deal. Raising your income lets you sock away money for a down payment or to buy discount points. It can also help you qualify for a lower interest rate. You have a few options for how to add another stream of income.

Ask for a raise

Increase your existing income by asking for a raise if you have been with your current employer for a while. Do not try this if they just gave you a regularly scheduled performance raise after your annual performance reviews. This is if you have not had a raise for some time and you have performed your job well.

Find another job

Get a second job. It does not have to be a fancy or career-oriented job. You just need to quickly bump up your income and save the money. You can get a  job in retail, grocery, fast food or waiting tables or bartending, typically in less than one week of job hunting. Forget glamourous gigs. You need money for a mortgage down payment. Most employers start you at $10 to $12 per hour. Work at the job at least six months before applying for a loan.

Try freelancing

Start freelancing. You can drive for Uber or Lyft. Rent out a room in your apartment on Airbnb. If you write well or photography is a hobby, try blogging or freelancing as a photographer.

You can quickly add this money together in a savings account that lets you put down a larger down payment and/or buy discount points. Either way, you reduce the amount you’ll ultimately pay back to the bank. Saving it all gives you a larger down payment which means you’ll need to apply for a smaller loan. The less money you are asking for, the easier it is to get approved, generally.

4. Plan It Out With a Budget and Loan Calculator

There’s nothing simple about getting a loan or improving your credit. Buying a house requires serious budgeting along with knowing your mortgage terms and definitions. You have to make the budget and stick to it.

Make a budget if you do not already have one or study your current one. You should have at least 30 percent of your income available before taking out a loan. That is because your total loan repayments including the loan you are applying to financial lending institutions for should not exceed 30 percent of your monthly income.

Use a loan calculator to calculate what you can comfortably afford. Do not try to take out a loan for the absolute maximum for which you qualify. This is just a bad idea that can land you in a lot of trouble if anything happens that makes you late for a payment or two. Use the calculator to figure out your potential monthly payments using various options for loan term and interest rate, plus down payment, if that applies.

Conclusion

Now that you have a handle on the basic mortgage terms and definitions, you’re ready for part two. We’re just kidding. You now know the essential mortgage terms and definitions you need to apply for a mortgage loan. We won’t even pull a pop quiz on you. Do stop by Loanry though and use the request form to jump-start where to apply.

Mortgage Loan Statistical Overview: By the Numbers

Most of us want at least THREE things from home-buying experience.
First, we want to FEEL GOOD about it. We want to believe we’ve settled on the right house, negotiated a good price, and locked in a decent interest rate with the right lender. Second, we want to UNDERSTAND IT, at least enough that we can talk about it with others without feeling in over our heads. And third, we want it to BE DONE.

It’s fun shopping for homes for the first 3 or 4 (or for some of you, the first 8 or 10), then it starts to get confusing. Maybe even tedious. None of them are perfect. One has enough room, but it’s in an iffy location. Another one has exactly the look we’d hoped for and it’s a decent neighborhood, but the price is, well… a bit higher than we’d hoped.

Not to mention your friends or colleagues

That’s before you even mention to friends or colleagues that you’re shopping for a home (or thinking about refinancing our existing mortgage). Suddenly, everyone’s an expert on interest rates and real estate slang. They start talking about origination points and ask whether you’re locking in a fixed rate or rolling the dice with an ARM. And of course at least one guy at the office wants to project what the Fed will or won’t do next week so you should hurry up, or wait longer, or look into this completely different sort of financing you’ve never even heard of, and what’s your credit score, by the way?

Honestly, you were hoping more of them would ask you about that nifty deck along the back that you’d like to refinish. At least you’d know what you were talking about then.

I can’t answer all your mortgage questions that are going to come up for you. But I certainly can help by giving you a lot of well documented research and walk you through the numbers related to home purchase loans, refinancing and other types of mortgages. A few basic mortgage loan statistics can help you find your bearings and maybe feel equipped to ask the right questions and make better decisions along the way.

What Is a Mortgage?

Before we talk specific mortgage loan statistics, let’s start with some foundational stuff. What do we mean when we’re talking about mortgages?

Mortgage Loan Basics Spelled Out: Lending 101

At its most basic, a mortgage is the loan you take out to buy your house. The home you’re purchasing is generally used as collateral, meaning that if you fall behind on your repayments, the lending institution has the right to take your house. They don’t really want it, you understand – they’d rather you make the payments – but it’s their leverage to make sure that happens.

Lower that Principal…

Your mortgage payments have two primary elements – the principal and the interest.

The principal is the part that goes to the actual purchase price of the house. The interest is the extra you pay the lending institution for the loan. Your mortgage also usually contains payments towards taxes which come due annually. This part of your payment goes into a separate account until taxes are determined each year. That’s your “escrow account.” Sometimes insurance payments or other related costs are rolled in as well.

What’s The Big Deal With Interest Rates?

Interest rates are one of the most discussed, and even debated, mortgage loan statistics. At times, it may seem like overkill – and maybe it is. The thing is, the difference of a percentage point or two on that credit card in your wallet and that same point or two on a mortgage simply do NOT compare.

Let’s Look at an Example

Assume you owe $5,000 on your credit card and have an interest rate of 17%. You’re pretty determined to pay it off in 24 months, so you buckle down and do some math. To hit your goal, you’ll need to pay at least $256/month. At the end of 24 months, when your balance is $0, you’ll have paid $895 in interest.

Let’s lower that interest rate just 2%. Same $5,000 on your credit card, same 24-month target. At 15% APR, your payments now drop to $251 and at the end of 24 months you’ll have paid $786 in interest. That’s a difference of $5/month and about $109 over the course of two years. That ain’t nothing, but you’re unlikely to lose any sleep over it either way.

Let’s drop that APR one more time to 13%. Now your payments are $238 and you’ll pay a total of $734 in interest. $238 is nearly $20/month less than $256. Depending on how closely you pay attention to such things, that may or may not rock your world. It’s noticeable, but probably not critical.

What About Mortgage Interest Rates?

Now let’s talk interest rates on a mortgage instead. You find a modest little house, just big enough for the family, with that promising deck out back that needs a little work but has plenty of potential. We’ll use round numbers and say you offer $140,000, which the seller accepts. You pay $10,000 down and secure a fixed interest rate of 5% (somewhere around fair to shopping for a mortgage with good credit) on the balance with a standard 30-year loan. (We’re ignoring insurance, taxes, etc., to keep things simple.)


Credit Score Impact on Payment


At 5%, your monthly payment will be around $698/month – not bad! That means each calendar year you’re paying around $8,375 for your home.  When you make your final payment in the summer of 2049, you’ll have paid a little over $121,000 in interest for a total of around $261,000 for your home (nearly twice the purchase price). Fair enough, and quite doable.

Let’s Keep the Same Numbers Across the Board Except For That Interest Rate

We won’t go so crazy as to drop it 2% right off; let’s try a half-a-percentage point. $130,000 for 30 years at 4.5%. Before you look, how close do you think the numbers will be? Come on, take a guess – and be honest!

Your new monthly payment is about $658/month. That’s a $40/month difference. That’s enough for a nice dinner or two (depending on whether “nice” for you means “they bring you a menu and use cloth napkins!” or “I’ll super-size that and add a turnover!”). Each calendar year you’d be paying $7,904, a difference of $471. In my world, kids, $471 is enough to cover a car payments so we can drive to that nice dinner (with menus and cloth napkins). Your total interest over the life of the loan will be just over $107,000, a roughly $14,000 difference, or about half-a-car. The total you’ll have paid for your house after 30 years will be around $237,000.

Let’s Drop it One More Half-a-percentage Point, Just For Kicks

Rates change, right? Sometimes unexpectedly. That same cute house at 4% means monthly payments of $621/month, or $7448/year. We’re down $77/month and $927/year with a single percentage point drop. That’s a house payment-and-a-half each year. Total interest over the life of the loan is now down to $93,430 and you’ll have paid $223,430 for the house – about $37,500 less than at 5%.

I know that’s a lot of numbers to throw at you, but I thought it might give us some context. I’m not going to suggest that you freak completely out over a fraction of a percentage point here or there, but wanted to help us better understand those who do.

What Are Mortgage Interest Rates These Days?

Now you’re talking serious mortgage loan statistics. Appreciating rates in 2019 means looking briefly at those same rates historically. Rather than give you a long table full of numbers, let me offer a general sampling from recent decades and discuss general trends. It’s easy enough to look up the details if you’re so inclined and of course your credit is a factor for the rates you’ll pay.

According to Freddie Mac, the average annual interest rate on a 30-year fixed mortgage in 1979 was 11.2%. It rose the next few years, temporarily peaking in 1981 at just under 17%, gradually declining after that but not slipping below 10% until 1991. Keep in mind that these are annual averages – it doesn’t mean that everyone who bought a home received this rate, or that it was the same in March as it was in November. Still, these averages are useful anchors for recognizing clear trends in mortgage loan statistics.

After the 1981 Speak

So, after that spike in 1981 and a very slight reduction in 1982, interest rates for most of the 1980s hovered in the low teens and dropped to a shade over 10% in the final few years of the decade. As we moved through the 1990s, rates swung back and forth in the 7% to 9% range, with the high being 9.25% in 1991 and the low at 6.94% in 1998.

Source: Value Penguin

In Our 21st Century

For the first decade of the 21st century, interest rates continued to lower overall, dropping below 7% and at times slightly under 6%. The housing bubble burst (aka “the subprime mortgage crisis”) which began in 2006 is an important and fascinating topic (discussed quite effectively by The Balance here and here, in this article on Investopedia, and broken down into an impressive timeline by Wikipedia of all places), but you’d never know it just from looking at average mortgage interest rates. That’s one example of why mortgage loan statistics must be considered as a whole; you can’t always count on a single figure to tell you what’s going on.

Mortgage interest rates continued their gradual descent until hitting 4.69% in 2010, 4.45% in 2011, and – goodness golly gracious! – 3.66% in 2012. Rates have been hovering in the upper 3’s and lower 4’s ever since.

What Are Mortgage Interest Rates Going To Do Next?

There’s much discussion currently about what to expect from interest rates going forward. As I type this, it’s seems bound to 4% with elastic – stretching a bit above for a day or two, then a bit below, but snapping back with great regularity. Here’s the thing though – economics are complicated. Economists in general are far better at explaining why certain things have happened than they are predicting what’s coming next. That’s not a dis on the profession – it’s just the nature of the field.

It Does Matter!

Why does that matter for you as you debate whether or not to refinance your house mortgage or try to figure out where to shop for a mortgage? Because yes, it matters what the average rate is today, and what it might be tomorrow, or next week. It matters what the Fed may or may not do, or what the President may or may not Tweet which could dramatically impact the housing market for better or worse on a given day.

But while you should stay aware and try to educate yourself, as you’re doing right now, you can’t control those things. What you CAN control is what you do for your situation. The biggest question isn’t “What’s the average mortgage interest rate?” or any other detail of mortgage loan statistics. The biggest question is “What kind of mortgage interest rate can I get right now for me in my circumstances?” Which part of these mortgage loan statistics will help me make a better decision about my stuff?

It’s Not Just About Interest Rates – A Brief History of Home Prices

As I’m sure you recall from above, interest rates aren’t the only primary factor in mortgage loan statistics. It shouldn’t be a shock to discover that the price of your home is a major determinant of how much you’ll pay on your residential mortgage.

As with interest rates above, I’m going to try to do more than throw some tables at you, although there are some interesting graphs and such out there if you’re so inclined. Instead, let’s step back and talk big picture home prices – which of course are one of the two biggest factors in any mortgage loan statistics. Here’s one from this source that shows the steady increase in the average sales price of houses in the United States from the early 60’s to current day:

US Average Home Sales Price

According to figures from another source the National Association of Realtors, average home prices starting in the late 1960’s rose more or less steadily all the way through 2004.

Fifty years ago, in 1969, the average price paid for a home was $21,300. By 1974, it had risen to $32,000.

In 1979, the average home cost $55,700. By 1984, $72,400. By 1989, it was $89,500.

See a Pattern?

In 1994, the median price for a home purchase was $107,200. You’d think five years later as we were all worried about Y2K bringing about the end of civilization that perhaps housing prices would slow, but such was not the case. By the end of 1999, the average home sale was around $133,300.

The rise continued through 2004 when the average hit $185,200. It appeared it would never stop. That appearance, was, arguably, a big part of the problem. You probably remember the so-called “housing bubble burst” around 2006 (if for no other reason than I mentioned it only moments ago). While the trauma of those years wasn’t reflected in average interest rates, it absolutely dominated housing prices.

Prices began plummeting in 2007 and continued for several years. Again, we’re not talking every house in every market at every price point – but on the whole, it was bad. Bad for sellers, and not even that great for buyers, since you can generally only live in one home at a time and a plunging market is a horrible time for “flipping.”

Have Home Prices Recovered Or Not?

Since 2010, average housing prices have risen in fits and starts, peaking (so far) in 2017 at a little over $330,000. But it’s been messy. And, honestly, even before the crash, the numbers weren’t as clear as they at first seem.

Obviously inflation is a major factor. 1969 dollars simply weren’t the same as 2019 dollars. For sales prior to 2000, adjusting for inflation ruins that nice smooth climb I just described, and instead gives us a nice wave back and forth between approximately $150,000 and $175,000 in 2019 dollars. There’s still a gradual overall rise in housing prices, but it makes more sense – like everything else, prices fluctuated, but not radically. Instead, the growth happens in a more traditional “pendulum” pattern.

US Housing Prices

Even this more gradual rise in mortgage loan statistics is tricky to pin down, however, because the average home size was changing over that same time period. If we figure housing prices by the square foot, it’s not clear they rose in any consistent pattern – not to mention how quickly this complicates the numbers. Plus, if you watch any of those “Love It or List It or Flip It or Screw It” shows on cable, you know that housing prices in, say, Houston, have almost no relation to housing in and around Tulsa. The average size, design, age, and price of a home in San Francisco is inconceivable to the average resident of Tucson.

Remember what I said above about learning from mortgage loan statistics, but not feeling compelled to live by them? This is one more reason why. It’s good to know what’s going on; it’s risky at best to make major decisions based on what’s going to happen next.

Starting in the late 1990s and early 2000s, the rise in housing prices was unmistakable, in real dollars or adjusting for inflation. So is the plummet which began in 2006 and the partial recovery which has been stopping, starting, and generally jerking all over the place since around 2012.

OK, I Give Up. Do I Even Want To Buy (Or Refinance)?

The good news is that all of this other stuff is background. It’s “Previously, on Mortgage Loan Statistics…” It’s presented to inform you, not to dictate your next step. The bad news, I’m afraid, is the same – there are no clear right or wrong answers on this one.

If you’re considering refinancing, there’s no substitute for looking at your options. You’ve probably figured out that I’m a big fan of Investopedia by now (no affiliation), so you might check out their thoughts on this one as well.

If you do decide to buy, you should keep in mind that, while a mortgage has many things in common with any other sort of loan, there are unique features of which you must be aware. First, there are two major steps in the process – pre-approval before you select the home you wish to buy, and final approval once you’ve made an offer on a specific home at a specific price which has been accepted. In fact, it probably wouldn’t hurt for us to step back and do a quick overview of the process from start to finish. You know, just to make sure we’re on the same page.

1.    Find the Right Lender and Get Pre-Approved. (That’s right, FIRST.)

Before you start meeting real estate agents or attending open house events. Also, before you check rates on moving companies or do-it-yourself trailers and trucks. Before you do the paperwork to change school districts. Besides, many real estate agents won’t even start showing you homes until this part is done. Did I mention you should do it FIRST?

As you’re shopping for a mortgage lender and your pre-approval, keep in mind that not all lenders are the same. There’s no law saying a lender has to offer everyone the same terms, same interest rates, or same level of service. You’ll also find they move at very different speeds. Traditional lenders can take weeks or months even to get you pre-approved, while alternative lenders – including those you primarily deal with online – tend to move more quickly. They want your business, and they want you to still be telling your friends and co-workers in six months and three years and ten years how happy you were and are with them. That’s how they stay competitive with your local brick-and-mortar bank down the street.

But I digress…

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2.    Shop for the Right Home

I’m not going to tell you what that means for you in your situation. I will remind you that you don’t have to use the full amount of your pre-approval. It’s not unheard of for lenders to offer you an maximum that looks pretty good on paper, but isn’t practical once your real life kicks back in and you’re making real payments each month. As with anything else, just because you CAN spend up to a certain limit doesn’t mean you MUST. It doesn’t even mean you SHOULD.

3.    Make an Offer. Negotiate as Necessary

This is a large part of why you work with that real estate agent. Hopefully he or she is helping you find just the right home in just the right location, but their real value comes when it’s time to talk numbers. A good realtor can give you a good idea of what’s happening in your market right then – are people buying homes well-under asking price, or is there a bidding war going by the end of the first day on the market for almost anything available? Should you ask for concessions other than price (that washer and dryer look like they’d be hard to move up from the basement and you don’t have either just yet, so maybe…)?

Your realtor is unlikely to tell you exactly what to offer or ask, nor should they. But if they know their job, they know the market and what’s reasonable. They’ll also help you find the gumption to pass on anything not meeting your wants and/or needs.

Sometimes the best thing you can do is walk away and look some more next weekend. The first step towards securing the best mortgage you can is to make sure it’s on the right house. A great interest rate on a place you overpaid for or don’t really like that much is a consolation prize, not a bargain.

4.    The Real Paperwork Begins

Once you’ve made an offer that has been accepted and any other details with the seller have been worked out, it’s time to go back to that lender you hopefully love and do the most paperwork you’ve probably ever done in your life. Just keep reminding yourself that you’re getting that deck in the back that you really wanted, and that your wife likes the mudroom.

The Mortgage Loan Process

If you want to know more about this part of the process, we talked about it in greater detail not so long ago. If you still have questions, feel free to shop mortgage loans here and we’ll see if we can hook you up with a lender that may be able to help you out.

A Very Wise Conclusion

Because you’ve read this far, however, I’ll offer a few bits of wisdom and insight suggested by these particular mortgage loan statistics. Obviously, I think they’re worth considering or I wouldn’t bother – but what you do with them is up to you. That’s the thing about big decisions, whether you’re buying a house, getting married, having kids, changing jobs, moving out of state, or whatever… we gather information and make the best call we can. After that, all we can do is make the best of what comes and not blame ourselves for not always predicting the future perfectly.

Wisdom #1: The value of your home on paper is secondary to the value of your home as the place where you and your family live.

Once you’ve committed to a mortgage, the goal is to pay it on time every month and take care of your new home. Watching for signs our home has gone up or down in value really only impacts our property taxes unless we plan on selling, so don’t get too hung up on paper value if you’re not planning on turning your home into paper money. Go refinish that deck in the back instead – not to raise the resale value, but because you want to sit out there and feel good about it.

Wisdom #2: Keep in mind that when mortgage interest rates are low, housing prices tend to remain high.

Like everything else in mortgage loan statistics, this varies from market to market and even month to month, but it makes sense. Most of us base what we can afford on monthly payments, and we’re more likely to take on larger debt if the interest rate is good, keeping those payments under control (see above). Basic supply and demand, then, says if we’ll pay more for housing, housing prices will go up.

Wisdom #3: Talk it through with a trusted friend.

Don’t ask them what to do. Tell them you need help. Most people love to be needed, especially when it doesn’t cost them money or involve lifting anything. Talk through your thinking process with them and let them ask questions or make observations – “reflective listening,” as it were. This is about you clarifying your thinking; not them injecting theirs.

Mortgage Loans
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Wisdom #4: You don’t know what’s available to you until you ask or apply.

Mortgage loan statistics may be enlightening, but they’re not specific to you. Look into mortgage options, and don’t try just one place; that’s almost recklessly irresponsible. Talk to your local bank or credit union. Explore alternative lenders and their track records. And remember that it’s the 21st century – there are online lenders who want to earn your business. They don’t stay in business if you don’t like their terms or the level of their service. While you’re scrambling to win over the hearts and minds of the local mega-bank, online lenders are working to win over you.

Personally, I like that dynamic much better. That is, in fact, why we do this. No fees, no gotchas – just connections.

Wisdom #5: Learn from the wrinkles, but don’t get bogged down in them.

When you’re done, move forward. Don’t second-guess yourself all day long. It’s rare that there’s not SOMETHING we wish we could redo with the benefit of hindsight. That doesn’t mean we did badly, just that in the rearview mirror every little wrinkle seems so much more obvious.

And now that THAT’S done, maybe you should get started on refinishing that deck. Compared to this, it will probably seem like a breeze.