let’s talk: MORTGAGES – WHAY ARE THEY?!
WE ARE TALKING MORTGAGES THIS WEEK! I was recently approached by US News & World Report to talk about an article they put together on mortgages. This is a topic that many of us will have to do some research on at some point in our lives and truthfully, I feel as though I can ALWAYS use a refresher on them as well. So let’s talk about them!
So as we do, let’s talk Real Estate, let’s talk MORTGAGES – WHAT WE NEED TO KNOW…
**Just adding in my usual disclosure here – I am not a licensed mortgage professional or lender. Just sharing what I learned in partnership with U.S. News & World Report**
FIRST THINGS FIRST, WHAT IS A MORTGAGE?
By literal definition a mortgage is, “a legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt.”
In short, a mortgage is a bank loan used to purchase your home. In return for the bank lending you this money, you pay an interest rate and hand over the deed to your house until your loan is paid off. Mortgages are typically paid in monthly installments. Once the home is paid off, the bank will give you back your title and you will officially own the home in its entirety- woo!
OKAY, SO I NEED A MORTGAGE, WHAT SHOULD I LOOK FOR?
There are 5 MAJOR things to look out for here:
(1) Lender
(2) Loan Type
(3) Loan Term
(4) Interest Rate
(5) Fees & Additional Costs
Let’s dive further into each of these loan aspects, shall we?!
RE: Lender
Luckily, there are a TON of lenders to choose from. The below are currently rated the “best” for 2019. I do not personally have mortgages with any of these banks so I cannot opine on any of them, but hey, this is what the people voted for!
Quicken: Top Lender for Customer Satisfaction
Bank of America: Best for 100% Loan-to-Value Options
Guild: Best for Extensive Loan Options
loanDepot: Best Home Equity Lender for Fair Credit
Chase: Top Lender for Adjustable-Rate Mortgages
Veterans United Home Loans: Best for VA Loan Specialization
Fairway Independent: Best for USDA Loans
RE: Loan Type
These can really be categorized into two major buckets; government backed vs conventional.
(1) Government backed
“Government-backed mortgage programs offer guarantees to lenders that reduce their risk and can make it easier for borrowers to qualify for a mortgage.”
We’re looking at 4 main types of government backed loans here.
Government backed loan #1: FHA Loans
The Federal Housing Administration offers loan programs that make it easier for homebuyers to qualify for mortgages. FHA loans can be beneficial for those who may not qualify for a conventional loan.
What do these loans look like?
- Minimum of 3.5% down payment
- Minimum credit score of 500 with a 10% down payment, minimum score of 580 to qualify for the3.5% down payment
- FHA upfront loan fee of 1.75% of the total loan amount
- Annual mortgage insurance for at least 11 years
Interested in a fixer upper?! Make sure to look out for the FHA 203(k) Loan!
You can use these to renovate your home if you find a fixer upper. This loan programs lends you the money for the renovation costs in addition to your mortgage to purchase the home.
Government backed loan #2: VA Loans
This loan program, sponsored by the U.S. Department of Veteran Affairs, is for all of our active-duty members of the military, veterans and their surviving spouses.
What do these loans look like?
- 0% down payment
- Lower interest rate than conventional loans
- No minimum credit score
- HIGHER funding fees. The lower the down payment, the higher the funding fees typically are.
Government backed loan #3: USDA Loans
Also know as the Single Family Housing Guaranteed Loan program. This is sponsored by the U.S. Department of Agriculture.
This program encourages home buyers to purchase in certain rural areas.
What do these loans look like?
- Lower interest rate than conventional loans
- Upfront loan fee of 3.5% of the total loan amount
- Annual fee of up to 0.5% of the unpaid balance
Government backed loan #4: State and Local Mortgage Programs
State and local governments will often have their own mortgage programs to help people buy homes in their respective communities. These programs may be set up to help first-time buyers, encourage buyers in underdeveloped areas or support public sector employees(i.e. firefighters, teachers, cops, etc). You can find these in your area by checking in with your state or local housing department!
Now that we have talked about the government guaranteed loans, let’s move on to the other “major” loan type!
(2) Conventional Mortgages
These are loans provided by your private lenders and are NOT government backed. These loans are typically harder to qualify for because they do not have that government guarantee in place in the event you default on your loan
What do these loans look like? 5% to 20% down payment requirement is typically the norm, although you may able to find a lender that lets you go as low as a 3% down payment. Although, know that if you put less than 20% down, you will most likely need to buy mortgage insurance. This can be $$$.
RE: Loan Term
Your loan term is the length of your mortgage. We typically see 15 or 30 years mortgages for residential purchases. It is important to pay attention to your loan term because this will significantly impact the amount of your monthly payment.
What to know here? A longer term (aka 30 years) means lower monthly payments but it also means you are paying more interest over time!
Let’s look at an example
Say you have a $200,000 mortgage – what would that look like over 15 year term vs a 30 year term?
15 Year Term
Interest Rate: 3.5%
Monthly Payment: $1,430
Total Interest Paid Over 15 Years: $57,358
30 Year Term
Interest Rate: 3.5%
Monthly Payment: $898
Total Interest Paid Over 15 Years: $123,312
FYI, that 30 year interest total is more than 2x the 15 year term…
RE: Interest Rates
What we want to look at is the two types of rates AND how YOUR rate is determined.
What are the two types of interest rates?
Let’s start with looking at two main types here; fixed rate vs adjustable rate.
(1) Fixed Rate
With a fixed rate, your interest rate is the same throughout the entire loan term, and your monthly payment will remain the same throughout the entire duration of the loan.
What to know here?
- Fixed rates are higher than the adjustable rates because the lender will not be able to increase your interest rate later.
- Higher monthly payments (when compared to the adjustable rate initial payments).
- You can’t benefit if market interest rates fall unless you refinance, which means more paperwork, more fees, the whole works.
(2) Adjustable Rate
An adjustable rate can change over time depending on market interest rates. These adjustable rate mortgages, also know as ARMs, are based on a benchmark rate, and when this benchmark rate goes up or down, so does your ARM payment. That being said, you won’t see your rate change every single day. There are rules as to how and when your rate may change.
What to know here?
- How to read your ARM rate. Let’s say you have a 5/1 ARM, you would keep the same rate for the first five years and adjust only once per year after that.
- There are caps on how high these interest rates can go. Each adjustment has a cap and the loan has a lifetime cap on how much your rate can increase overall.
- It is important to calculate rate for your ARM under the lifetime cap. This will help you determine your worst case scenario for monthly payments.
Now that we have discussed the type of interest rates, let’s talk about how YOUR specific rate is determined.
Lenders consider a wide range of factors when determining your personal interest rate including your credit, loan term, home price, property type and down payment, and whether it’s a fixed- or adjustable-rate mortgage.
Want to know some general rules of thumb on these?
- Government backed loans typically have lower interest rates than conventional loans BUT can have higher fees.
- Single family homes typically have lower interest rates than multi-families as they are deemed less risky.
- The more money you borrow, the higher the rate.
- A longer loan term typically coincides with a higher interest rate.
- For a fixed rate mortgage, you can lower your interest rate by paying mortgage points upfront. Each point costs 1% of your total loan amount. The interest rate reduction depends on the lender, but it is common to lower your interest rate by 0.25% in exchange for every point purchased. It makes sense to do this if you plan to be in your home for a long period of time, it will save you money in the long run.
- For an ARM, you can lower your interest rate by paying mortgage points upfront BUT the rate is only discounted for the first 3-5 years, depending on the term of the ARM. Each point costs 1% of your total loan amount. The interest rate reduction depends on the lender, but it is common to lower your interest rate by 0.25% in exchange for every point purchased.
- Interest rates can vary by state, city & county.
- When assessing your interest rate (the % of the loan your paying for borrowing the money) it is important to also take note of the Annual Percentage Rate aka your APR. Your APR will show you your total interest rate + any upfront fees you may be paying. It gives you more of a well rounded picture when comparing interest rates from different lenders.
RE: Fees & Additional Costs
Always important to budget for the following:
- Property taxes
- Homeowners insurance
- Association fees (if applicable)
- Private mortgage insurance (if applicable)
- Mortgage closing costs and underwriting fees (vary by loan type and lender)
WHEW, TODAY WAS A LONG ONE. THE GOAL WAS TO COVER ALL OF THE GENERAL INS & OUTS OF MORTGAGES. NEXT WEEK, WE WILL TALK ABOUT THE PROCESS BEHIND APPLYING FOR A MORTGAGE.
YOU CAN DIVE INTO THIS FURTHER BY CHECKING OUT THE US NEWS & WORLD REPORT WEBSITE HERE.
Feel free to comment on the blog post and let us know what YOU think!
Happy Wednesday!
Erin
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Data Sources for Today’s Content:
Me – this is based on my own personal experience!
https://loans.usnews.com/mortgage-lenders#usnews-survey
