4 Financial Concepts to Understand About Mortgages
The Mortgage Reports defines a mortgage as a loan used to buy a home. Since the majority of home buyers rarely have the cash necessary for this large purchase, a mortgage makes home ownership possible for consumers who can come up with a satisfactory down payment and who can show they have good credit and sufficient income.
Qualifications to Get a Mortgage
Depending on the loan you are interested in, there are different qualifying requirements. Underwriters evaluate a borrower’s loan package largely based on whether they believe the borrower has the ability to pay the loan back consistent with the terms of the loan. That’s why a borrower’s credit score, earnings and assets are key criteria that are examined to determine if a borrower qualifies for a loan approval. Job stability and credit history are carefully evaluated. Debt ratios must be low and credit must be acceptable.
Granted, there are some loans that have less stringent requirements than others. Generally, lenders are willing to make loans to higher-risk borrowers based on assigning higher interest rates to compensate for the greater risk assumed.
Different Loan Programs
There are different types of loans available. The most common loan is the 30-year fixed which means paying equal monthly payments for 30 years. A 15-year mortgage is the same kind of loan, except that it is paid back over the shorter term of 15 years. This shorter loan is often preferred by borrowers who can afford the higher payments because it effectively reduces the amount of interest paid.
Investopedia reports that adjustable-rate mortgage (ARM) loans are attractive to borrowers because they offer lower interest rates. The downside associated with these loans is that they are considered to be higher-risk loans by many borrowers since the interest rate fluctuates based on the economy and certain market indices. Depending on the type of adjustable rate loan, the rate can adjust at different intervals as described in the loan agreement. Many borrowers will apply for an ARM loan to benefit from lower payment requirements in the beginning months with the purpose of refinancing in a year or two.
Loan Costs and Points
Closing costs are essentially the cost of borrowing the money. Depending on your credit history and other credentials, loan costs can vary widely. Bankrate reports that closing costs typically average between two and five percent of the loan amount. Usual costs associated with a mortgage include an application fee, origination fee, appraisal fee, title and research fees, document prep fee, underwriting fee, and credit report fee.
It is important to know that lenders are required by law to provide you with an estimate of your closing expenses so that you can review them. This disclosure is due to a borrower by three days before closing at the latest.
When a discussion of closing fees arises, the term point is used. Forbes defines a point as a percentage point of the loan amount. For example, a person who pays 2 points for a loan in the amount of $200,000 is paying $4,000 in points for the loan.
Interest Rates
The interest rate charged on the loan is determined by the borrower’s creditworthiness and the type of loan. Interest rates changes with the economy, since the cost of money is a function of supply and demand. Borrowers should shop for the best loan rates. It is important to remember that the loan rate is not guaranteed until it is locked in with the lender.
Borrowers can lock in a loan rate for a period of 30 to 90 days typically. What that means is that the borrower is entitled to that rate as long as the closing takes place within that time frame. This can be especially valuable for a borrower when rates are on the rise.
Mortgage loans can seem complicated. That is why it is important to do your homework before moving forward with any particular mortgage. Shopping different lenders for the best rates and then locking the best rate in makes sense for home buyers. It is also important to compare costs between lenders.
