Home Mortgage Loans

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Home Loans
Gearing up to purchase a home is an exciting time in anyone’s life, although the process can also be stressful. From picking the right lender to underwriting and closing costs, getting a loan to buy a home is a huge undertaking. With the cost of real estate skyrocketing, your home is probably going to be…

Gearing up to purchase a home is an exciting time in anyone’s life, although the process can also be stressful. From picking the right lender to underwriting and closing costs, getting a loan to buy a home is a huge undertaking.

With the cost of real estate skyrocketing, your home is probably going to be the biggest purchase you’ll ever make as well. The more you understand when it comes to the terms and types of home loans, the easier your decision will be to find the one that’s right for you.

Whether you want a house with a white picket fence or a high-rise condo, here’s what you need to know to make your dream a reality.

How Does A Mortgage Work?

Home LoansHome loans let you borrow money to purchase a property. You can apply for a mortgage with most major banks, credit unions, and mortgage companies.

When you take out a mortgage to purchase a home, you are ultimately using the home as collateral. This provides some security to your lender because it allows them to foreclose on your home if you fall behind on your payments.

When you’re ready to start house shopping, the first step is getting pre-approved for a home loan. This step also lets you know how much a lender will let you borrow or if your loan may require a co-signer.

However, you don’t have to borrow every penny a lender qualifies you for. Always keep in mind you know your budget better than anyone. Just because the bank thinks you can afford a $350,000 house doesn’t mean you can.

There are certainly advantages to owning a home and building a stronger credit history. Paying off your mortgage can also be a great step towards building a larger investment portfolio. There are several methods to pay off your mortgage earlier which could allow you to free up additional income for investing.

Understanding the Language of Home Loans

Buying a home requires you to learn new lingo. If you aren’t familiar with these common terms or don’t know what they mean, it can make the process more difficult than it already is.

Plus, this is your money on the line. Any mistakes you make could cost you a lot of cash.

Here are the main mortgage terms you need to know and understand:

  • Annual Percentage Rate – Representing the true cost of borrowing money to buy a home, the annual percentage rate or APR is the interest you’ll pay. The lower the rate, the less interest you’ll pay over the duration of the loan. Side note – a lot of people think about refinancing their mortgage to lower their rate, but this is not always the best idea.
  • Earnest Money – Once you find a home you like, giving earnest money shows you’re serious about wanting to buy it. Usually, earnest money works out to around 1% to 2% of the home’s purchase price, but it can be a lot more. This money goes into escrow until it is applied toward closing costs or your home’s down payment.
  • Title Insurance – Title insurance makes sure there aren’t any unpaid taxes, pending legal action, errors, fraud, or undisclosed heirs that might have a claim to the property.
  • Closing Costs – The money you need to bring with you to close on your home loan is known as closing costs. These fees average out to around $7,000 in the U.S., and can include title insurance, home inspection fees, appraisal fees, commissions for real estate agents, transfer taxes, and recording fees.
  • Underwriting – Underwriting is the process lenders use to approve or deny your mortgage. During this process, they review your loan application, credit history, and the value of the home.
  • Escrow – Your escrow account acts as a neutral third party that is responsible for handling exchanges of money between the buyer and seller. Money that’s put toward the purchase of the home before closing, such as earnest money, is put into escrow.
  • Mortgage Insurance – To protect the lender against financial loss, you’ll usually pay private mortgage insurance if you don’t put at least 20% down when buying your home. Once you build up enough equity, you may be able to have PMI removed from your loan.

Different Types of Home Loans

Not all home loans are created equal. Depending on your budget, credit score, and down payment, one might work better than another. Some providers, like Mr. Cooper, cater to those who have a 620 score and higher, for example.

Most mortgage products come with an interest rate that’s fixed or adjustable and a term that spans from 5 to 30 years.

Fixed Rate Mortgage

Offering the most consistent monthly payments, a fixed rate mortgage has the same interest rate for the duration of the loan. This is the most popular type of mortgage since it’s easier to manage your money when you can predict your house payment.

Variable Rate Mortgage

A variable rate home loan has interest that fluctuates. As rates change, your monthly payment can swing up or down with little warning.

Variable rate mortgages are sometimes called adjustable rate mortgages, or ARMs. This option can be cheaper for some borrowers, especially if you’re planning to live in the house for a short time.

Conventional Mortgage

When buying a home, conventional home loans are a popular choice. They aren’t backed by the government. Instead, private lenders provide conventional mortgages for purchases of primary residences, secondary homes, or investment property purchases.

A down payment of as little as 3% is possible. To qualify, you’ll need a higher minimum credit score than you would with an FHA, VA, or USDA loan.

FHA Loan

The Federal Housing Administration (FHA) opens up the opportunity for homeownership to people who might not qualify for a conventional home loan. The government backs FHA loans, and they have lower down payments and closing costs. This can help if you have a lower credit score.

VA Loan

If you’re a Veteran, on active duty, or are a National Guard or Reserve member, a VA loan could be just what you’re looking for. VA loans have come with favorable terms such as no down payment and no requirement for private mortgage insurance.

USDA Rural Development Loan

Perfect for rural borrowers with a low-to-moderate income, a USDA loan can help people buy a primary residence in qualifying areas. Income requirements vary by location and the number of people in your household, and you have to buy a home in a rural area to qualify.

How to Get Mortgage Quotes Online

With so many lenders, it’s hard to know where to start. The process will run more smoothly if you check out a few options and compare them based on their terms and interest rates.

Asking family and friends and relying on industry reports, such as the 2018 Primary Mortgage Servicer Satisfaction Study from J.D. Power, can give you insight, too.

No matter which you choose, most lenders will supply you with a free no-obligation mortgage quote if you answer a few simple questions.

Buying a home can be a fantastic experience if you weigh each option before jumping in. The decision you make now can affect you for the next 15 to 30 years.

Whether you’re looking for a conventional loan, an FHA loan, or another type of mortgage, comparison shopping is key.

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About Ryan Guina

Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.

Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.

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