Home Purchase Mortgage Information
Unless you are the rare person that can afford to purchase a home with cash, you're going
to require mortgage to purchase your new home. So what should you look for in a mortgage? Consider the following:
Rate of Interest
Mortgage Amount
Down Payment Amount
Mortgage Term (in months/years)
Type of Mortgage
Amount of Fees Charged / Closing Costs
Index and Margin (if it is an adjustable rate mortgage)
Monthly Mortgage Payment (including taxes, insurance, etc)
It is very important that you work with a lender that offers a wide variety of options
for each of these factors so that you are ensured a program that best suits your specific needs.
What is a Down Payment?
A down payment is the cash investment that you provide toward the purchase of a home. By investing your own money into the home, you are essentially taking on part of the risk of home ownership. After all, if you lose the home to foreclosure then you will have also lost your down payment (along with any equity you may have had). For this reason, lenders consider home purchases with larger down payments to have less risk than home purchases with low down payments. Most mortgages today require a down payment of at least 3.5% of the purchase price. There are, however, some special government sponsored programs with down payment requirements that are less than 3.5%.
It is important to remember that most mortgages do place some restrictions on down payments. The most common restrictions relate to how long the down payment cash has been in your possession (i.e. 'seasoning of down payment funds') and the source of the down payment funds (are the funds the result of your employment and investment efforts, a gift from a family member, and so on).
Types of Mortgage Loans
- Conventional/Conforming Mortgage: this is the category of mortgages that conforms to the regional loan limits as determined by the Federal Housing Administration. The regional loan limits are usually around $417,000 but may be as high as $729,000 in some areas. These mortgages typically have lower interest rates than non-conforming mortgages.
- Jumbo/Non-Conforming Mortgage: this is the category of mortgages that does not conform to either the loan limits or guidelines set by the Federal Housing Administration. There are a number of reasons such mortgages are considered non-conforming; usually it is because of loan amounts that are higher than the Federal Housing Administration's (FHA) limits or because the qualification guidelines for these loans do not conform to those of the Federal Housing Administration (i.e. non-conforming income documentation, debt-to-income ratios, loan-to-values, and so on). Non-Conforming mortgages typically have higher interest rates than conforming mortgages.
- FHA Mortgage: This is a government insured loan that typically has a low interest rate and requires a low down payment of no more than 3.5%. You do not have to be a first-time home buyer to qualify for an FHA mortgage.
- Fixed Rate Mortgage: This is a mortgage wherein the interest rate does not change at any point during the term of the loan. The mortgage term for a fixed rate loan is typically 15 or 30 years. However, 10 and 20 year terms are also available. Many home buyers appreciate the comfort that comes with a predictable monthly mortgage payment
- Adjustable Rate Mortgage: This is a mortgage where the interest rate may change periodically, usually in relation to an index (such as the Prime Rate, cofi, codi, cmt, libor, or mta) and your payments may rise or fall accordingly. They typically have lower initial interest rates than fixed rate mortgages and are thus easier to qualify. Read more about Adjustable Rate Mortgages HERE
Mortgage Term
The mortgage term is the total length of time, usually in months or years, for which payments are scheduled. The mortgage is considered paid in full or satisfied when the final payment of a scheduled term is made. The most common mortgage terms are 15 and 30 years, though 10 and 20 year terms are also prevalent.
Mortgage Interest Rates
The interest rate is an amount charged by the lender for the use of funds provided to purchase a home. It is expressed as a percentage which, generally speaking, is based on the perceived risk of the lending terms and qualifications (such as a borrower's credit, the value of the home in relation to the amount of the loan, and so on).
It is important to note that interest rates change daily and these changes can be positive or negative. Be sure to pay attention to these changes in order to ensure that you are able to take advantage of the best rates by 'locking your rate' when conditions are most favorable. Locking in a rate is when your lender sets the interest rate for your loan and disallows further changes, regardless of any market fluctuations.
Closing Costs
This is a general term that refers to all costs associated with the purchase and financing of a home. It can include the appraisal, home inspection, credit report, application, processing, underwriting, origination, and other fees. For a more detailed itemization of these fees Click Here.
