Obtaining a Mortgage

A mortgage is a loan that you obtain to close the gap between your down payment and the purchase price of the home you are buying. Regardless of the price range of the home you are looking to purchase, it is unlikely that you have the necessary funds to pay for it in full. Mortgages usually require monthly payments to repay the loan. The mortgage payments are made up of interest (the charge the lender assesses for use of the money you borrowed), and principal (repayment of the original amount borrowed).

Selecting a mortgage to meet your needs ensures financial stability in your new home. Since the mortgage will likely be your largest monthly expense, shopping for a good deal is crucial. Total interest charges over the life of the mortgage typically exceed what you originally paid for your home. Thus, it is extremely important to understand the mortgage options that are available.

There are many choices available in mortgage financing. The two basic types that exist are fixed-rate and adjustable-rate mortgages, which are different on the basis of how their interest rates are determined.

A fixed-rate mortgage is just as the name implies: it is a loan with a set interest rate that does not change for the life of the loan, which is usually a 15 or 30-year term. An advantage to a fixed-rate mortgage is always knowing what your monthly payment will be. Unfortunately, though, you could end up with a high interest rate during a time period when overall interest rates drop. It is possible to refinance your loan should this occur, but to do so is costly and time-consuming.

Adjustable-rate mortgages (also called ARMs) have varying interest rates. The interest rate changes can take place anywhere from monthly, to every 6 to 12 months. The determining factors of ARMs’ interest rates are the overall interest rates, and they can be unpredictable. ARMs can be risky because as interest rates fluctuate, so do your monthly payments. ARMs usually start out with lower rates than fixed-rate loans for at least the first year or two to entice prospective homebuyers. When overall rates decline, people with ARMs benefit from the low rates without having to refinance. When the overall interest rates rise, however, the adjustable-rate loan will likely exceed the cost of a fixed-rate loan considerably.

You may be required to pay points on your loan, which are charges of up-front interest, to reduce the rate of interest on your mortgage. A point is equivalent to 1% of the amount being borrowed. The more points paid up-front, the lower the interest rate on the mortgage, and therefore, the lower the monthly payments will be. Another benefit to paying for points is that they are tax deductible for the year in which the home is purchased.

Loan prequalification and preapproval is a critical aspect of home-buying. After finding the perfect home, signing an agreement of sale, and possibly spending hundreds of dollars on home inspections, the worst thing that can happen is to have your mortgage application declined. A casual discussion with a lender can lead to prequalification. The lender considers the loan amount you can borrow based on financial information you provide. At this point, you will have a reasonable estimation of the amount of a loan you will be approved for, and you can move forward to the preapproval process.

Preapproval is an in-depth analysis of your employment history, earning capacity, assets, and liabilities. Documentation of these items is required for preapproval. While preapproval requirements can be rigorous, house sellers look favorably on prospective buyers who have obtained preapproval on their loans. It gives a buyer an advantage over a competitor bidding on the same property without preapproval, and there is usually no charge from the lender for this process that ultimately ensures your creditworthiness to a seller.