Buying a home is exciting, but it can also be a little daunting. After all, you’re getting ready to take on a major financial responsibility, and the home buying process can feel overwhelming. We understand. But buying your home doesn’t have to be scary, or overly complicated. The secret is to work with a great team of professionals, know your budget and take time to learn about the fundamentals of mortgages.
Here’s a quick lesson in mortgage terminology to get you started:
These are the fees you’ll need to pay up front (along with your down payment) to secure your mortgage and own your home. These costs include a loan origination fee, prepaid interest, title insurance and the initial deposit and fees for your escrow account (more on that later). Closing costs are typically about 2% to 5% of the loan’s cost.
Your lender will provide documentation to explain each of these costs.
Along with your ratio of debt to income, your employment and the amount of your down payment, your personal credit is a major factor in qualifying for a home loan. It also can affect the rate you’ll pay and how much financing your lender may offer. A credit score of 720 will typically get the best mortgage terms, but credit unions are often able to offer affordable financing for a variety of financial situations.
Making a down payment shows the lender that you have “skin in the game” and will be a responsible borrower. Lenders usually require a down payment of at least 5% of the home’s purchase price, but some lenders (as well as government programs like those of the FHA and VA) allow a lower down payment for qualifying borrowers.
If you have the cash, making a larger down payment could help you get a better rate (and have less principal collecting interest over time).
To ensure your home is covered by insurance and that you’re current on your taxes, your lender will set up an account managed by a third party (your escrow account), which will fund your local real estate taxes and homeowners insurance premiums. Deposits to your escrow account are part of your mortgage payments.
This stands for principal, interest, taxes and insurance. Together, these make up your total mortgage payment. When considering a borrower for a home loan, a lender will compare this total to the applicant’s monthly gross income to make sure they can afford their monthly payments. As a rule of thumb, housing costs should be less than 30% of your monthly income.
Private mortgage insurance (PMI) protects the lender if a borrower fails to pay back their mortgage. Lenders require this coverage for down payments lower than 20% of the homes purchase price (which is why 20% is often considered the ideal down payment). But if you can’t pay that much up front, there’s good news: Borrowers with conventional loans can remove the extra PMI expense once they’ve paid off 20% of the home’s value.
Rate & APR
Your rate is your borrowing cost, expressed as a percentage of the loan amount. Mortgages are often discussed in terms of their APR (annual percentage rate), which factors in fees and other charges to show how much the loan will cost each year.
There are two general types of mortgages: fixed rate and adjustable rate. A fixed-rate mortgage has the same interest rate for the whole term, giving you more consistent monthly payments and the ability to avoid paying more interest if rates go up.
Adjustable-rate mortgages, commonly known as ARMs, typically start with a lower fixed rate for a set number of years (such as five, seven or 10), then adjust periodically after that, based on the market. This option may be more cost-effective for buyers who expect to move or refinance after several years. Be sure to discuss your long-term plans with your mortgage specialist to see what’s right for you.
Each mortgage has a term during which the balance must be paid off (which is called amortization). Terms may be as short as 10 years, but most first-time buyers opt for the popular 30-year mortgage, which spreads out the loan over many months to keep payments lower. Keep in mind, a longer term allows more time for interest to add up.
When you buy your home, the property’s legal ownership (or title) will transfer from the seller to you. In advance of the sale, a title company will perform a title search to confirm the property’s legal ownership, and you will need to buy title insurance to protect you and the lender in case of a dispute over the property. The property’s title is recorded by your local government, and recording fees will be included among your closing costs.
Making Home Ownership Happen
Now that you know the right mortgage terms, get to know the right mortgage team. At USE Credit Union, our experienced Mortgage Specialists are happy to answer any questions you may have about mortgages and ready to guide you through the home financing process.
Learn more and connect with one of our friendly local Mortgage Specialists today.