The Ins and Outs of Home Finance
Purchasing a home is a major commitment. The median cost of homes in the United States now exceeds $300,000. Unless you can come up with that kind of cash, you must borrow to finance a house. The kind of loan you need is called a mortgage.
Home Finance Basics
If you had to repay a $300,000 home loan in just a few years like you do to buy a car, the payments would be huge. Mortgages offer much longer repayment timetables. This keeps payments to a manageable level. The most popular kind of mortgage is a 30-year fixed rate loan. “Fixed rate” means the interest rate remains the same for the life of the loan. You can save on interest by making a 15-year mortgage, but the monthly payments will be higher. A second type of home loan is the adjustable rate mortgage, or ARM. The interest rate can be low to start with. This can keep monthly payment amounts down. However, ARM interest rate may increase. If this happens, payments also increase.
Who Are Mortgage Providers?
Mortgage banks, commercial banks, mortgage brokers and credit unions all originate mortgages. These entities underwrite loans that meet or exceed the parameters that the investor provides. Who is the investor? Mortgages are generally broken into three categories: conventional loans, government loans and non-conventional loans. Conventional loans are underwritten to meet Fannie Mae or Freddie Mac guidelines. This allows the paper backing these loans to be traded in the marketplace with the guarantee that the underlying loan meets their guidelines. Likewise, government loans are underwritten to FHA, VA and USDA guidelines, and that paper can be traded, too. Finally, non-conventional loans are underwritten to meet individual investor (or bank) guidelines. Traditionally, the paper backing these loans is not traded, and the bank underwriting the loan will always service it.
Home Financing Requirements
Prospective borrowers submit a mortgage application to be analyzed by a loan originator. Additionally, you will be asked to provide supporting documentation such as paystubs, taxes and bank statements. Lenders will also pull your credit score. Good credit is important but not essential. Your loan officer should be well trained to quickly analyze various loan programs that meet your income and credit profile.Lenders will also require an appraisal of the property. Oftentimes, you need a down payment, but there are some programs that don’t require that.
Components of a Mortgage Payment
A mortgage payment includes several items. The principal is the money you borrow. The mortgage payment also includes interest. Interest is the cost of borrowing money. In addition, lenders require you to take out home insurance and pay the property taxes on the home.