If you’re a new homebuyer and don’t know the first thing about securing a house mortgage, you likely have a long list of questions.
Let’s start by breaking down the basics: What is a mortgage?
By definition, a mortgage is a real estate loan that covers the cost of buying a home. The loan, extended to you by a financial lender, such as a bank or credit union, makes it possible to purchase real estate with borrowed money, using the property as collateral. As you pay off the mortgage, you’ll build equity in the property. Once you accrue enough equity, you can often use the value of your home to finance other expenses through either a home equity line of credit or home equity loan.
For many, owning a home represents the American dream. Securing a house mortgage may be one of the necessary steps toward realizing that dream, as most people who buy a home can’t afford the full cost out of pocket.
Typically, borrowers have 15 to 30 years to pay back a standard mortgage loan, and it accrues interest during that entire period of time. Standard mortgages, including fixed rate and adjustable rate mortgages, require borrowers to pay interest over the life of the loan. If for any reason you stop repaying your mortgage, a lender can repossess the property.
Owning a home also helps build personal wealth as a long-term investment. Once you pay off your mortgage, you’ll own an asset that’s likely appreciated in value since you purchased it — particularly if you’ve improved the property over the years.
By definition, mortgages vary significantly, depending on the length of the loan and correlating interest rates, along with what percentage of the home price you can afford to invest toward a down payment. While interest rates largely depend on a borrower’s financial standing, the average rates available at any given time tend to fluctuate according to financial market conditions.
Depending on the length of your mortgage term, you might need to pay private mortgage insurance (PMI). You should also factor in property taxes and homeowner’s insurance when calculating how much you’ll owe each month.
A breakdown of various mortgage definitions
Now that you understand what a mortgage is, let’s review the variety of home loans available. Whether you’re interested in a standard mortgage loan or you’re hoping to qualify for government assistance, the following are the main types to consider.
- Adjustable rate mortgage: This loan starts with a lower interest rate for the first few years. It increases after a predetermined time period, based on market indexes.
- Fixed rate mortgage: The interest rate does not vary over the life of this type of loan.
- FHA loan: A Federal Housing Administration (FHA) loan requires a down payment as low as 3.5%, making it an attractive mortgage option for first-time homebuyers with little means for a down payment or those who show a spotty credit history.
- USDA loan: U.S. Department of Agriculture loans are designed for low- to average-income families in rural areas. If you qualify for a USDA home loan, you can secure financing with no down payment, reduced mortgage insurance rates, and below-market mortgage interest rates.
- VA loan: If you’ve served in the U.S. military, a house mortgage loan through the Department of Veterans Affairs allows you to secure a very competitive interest rate with no down payment, no credit score threshold and no mortgage insurance requirements.
It’s important to note that many homebuyers won’t qualify for government-backed loans. Most homebuyers will end up securing a standard mortgage, such as a fixed or adjustable rate loan.
Five house mortgage takeaways
- When to get a mortgage: Lenders suggest you should shop for a house mortgage before you start hunting for a home. Getting pre-approved before searching for a home can give you leverage in negotiations and confidence knowing how much you can realistically afford to spend.
- Where to get a mortgage: Your local bank provides a good starting point. Non-bank lenders tend to work with borrowers who carry riskier profiles. Mortgage brokers often work with different lenders to identify the best fit based on your situation, but often charge a fee based on a percentage of the loan or receive commission from the lender you choose.
- What standard mortgage payments include: If your mortgage has an escrow account, each monthly payment likely includes the principal, interest, taxes and insurance.
- How to apply for a house mortgage: When you’re ready to apply for a mortgage, loan officers will need copies of your recent paycheck stubs, tax returns and current bank account statements. We recommend getting pre-approved online to improve your negotiation power and ensure you’re ready to make an offer the minute you discover your dream home.
- Why track mortgage rates: Locking in a lower mortgage rate means saving significantly on your home loan, which can equate to several thousands of dollars over the life of the mortgage loan.
Are you interested in learning more about securing a home loan? Reach out to one of our lending experts today to learn more about your mortgage options.
