Mortgage Information

The modern mortgage market offers a variety of mortgage loans catering to the needs of homebuyers. The titles and details of these plans can become confusing, especially as new types are introduced continuously. You might not understand all of these loan types, however, if you understand the basic principles that govern all mortgage loans it is a good start.

Basic Principles of all Mortgage Loans

  • The home is used as security to back up the loan. A lender can force sale of the home if the borrower defaults by failing to make scheduled payments.
  • The larger the loan compared to the value of the home, the more risky for the lender and, often, the more expensive the loan will be.
  • Interest earned by the lender is always equal to the periodic interest rate times the outstanding principle balance of the loan. The periodic interest rate is the annual interest rate divided by the number of payments in the year (usually one per month).
  • Initially, the required payment is usually a bit larger than the interest due so that some of the loan principal is repaid with each payment. This process is called Amortization and is why most mortgage loans can be retired when all the monthly payments have been made.

All mortgage loans have one of the following features:

  • Fixed payment and fixed interest rate - fixed rate mortgages
  • Fixed rate but variable payment - graduated payment mortgages
  • Variable rate and variable payment - adjustable rate mortgages

As you learn more about the types of financing available, you will notice that some loans appear to have more favorable terms. That may indicate that those loans are indeed bargains (and it does pay to shop around), but usually it means that those loans could have some features that are less appealing to borrowers. For example, shorter-term loans often have slightly lower interest rates compared to longer-term loans. However, the monthly payment for the same amount of principal will be higher because of the shorter term. Variable rate loans usually have much lower interest rates to compensate for the risk the borrower accepts that interest rates will rise in the future.

Buying a home comes with a lot of different decisions, it is helpful to determine the type of home you'll like and how much you can afford before beginning your search. Contact me and I will help with every aspect of your home buying process, and even help you find a trusted Mortgage Professional. Most lenders allocate approximately 28% of your gross monthly income to housing expenses. Housing expenses includes principal, interest, taxes and insurance (PITI). To get an idea of how much you can afford to pay each month for a home, multiply your gross monthly income by 28%. When coupled with current outstanding loans, the total for your debt should not exceed 36% of your gross monthly income. Some lenders may have more liberal guidelines or loan interest rates which may increase your purchasing power.

Getting Pre-Approved

Most mortgage lenders take the guess work out of applying for a loan by determining the amount you can afford to borrow. They will give you a printed document stating the maximum mortgage amount you qualify for based on your particular finances and income. Mortgage pre-approval establishes your price range and strengthens your buying position by letting the seller know that you have already been approved for the loan. It can also ease time constraints once the purchase agreement is signed between the buyer and seller.

Consider these Scenarios:

You're out looking at homes. Your REALTOR® never mentions that you should get pre-approved and just ballparks what you can afford. You find the "perfect" house, and work out a deal with the seller. Three weeks later, the lender informs you that the house is $10,000 over what you qualify for and does not approve your loan. The seller has already bought another house. You've given notice where you're renting and told all your friends about the great house you were buying. Additionally, there's the money you've already spent on inspections on a house you can't own.
You and your REALTOR® have been working diligently finding that "perfect" home. A new listing comes on the market that's priced right and has got everything you've been looking for. You write an offer. Your REALTOR® takes it to the listing REALTOR® and is informed that another offer is coming in and will have to present both offers simultaneously to the Seller. The other Buyer is pre-approved for their loan. Whose offer do you think the seller will negotiate first?

For help finding financing contact me, I will put you in touch with a trusted Mortgage Professional.