Mortgage Basics

You’ve been saving up for a long time, you know how many bedrooms you want, you know what your ideal backyard looks like, and you can’t wait to meet your future neighbors.

You are prepared to purchase your first home.

As exciting as this time in your life can be, it’s important to remember that this is a very big decision. Before you take out a loan, you need to be sure that you understand the basics of the mortgage process.

Qualifying and Getting Approved for a Mortgage

Pre-qualification

If you’re going to start looking at houses, you will need to have a price range in mind. This is where getting pre-qualified comes in.

A loan officer can briefly review your information including debt, income, and assets to give you an idea of how much you will qualify for. Usually, this is a quick and simple process that can be done in person or over the phone.

Pre-approval

Just because you pre-qualify for a loan amount doesn’t mean that you will actually be able to get a mortgage for the full amount.

If you want to know exactly how much money you have to spend, you need to get pre-approved. A pre-approval means that the lender collects and thoroughly reviews all of the necessary financial information in order to commit to a specific loan amount.

Types of Mortgages

Fixed-rate mortgages

A fixed-rate mortgage means that the interest rate and mortgage payments are determined when the mortgage is taken out and never changes. These are the most popular types of mortgages and are generally 15-year and 30-year loans.

By spreading out the loan over a long period of time, 30-year fixed rate mortgages provide the borrower with lower payments.

While this may free up money for the borrower to use for other things, these loans usually come with a higher interest rate than 15-year fixed rate mortgages.

In addition, the borrower will pay significantly more interest throughout the life of the mortgage and it will take longer to build equity in the home.

Fifteen-year fixed-rate mortgages, on the other hand, offer lower interest rates but higher monthly payments in order to pay off the balance in half the time.

By cutting the loan term in half, a higher percentage of each payment goes towards the principal, helping the borrower build equity faster than a 30-year fixed-rate mortgage.

Adjustable rate mortgages (ARM)

If you’re in a position where you need low monthly payments early in the loan term, an adjustable-rate mortgage may be a good option.

Interest rates start low and increase over the life of the loan based on market interest rates. The borrower takes on a degree of risk with these types of loans as interest may fluctuate.

Components of a Monthly Mortgage Payment

Principal

The principal is the full amount borrowed to purchase a home. A borrower can reduce the amount of money he or she is borrowing by putting down a larger down-payment.

The quicker a borrower pays the principal, the more equity they have in the home.

Interest and points

Mortgage interest is the fee that the lender requires the borrower to pay in order to borrow money. In addition to interest, some lenders also charge points.

A point is equivalent to 1% of the total balance borrowed.

Property tax

In order for a community to provide public services such as roads, schools, and parks, it must require property owners to pay property tax.

This tax is based on a percentage of the value of your home.

Insurance

There are two basic types of insurance that homeowners will pay each month for their home.

The first is property insurance, which protects you against risks including fire, weather damage, and theft. Depending on the risks associated with your homes location, you may need to purchase fire insurance, flood insurance or earthquake insurance, among others.

The second type of insurance you may need for your home is private mortgage insurance (PMI). You may be required to purchase private mortgage insurance if you pay less than a 20% down payment on your home. This limits the risk to the lender, in case the borrower defaults on their loan.

Get Started!

Now that you have a basic understanding of mortgages, it’s time to start looking for your new home! If you’d like to learn more about mortgages and the home-buying process, feel free to reach out to a mortgage specialist at a First Bank branch near you.