Mortgage Loans 101

Your ultimate guide to Mortgage Loans


1. What is a mortgage loan and how do I acquire one?

A mortgage is a type of loan used to purchase real estate property. Since many homebuyers cannot pay cash for a house, they apply for a home loan with a mortgage lender. The lender will review your credit report and verify your income to determine how much you can afford. The majority of mortgage loans require a down payment. You can choose between different mortgages and mortgage depending on what works best for your situation.

2. What are a few things to keep in mind when choosing a good mortgage lender?

Buying a home is one of the biggest financial decisions you'll ever make. Mortgage rates and loan requirements vary from lender to lender, so it is important to shop around and compare loans with two or three different banks. When choosing a good lender, consider how fast the bank responds to your application and questions. You can also read profiles online to see what other people have to say about the bank. Once you receive quotes, compare interest rates, terms and other fees.

3. What are the different types of mortgage loans?

There are a variety of mortgage loans available to homebuyers. You can choose between a fixed-rate or an adjustable-rate mortgage. With a fixed-rate mortgage, your interest rate and payment remains the same for the entire loan term. An adjustable-rate mortgage has a fixed-rate for the first few years. After the initial fixed-rate period, the rate adjusts every year. Different mortgage programs include conventional, FHA, USDA and VA loans.

FHA loans
An FHA loan is a mortgage insured by the Federal Housing Administration. Borrowers with FHA loans pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.
USDA loans
These are USDA loans that are aimed at aiding homebuyers in rural and disadvantaged areas. The program offers low interest rates and no down payments, designed to "improve the economy and quality of life in rural America."
VA loans
Guaranteed by the U.S Department of Veterans Affairs (VA), this loan offers long-term financing to eligible American veterans or their widowed spouses.

4. How does my credit score affect my loan qualification?

Your credit score could determine whether you're eligible for a mortgage loan. When you apply for a mortgage, the lender will pull your credit report and check your credit history and score. Getting a mortgage requires meeting the bank’s minimum credit score requirement. This requirement varies depending on the type of mortgage loan.

5. How is my interest rate determined?

Interest is the fee paid to a mortgage lender for the use of their funds. One of the biggest factors that affect your interest rate is your credit score. Borrowers with higher credit scores tend to receive lower mortgage rates than those with lower credit scores. Lenders also take other factors into consideration when determining your rate, such as the length of your loan term, the type of property and the loan-to-value. The lower your loan-to-value and mortgage term, the better your interest rate. Typically, loans for a primary residence have a lower interest rate than loans for an investment property.

6. What are "points" and are they worth purchasing?

Discount points are fees paid to the mortgage lender at closing in exchange for a better mortgage rate. A lower mortgage rate can reduce your monthly mortgage payment and help you save money over the life of the loan. Discount points may be worth the cost if you need a lower mortgage rate, and if you can afford to pay higher closing costs.

7. What’s the difference between an interest rate and APR?

The terms "interest rate" and "annual percentage rate" are sometimes used interchangeably. But while both are expressed as percentages, there are differences between the two. Interest refers to the cost paid to your mortgage lender annually to borrow funds. Interest does not include other fees you pay for a loan. The annual percentage rate (APR) refers to the total cost of your mortgage loan on an annual basis. APR takes into account the cost of mortgage insurance, interest, closing costs, discount points and origination fees.

8. What are the best ways to save/budget for a mortgage loan?

Buying a home involves budgeting and saving up for mortgage-related expenses, such as the down payment and closing costs. Once you have an idea of how much you need to save, adjust your budget in order to spend less than you earn. For example, you can cut spending in certain categories, or downsize before a purchase. Automating your savings can ensure you’re depositing money into your account every month. You can also maximize your savings efforts by saving 100% of windfalls you receive, such as gift money, work bonuses, and tax refunds.

9. Can I finance my rental property?

Getting financing for a rental/investment property is slightly harder than getting financing for an owner-occupant property, but it’s not impossible. From a lender’s standpoint, investment properties are riskier than other types of properties. Since mortgage insurance does not cover investment properties, you’ll also need to put down a down payment.

10. What are some helpful tips to ensure I can repay my loan?

A mortgage pre-approval determines how much you can afford to spend on a property, but you don’t have to purchase a property at your max budget. To ensure you can repay your mortgage, don’t borrow more than you can reasonably afford. It also helps to have an emergency fund with two to three months’ worth of mortgage payments. Limiting other types of debt (auto loans, credit cards, personal loans) also makes it easier to manage a mortgage loan.

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