A home mortgage is the largest debt some people will incur in their lifetime, so understanding all the variables before closing is extremely important. Here are the basics:
Fixed-rate mortgages lock in the current mortgage interest rate for the duration of the loan. Ten-year and 15-year interest rates are often lower than 30-year rates.
Adjustable-rate mortgages (ARMs) have low introductory rates. After the period expires, the interest rate adjusts to reflect current rates. ARMs vary in years before the interest rate adjusts; sometimes the rate is fixed for one year, sometimes it’s 10 years. For example, a 5/1 ARM will remain at a low, fixed rate for five years, and afterward adjust annually.
Balloon and interest-only mortgages have low introductory payments followed by a large payment after a set number of years. If buyers do not plan for this, the final payment could be difficult or even impossible to make.
Government-sponsored mortgages, such as FHA and VA mortgages, have reasonable interest rates and low down payment options
What Is a Preapproved Mortgage?
Getting preapproved is a smart move to make, as it shows sellers a loan officer has reviewed your basic financial information and you are tentatively qualified to borrow a set amount of money. This shows you are a serious buyer when making an offer on a home. The preapproval process is preliminary and not subject to the scrutiny of actually qualifying for a mortgage.
How Do Mortgage Interest Rates Affect Me?
The mortgage interest rate is the most important component of the loan, since even one percentage point can mean a payment of hundreds of dollars more or less each month and thousands of dollars over the life of the loan. Mortgage interest rates are based on the economy, the borrower’s credit score and assets, the Federal Reserve rate, and the secondary mortgage market.
What Are Discount Points?
Borrowers can purchase discount points to lower the interest rate, with one point usually equaling about 1% of the loan’s amount. For example, two points on a $100,000 mortgage would cost about $2,000. If the original interest rate was 5%, the new rate would be about 4.5%, so purchasing the points would save the buyer $10,000 over the life of the loan. This makes sense for buyers who plan to stay in their home for a long time.
What Is a Lien?
A lien is an unpaid fee, such as a second mortgage, insurance, or taxes. Sellers must remove any liens before the mortgage company will close on the property. However, homes in foreclosure sometimes have unpaid liens, which would force the borrower to pay off any fees before purchasing the home.
How Does the Secondary Mortgage Market Affect Me?
Since mortgages are commodities with associated risks and rewards, lenders often sell them to other lenders. This selling and reselling does not affect the loan agreement in any way.