Mortgage Loans: The Basics
Everybody’s dream is different and there’s no one-size fits all mortgage solution for everybody. You may prefer a shorter term loan with bigger payments, or a longer term loan where you pay more interest over time but the monthly payment is lower. Each mortgage agreement has its own pros and cons and it’s up to you to weigh it all before you sign on the dotted line and get the keys to your dream house. Buying a house is the biggest purchase most homeowners make, so here are some insights to guide you and offer you some peace of mind.
How to Find the Best Lender
Learning the ropes of what you are looking for can help you narrow down the various mortgage lender options. Examine your own requirements to narrow down the pool, and read up about the lenders’ reputations, rates and service. Check the following:
Compare the types of lenders
Before you try to tackle the lending world, get some intel. Figure out all the different types of lenders you can access - be they online lenders, your local bank branch, or a credit union. What are the pros and cons of each style lender and what makes you feel the most comfortable.
Look at reviews for the various lenders and compare the average interest rates and APRs for each lender and see if you can get some interim quotes online which you can then take to your chosen lender for negotiation.
Get to know your budget and credit score
Once you’ve gotten some general numbers from lender reviews, take some time to play around with online mortgage calculators to get an idea of what type of property and terms you can afford and what your personal rates will look like. Know which lenders will offer you what you’re looking for per your credit history.
Consider customer service access
Think about what kind of customer service will make you comfortable and give you the assistance that you need. Will you want a personal agent or 24/7 chat? Are you comfortable entirely online or would you prefer a person to talk to face to face? Top mortgage companies offer a wide range of contact options, hours and locations.
Improve your credit
If you’re having a hard time getting approved by the best mortgage lenders, try and find ways to improve your credit score by paying off outstanding debt if possible so that you can try again in the near future. This will not only free up money for a down payment, it will also tell lenders that you are a secure borrower and this can help you get better terms for your mortgage.
What are the Top 3 Mortgage Companies?
- Minimum Down Payment: 0%-20% minimums based on loan type
- Minimum Credit Score: 500+
- Featured Loans: FHA, USDA, VA, jumbo, conventional
- Repayment Terms: 10-,15-, 20-, 30- years fixed-rate, 5/1, 7/1 ARM
An industry leader in online lending, LendingTree has helped countless people receive all types of loans. The company is not a lender, but it facilitates loans with all types of lenders so you can make them compete for the best deal. With LendingTree you can attain 15-year and 30-year fixed rate mortgages, and receive 30-year fixed rate mortgages with APRs as low as 4.18%. 15-year mortgages can reach APRs as low as 3.75%.
The company facilitates a wide range of loans including home purchase and refinance with no hidden fees and can provide you with a free credit score check. LendingTree is especially good for when you’re learning the lay of the land and you’d like to compare multiple offers at the same time.
- Minimum Down Payment: As low as 3.5%
- Minimum Credit Score: 630+
- Featured Loans: VA, FHA, HARP
- Repayment Terms: Fixed terms of 15, 20, and 30 years
J.G. Wentworth has been in the mortgage business for more than 20 years and has helped all types of customers improve their access to funding. Because the company has a broad range of fixed rate options, including 15-, 20-, and 30-year mortgages, it’s a very sound choice for customers who would like a predictable, steady monthly payment with good terms. The company also offers a variety of adjustable rate mortgages - including 5-, 7-, and 10-year options, and refinancing options. It also accommodates federal programs like FHA and VA loans.
One note though - you must have a credit rating of at least 620 to get a mortgage from J.G. Wentworth.
- Minimum Down Payment: 0%-20%
- Minimum Credit Score: 620+
- Featured Loans: VA, FHA mortgages, HARP refinancing, traditional fixed rate
- Repayment Terms: 15- or 30-year fixed-rate, 5- or 7-year ARM variable rate
If you love all things digital, Rocket Mortgage may be just the right lender for you. It is a highly-advanced and sophisticated mortgage platform that you can access seamlessly from your mobile device at any time.
The company is run entirely online and the application process is easy and quite fast. With Rocket Mortgage you can find 15- or 30-year fixed rate mortgages and 5- or 7-year adjustable rate mortgages. The company also accommodates federal programs like FHA and VA loans, and can secure loans with a minimum down payment of 3% and requires a credit score of 620 or higher.
With Rocket Mortgage you can get information about the loan you’ll qualify for within minutes, but if you really enjoy or need the in-person experience of meeting with a loan officer, then it may not be for you.
How to Apply for a Mortgage
Think of a mortgage like this - it’s your chance to buy and own property that would be unattainable as an up front purchase and to build equity and value in that home. You’ll need to show that you have the financial means necessary to make the payments, but you don’t need to pay the value of a home in cash, allowing you to afford the home of your dreams through financing.
Step 1: Choose a lender
When going through the application process, don’t limit yourself to just one lender. Compare mortgage lenders and speak with number of representatives so that you can see who offers the best deal and customer service that suits your needs. In addition, once you have an idea of what to expect from lenders, you’ll have a better idea if potential lenders are giving you a good deal or not. Mortgage quotes should compare, and rates should be in the same range, but you will recieve a range of mortgage offers from different lenders and it's great to have the means to negotiate and find something you're happy with.
The U.S. economy has been steadily expanding for the last 10 years, and with more millennials beginning to buy their first homes, this means a strong market. It's good to know though, that rates have been rising through spring 2018. Since 2009, rates have dropped to historic lows, but there's no way to know what the market will bring. Shop around for your mortgage to get the top rates.
Step 2: Show your sources of income by supplying these documents:
- Bank statements, including any investment accounts
- Private and business related tax returns
- W2 Tax forms from recent years
- Your monthly pay stubs
Step 3: Prioritize the terms that work for you
Some people are most interested in keeping their monthly payments low, while others are interested in making sure their payments don’t fluxuate and they’ll know what to expect for the years to come. Still others look toward paying off their mortgage quickly and building equity in the home. Think about what you need and which terms might be to your advantage.
What to Look for When Choosing a Mortgage
Take a deep breath and kick back for a second. Signing a mortgage, especially if it’s the first time you’re buying a home, is one of the biggest financial decisions you can make in your life and it’s not something you should rush into. You can relax though, knowing that you’ve done your homework.
Bigger payments or more interest?
One of the central questions when considering any mortgage is length of term versus size of payments. If you put down a bigger down payment and agree to bigger payments over a shorter loan term, you will pay less interest over the lifetime of the loan. That said, you will also have a higher monthly payment, so make sure this is something you can keep up with. The central question in this calculation is whether or not you’d prefer to pay less interest over the loan term, or would rather have somewhat more interest over a longer term, in exchange for a monthly payment that’s easier to make. This is a decision only you can make, and one that’s best done after taking a comprehensive look at your finances, long term plans and the mortgage lenders available.
Fixed vs Adjustable rate mortgages
With a fixed rate mortgage, the monthly payments are locked in for the entire loan term, which can help you plan your month-to-month expenses. A variable rate mortgage can adjust in keeping with changes in mortgage rates, potentially saving you money on the interest during the repayment period. Consider which is best for you, and don’t rush it.
Processing fees and penalties
Will you have to pay origination fees on the loan, and if so, how much? If you decide that you’d like to pay the mortgage off early, will there be a penalty fee? The sum cost of the interest, payments, and other fees forms what’s known as the annual percentage rate (APR), which is the total cost of the loan per year. Take a look at all of the fine print, and then you’ll get a clearer idea of the entire cost of the loan.
Types of Mortgage Loans
There is a wide variety of online mortgage loans available on the market. The two main types are fixed loans and adjustable loans. Fixed rate options keep the same interest rate for the entire duration of the loan, and will not fluctuate from month to month or year to year. Adjustable rate mortgages are just that – they adjust at predetermined intervals over time, but with a lower beginning interest rate than fixed loans. Fixed rate loans afford the borrower security and stability – though they will start higher than adjustable mortgages.
Fixed rate mortgages
These tend to be one of the most popular choices for any first-time buyer with lenders for first time buyers offering them to those planning to stay in a house for the long-term or duration of the home loan.
Adjustable rate mortgages
This option is best for a buyer who plans to stay only a few years in the property, in that for the first few years the loan has a lower interest than that of fixed rate mortgages. Adjustable rate loans do carry risk though – if the value of the house plummets and your mortgage interest rates increase dramatically you may not be able to refinance or sell the home.
These have a fixed interest rate for an initial period of time, which changes at a predetermined date. The second rate will be adjusted to the market rates at the time of the shift, which can work to your advantage or detriment. When the rate shifts, the borrower has the ability to decide between a fixed or variable interest rate for the duration of the loan.
Balloon mortgages have much shorter terms and begin with a fixed rate of regular payments and fixed interest rates for a predetermined period of time. After this it “balloons” and the rest of the remaining balance is payable with a one-time payment at the end of the loan term. Though this sort of loan entails lower interest rates in the initial years, it requires the borrower to gamble that they will have the funds to make the large payment at the end of the loan period, which often hinges on their financial situation remaining stable, or the property maintaining its value.
In addition, there are conventional loans – which are not guaranteed by the government – and options such as Federal Housing Administration (FHA), Veterans Affairs (VA), and Department of Housing and Urban Development loans (HUD), which may be an option for borrowers who qualify.
If you’re an older homeowner, you may want to consider a reverse mortgage. Now, this isn’t what it sounds like - the bank isn’t paying you to live at your house. Rather, it’s a form of home equity loan that's geared toward older homeowners. The borrower remains the owner of the property and is not required to make monthly payments until they move out or pass away. Reverse mortgages have proven to be a reliable way for older homeowners to increase their monthly cash flow.
VA and FHA loans
Federal Housing Administration and Veterans Affairs loans are government supported loans that can help a first time home buyer secure a mortgage. VA loans are for military personnel and can get you a fixed rate mortgage with zero down payment. These loans also have relaxed qualifying standards, though they come with a VA funding fee that can range from between 0.4% - 3.3%.
With an FHA loan you’ll need to put down at least 3.5%, and will need to pay mortgage insurance premiums for at least 5 years. That said, these loans also come with lower qualifying standards, including credit scores as low as 580.
What is Mortgage Refinancing?
Simply put, refinancing a mortgage is a way for you to get a new mortgage with terms that work better for you. With a refinanced mortgage, the lender pays off your previous home loan completely and you are left with the refinanced mortgage.
In order to refinance, you will need to go through basically the same process as when you received the initial mortgage. You will need to have your home appraised, submit financial documents, and pay closing costs to complete the process.
Why do people refinance their mortgages? The main reason is to reach terms that are better for them. For instance, if your monthly mortgage payment is too high, then refinancing can be a way to get some relief. You can also refinance in order to switch from an adjustable to a fixed rate mortgage, or refinance in order to use your home equity to pay for other expenses in your life.
The great news for prospective homeowners is that home loan rates are currently at one of the lowest levels in decades, hovering at below 4% for 30-year and 15-year-fixed rate mortgage loans. With additional options for 10-year mortgages and 20-year loans as well, and rates at their current low, this may be a great time to lock down a fixed rate option. Ask the best mortgage companies for their rates through online quote calculators or customer service agents.
There are a number of laws and regulations in place in the US to protect borrowers which reputable mortgage companies will all follow. On the federal level, these include a series of laws such as the Truth in Lending Act – which establishes disclosure requirements for lenders – and the Fair Housing Act, which bans discrimination based upon age, race, gender, religion, or nationality. Federal and state regulations are meant to uphold fairness in the lending process, and also to safeguard the financial information of home loan borrowers.
Before taking out a loan, it is important for you to know the relevant state and federal regulations that apply to it and that your mortgage lender adheres to them. These laws protect and help the borrower know their money and property are secure.
Regardless of the length, 10-, 15- or 30-year mortgages, all require repayment. Once you’ve bought your home, that property and it’s equity value are yours to borrow against, sell for profit, renovate, or pass to your children. A home loan gives borrowers ownership opportunities, so take a look at the best lenders to find the mortgage that works for you and your dream home.