Imagine hosting holiday gatherings, watching your family grow, and making memories in a place that is truly yours. This dream can be a reality, but navigating the world of mortgages can be overwhelming, leaving you searching for answers. Don’t let that stand in the way of your dream. Let us help guide you through the process and make your dream home a reality. Town & Country Bank is here to break down the different types of mortgage loans, how they work, and how to determine which option might be better for you.
A mortgage is a loan specifically used to purchase a home or to refinance an existing home loan. Similar to other types of loans, you will be required to make monthly payments to the lender until the mortgage is paid off after a set number of years. In exchange for borrowing the funds, you will be required to sign a contract agreeing that the home will be used as collateral for the loan.
There are many loan options available to homebuyers, including but not limited to:
A fixed-rate mortgage is a home loan where the interest rate remains the same throughout the entire 30-year or 15-year mortgage term. Regardless of any market fluctuations, your interest rate will not change. It’s a popular option for homebuyers who plan to live in their home for a long time and prefer a dependable monthly payment that they can predict.
Choosing a 30-year fixed-rate mortgage will generally result in lower payments than a 15-year fixed-rate mortgage. This is because the payments are spread out over a longer time period. However, 15-year fixed-rate mortgages usually have lower interest rates since the lender will get their money back sooner.
An adjustable-rate mortgage (ARM) is a type of mortgage where the interest rate applied on the remaining balance can vary during the loan’s life based on market conditions. Initially, the borrower will receive a fixed interest rate for a period. After that, the interest rate may periodically change at yearly or even monthly intervals.
Adjustable-rate mortgages are a type of mortgage loan that often have rate caps. These caps limit how much the interest rate can vary year after year and over the loan’s lifetime. This type of mortgage is a good choice for borrowers who plan to keep the loan for a limited time to take advantage of the low initial interest rate. However, borrowers should also have the financial ability to make their mortgage payments if the interest rate increases and they still own the house.
Homebuyers who do not meet the qualifications for a conventional mortgage may consider a government-backed mortgage due to more flexible qualification criteria such as lower credit score requirements, lower debt-to-income requirements, and down payment assistance. A variety of government mortgage programs are available aimed at helping make homeownership more accessible.
These programs include:
A construction loan is a short-term loan that finances the construction or renovation of a home. Because construction loans are short-term, your loan will be converted from a construction loan to a permanent mortgage loan (such as a fixed-rate mortgage or an ARM) after the custom build of your home is complete.
Your mortgage loan term refers to the time you have to repay the loan. The two most common loan terms are 15 and 30 years. As a general rule of thumb, the longer your loan term is, the lower your monthly payment will be. However, a shorter loan term can mean savings in interest.
Your mortgage payment is the amount you pay each month toward your loan. It will include an amount paid toward the principal balance and the amount of interest owed for that period. Most mortgage payments also include an amount escrowed to pay property taxes and insurance.
The principal refers to the amount of money you borrowed from the lender. This money does not include interest or fees. Every time you make a payment, this balance will decrease. For example, if you borrow $100,000 and the portion of your monthly payments applied to the principal equals $10,000, then your principal balance is reduced to $90,000.
The interest rate is an amount the lender charges, in addition to the principal, for the use of the money loaned. The interest rate is based on a borrower’s credit profile and is expressed as a percentage of the outstanding loan amount. The interest rate is a percentage of the total amount borrowed based primarily on the borrower’s credit profile. The Annual Percentage Rate (APR) provides a more comprehensive look at the overall costs of borrowing money. The APR includes the interest paid and other charges assessed by the lender, such as loan origination fees and mortgage insurance.
Every homeowner pays property taxes, which are based on the value of the home and the tax rates applied by the state, county, city, and school district in which they live. Tax rates can vary significantly depending on the location and value of the home.
Homeowner’s insurance is required for any homeowner who owes a mortgage balance on their home. It provides a home with insurance coverage in the case of damage from theft, fire, or other disasters. The price varies depending on the city and neighborhood you live in.
An escrow account is a dedicated account the lender sets up to hold the funds collected each month. Funds are disbursed from the account to pay insurance premiums and property tax when due. For example, instead of paying $6,000 in property taxes in a lump sum once a year, $500 a month will be added to your monthly mortgage payment. Your lender will take the $500 and hold it in the escrow account until the property tax bill is due.
In some instances, the lender may allow the borrower the choice to pay taxes and insurance on their own rather than utilize an escrow account; however, for certain loan programs such as government-backed mortgages, funds are required to be escrowed.
Getting pre-approval is an excellent way to begin the mortgage process. By getting pre-approved for a mortgage before you start shopping for a home, you will receive an estimate of how much you can borrow, and your application process will be more straightforward. A mortgage pre-qualification can also give you additional leverage with a seller in negotiating the best possible terms of the sale. Contact your local Town & Country mortgage banker; we can help you get started today.
