Home Loan Tips: Everything You Need to Know About Home Mortgage Loans
Buying a home is going to be one of the biggest purchases that most people will ever make. Most mortgages are for 15 or even 30 years and you’re financing hundreds of thousands of dollars over that time frame. You want to learn everything you possibly can to not only make yourself look like a great candidate to lenders, but also so you can save as much money as possible. Spend some time reading up on everything you need to know about home mortgages and catch the home loan tips at the end that can save you tens of thousands of dollars.
WHAT ARE HOME MORTGAGE LOANS?
Mortgages, or home loans, are secured loans that are funded by financial institutions that allow borrowers to purchase property or real estate, typically a home. Since this is a secured loan, the house is used as collateral and will become the property of the financial institution should the borrower not be able to make payments and defaults on their loan. However, once the mortgage is paid in full, ownership of the house transfers to the borrower.
TYPES OF HOME LOANS
Fixed Rate Mortgage
As the name implies, a fixed rate mortgage is a home loan that has a fixed interest rate for the entire life of the loan. This is the simplest type of mortgage since you’ll have the same payment month in and month out for 15, 20, or 30 years or however long you’re paying off your mortgage.
This type of home loan is the easiest to shop around for because you know precisely how much your monthly payments will be as well as how much the mortgage will actually cost you. You’ll be able to see how much of a difference that a shorter loan and different interest rates affect the overall cost of the loan. This will grant you the foresight you need to plan out your budget and finances to determine which financial institution is giving you the best deal and how it’ll affect your monthly budget.
Adjustable Rate Mortgage
This type of home loan is one that has a variable interest rate that can, and probably will, change throughout the life of your loan. This is a double edged sword before you might get lucky and see your interest rate decrease which would translate to a lower monthly bill, but it can also increase and cost you more money each month.
Interest rates usually change every 2 -3 years and there’s really no telling what the market will look like 5 / 10 / 15 years from now. There could be another market crash or we could see interest rates spike and that could spell disaster for you.
You can’t get a second mortgage without having one first so as you can imagine, these aren’t for buying property. Second mortgages are loans that are taken out against the equity you’ve built paying off your mortgage and added to your original mortgage. These loans are typically taken out for large home improvement projects or paying for a child’s college education.
Refinancing your mortgage can be a great way to lower your monthly payments by finding a lower interest rate at a different lender. The great thing about the refinancing process is that A) you can change loan types, i.e. from adjustable to fixed rate, B) lenders desperately want your business and are willing to give you lower interest rates, and C) some lenders will let you borrow on top of your loan so you can fund a home improvement project by refinancing your loan.
PREPARING TO APPLY FOR A MORTGAGE
Applying for a home loan is one of the lengthiest legal processes you will ever go through and it requires a mountain of paperwork to complete. Before you get started, you’ll need to know what will be required so you can get all of your financial ducks in a row to make this process as painless as possible. Don’t be fooled by the 4 headlines below. This is a long process.
Credit & Income Check
Before this process kicks off, lenders will want to verify that you’re a good candidate for one of their mortgages and that means an in depth credit and income check. These are vitally important factors in your ability to qualify for a loan so if your credit is not in good standing, focus on re-building it first because you will be denied. If you’re lucky enough to be approved with poor credit, you’ll have a higher interest rate than other borrowers which will cost you tens of thousands of dollars over the life of your loan.
Naturally, your income is very important as well, but not just your net income. Your employment history is taken into account as well. You may be earning a great living, but if you just got the job or you’ve had half a dozen jobs in the last 9 months, you may be labeled as a high risk borrower. They may look at you as not having stable employment since it’s possible that you could lose that job or you quit it and jump to a new one in a few months.
Debt to Income Ratio
Just because you have a good job with a large income doesn’t mean that you have a lot of money. This is why lenders look at your debt to income ratio. Lenders will audit the total amount of outstanding debts, including the potential mortgage, you have and compare that against your income to see how much money you actually have. Pulling down $100,000 a year is great, but if you have $150,000 in outstanding debt from student loans, a car payment, and multiple maxed out credit cards, the likelihood of lender being willing to put a mortgage on top of that is incredibly slim.
Loan to Value Ratio
A mortgage’s loan to value ratio is all about calculating risk to the lender. The less you borrow when compared to the value of the property you’re looking to buy lessens the risk to the lender. This is why it’s so important to put a large down payment on your property. This not only shows the lender that you’re serious about buying, but that you’re financially responsible and a lower risk than other buyers.
Lenders will not approve a loan you can’t afford. They don’t want you to miss payments, default on the loan, and cause the house to go into foreclosure. To put it bluntly, they make more money if you pay off the loan for the full 15 or 30 year term. This is one reason why pre-approved are so popular and successful. Lenders “pre-approve” you for a loan up to a certain amount so you have a price ceiling when looking for a new home. However, you aren’t guaranteed to be approved for this loan.
Regardless, a good rule of thumb to use when you’re looking at houses is that your mortgage should be less than 28% of your monthly income or roughly equal to 2 1/2 years of income. If you stay under that amount, you shouldn’t have any problem paying your home loan.