Mortgage 101 – The Basics of Home Financing
When borrowing money to fund the purchase of a new home, there are some points that are essential to understand. You are required to repay the full amount of money borrowed plus interest. Exactly how much you are required to repay is influenced by several factors and the following provides you with a broad understanding of how a mortgage works.
- Interest Rate. This is the percentage of the loan amount that is charged in order for you to borrow the money. Interest rates are based upon current market conditions, your credit score, down payment amount, and the type of mortgage you choose.
- Origination Charge. On a mortgage, this amount includes all charges that all parties involved will receive in connection with doing your loan. The origination charge encompasses items such as underwriting fees, document preparation, and other expenses.
- Loan Term. Your loan term is simply the amount of time that you have to pay off your mortgage balance. Shorter loan terms typically mean higher monthly payments, but also carry lower interest rates than a longer term mortgage.
- Monthly Mortgage Payment. Your monthly mortgage payment is made up of four parts – Principal, Interest, Tax, and Insurnace (often referred to as PITI). Depending upon your property type, location, and loan-to-value ratio you may be required to pay other monthly payments such as mortgage insurance, homeowner association fees, or flood insurance. Please contact one of our loan consultants for specific details.
One of the first questions that you will be asked by sellers and real estate agents is whether or not you have been preapproved for a mortgage loan. Once preapproved, we will supply you with a document to provide to your real estate agent, empowering you to put in an offer on a home with confidence, while signaling to the agents and sellers that you mean business. The preapproval does the following:
- Confirms that you have been through a credit and income check.
- Details approximate mortgage amounts and price ranges for which you qualify, subject to certain conditions.
- Means the probability of completing the transaction to completion is high.
- Allows for a faster closing.
Additionally, the preapproval process allows us to identify any credit blemishes or potential qualification issues early in the process, giving you time to correct any items and ultimately get you to the closing table.
Stages of the Home Buying Process
- Preapproval. Get preapproved to show offering strength and close faster.
- Making an offer. Work with a realtor to identify an area and home you are satisfied with and come up with the fair market price.
- Offering in writing. Work with the realtor to create a formal offer in writing to ensure both parties understand the terms of the transaction.
- Submitting a deposit. Put in a good faith deposit demonstrating your intent to purchase the home.
- Finalizing the purchase contract. This is the legally binding document produced at the closing table which describes all terms of the transaction. Depending on your state, an attorney, real estate agent, or title company may be required to draft the contracts.
- Loan funding. Congratulations, you have successfully purchased a new home!