Kinds of Mortgages & Costs
Once you’ve been pre-approved for a mortgage, you need to decide which type of mortgage to get. The decision is usually based on the interest rate of the loan and the time needed to pay the lender back. The interest rate is the percentage of the loan the lender earns for lending you the money. You can get a Fixed Rate Mortgage or an Adjustable Rate Mortgage (ARM).
Fixed Rate Mortgage
This is the traditional mortgage for financing a home. The interest rate stays the same for the entire term of the loan—usually 15 to 30 years. This means that the interest and the principal portions of your monthly payment remain fixed. With a Fixed Rate Mortgage, your payments are stable and predictable, but initial interest rates tend to be higher with a fixed rate than with an adjustable rate.
Adjustable Rate Mortgage
The interest on an Adjustable Rate Mortgage is linked to a financial index, such as a Treasury Security, so the interest rate fluctuates with changes in market conditions. With an adjustable rate, your payments will vary over the life of the loan. Most Adjustable Rate Mortgages have a lifetime cap on the interest rate increase. The advantage of an Adjustable Rate Mortgage is that it offers lower initial payments and this makes it easier for buyers to qualify. Some Adjustable Rate Mortgages may be converted to Fixed Rate Mortgages at specified times, usually within the first five years. This mortgage works well for people who know they will only be living in an area for a certain length of time.
Planning Your Budget
To purchase a home, here are some of the expenses involved:
The down payment is a percentage of the purchase price that the buyer pays in full at closing. The larger the down payment, the smaller your mortgage will be. For a $100,000 house, 20% down payment would be $20,000, financing $80,000.
There are basicially two types of loans:
Conventional and Government Loans
Conventional loans require down payments of any amount but 3% to 20% down payments require mortgage insurance to protect the lender from your default.
Government loan like VA loans may require no down payment since the government guarantees the mortgage but you pay a % of the loan amount as a funding fee; FHA loans require as little as 3% down payments but you buy insurance to protect the lender from your default also.
Costs and Prepaids
At closing the buyer is required to pay certain closing costs and/or prepaid items. These include costs like points which allow the borrower to buy down the interest rate from the current market rate. One point equals one percent of the loan amount. You can reduce the rate by paying additional points at closing.
Other costs include a home inspection fee, a home warranty fee, homeowners policy, title search and insurance, recording fees, interest charges, monthly amounts to set up your escrow accounts, and other lender’s fees. Lenders are required to give you a copy of their fees. Examples of fees are listed on the Buyer’s Cost Worksheet.
Monthly payments include your principal and interest payment, taxes and insurance, (PITI). When you know your loan amount, the difference between your down payment and the sales price, you can determine the monthly payment. There are two drop down menus here that help with that, one figures your payment and the other gives you a rule of thumb to use.
Your final budget should include moving costs and costs to set up your utilities.