As expected, buying a home for the very first time can be quite stressful, especially if you are not familiar with the entire process. Hopefully the information below makes you a little more knowledgeable in the specifics, as it is useful in obtaining a better offer when you are applying for a mortgage.
Mortgages: The Basics
Generally speaking, a mortgage is the money borrowed from the lender that is used to buy a house. The cost of borrowing this amount of money is represented by the interest rate. You can typically find lenders anywhere, especially since the mortgage industry has expanded given the increase in property availability. The combination of investors seeking a high return and the government pushing the "American Dream" ideal has led to a great influx of money into the mortgage business.
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Mortgage lenders come in many different forms. They can be public or private companies, private investors, and banks, just to name a few. To find a suitable lender, you can contact a mortgage broker who will help you conduct your search and match you up with a lender who best suits your situation. An alternative approach is to do your research and shop around by yourself. A quick and easy way to do this is via the internet. There are numerous websites for you to browse at your disposal, and it is important to remember that the terms and policies of a loan offer are for the most part malleable. That is, you can always negotiate more beneficial terms, so never accept an initial offer.
Process Length
The entire process of applying for and agreeing on a mortgage negotiation takes somewhere between thirty and ninety days. This number is based upon a few variables, such as the nature of the lender and the property situation. It is important to note, however, that the actual process of shopping for and tracking down the right lender may take weeks if not months.
Home buyers with good credit may stumble upon favorable terms more quickly than those with a poor financial report. Another important factor to consider is the availability of the property. To make things easy on oneself, it is wise to construct some sort of timeline so that you can save enough money for the time when escrow closes.
Fixed Versus Adjustable Mortgage Rates
Which rate to choose is basically up to the buyer, for neither one is "better" than the other. However, one may be more integral to a buyer's needs. If the borrower wishes to have an interest rate that is slightly higher than normal, but assured that the payments will be consistent in value, then a fixed mortgage rate is the way to go. On the other hand, if the buyer prefers to have a low interest rate upon agreeing to the terms of the loan and is willing to risk an increase in future payments, the adjustable mortgage rate would be a good choice.
You may even be able to find a lender who is willing to somewhat combine the two types of rates, meaning something in the middle of the road that ends up working better under the circumstances.
Points on a Loan
A point is equal to one percent of the principal amount borrowed which is paid to the lender in return for a reduced initial mortgage interest rate. For instance, if you are borrowing $500,000 and are required to pay 2 points, then you would have to pay the lender $10,000 to lower the interest rate.
Just because paying points entitles you to a lower interest rate, you still may end up paying more money by choosing this route. It is important that you carefully calculate each scenario so that you can decide which option will save you the most money in the long run.
The Loan-to-Value Ratio
This ratio determines the amount of money you are able to borrow against the property value. In other words, the amount borrowed is a percentage of the value of the property. As an example, suppose your property is valued at $750,000, and the principal amount of your loan is $500,000. The loan-to-value would be about 67%.
Typically, lenders do not like to loan more than approximately 80% of the market value of the property. However, there are certain lenders, called sub-prime lenders, who will let a buyer borrow a loan-to-value of 100%. This is recommended if your credit report is not as noteworthy as you would like. Do some research to see if you qualify to be approved for a sub-prime loan.
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