If you’re thinking of buying your first home, you might be confused about what a mortgage is or how to get one.
Mortgages are loans that allow you to buy a home and pay for it over time instead of paying all cash up front. This means you can pay just a small part of the home now (this is called the down payment) and pay the rest every month.
Most home mortgages are paid back over decades, usually 30 years. The amount you will pay each month includes interest, which the money the lender makes for taking the risk of lending you money.
Here are some tips to get help make you a homeowner in no time!
When: What is the Best Time to Apply?
Most realtors recommend that you begin to shop for a mortgage even before you have your dream home picked out. Mortgage shopping is boring compared to home-shopping but it’s an important part of the process. There are free online calculators you can use to give you an idea of how much a mortgage would cost, like this one from realtor.com.
The Jet Team recommends that you first get a pre-approval letter for a mortgage. Getting pre-approved shows that you can afford the house so you don’t waste time looking at homes that you won’t be able to afford. Also, having a pre-approval letter can help your offer stand out in a competitive market, so it might be the difference between getting the house of your dreams or losing out to another buyer.
Who: Where to get a mortgage
The most common places for getting a mortgage are:
- Bank: You can start shopping for mortgages by going to the bank where you keep your checking and savings account. This might be the easiest option since the bank will already have access to some of your financial information.
- Mortgage broker: This is a good option if your credit isn’t that great because brokers have a lot of experience and can come up with different alternatives to fit your needs. They usually collaborate with a lot of different lenders so the broker can give you a number of different options at once. This saves you time and work since the broker is doing the work of shopping for you. Brokers get paid when you actually close on the house, so you won’t have any upfront expense.
- Nonbank lender: These are companies that specialize in high-risk mortgages. If you have a bad credit or other issues with your financial history, this type of mortgage lender might be the best option.
What: Mortgages 101
Mortgages have their own lingo. Here is where to get started:
Down payment: Lenders require you to pay a small percentage of the total amount in cash. Traditional lenders require 10% or 20% of the price of the house to be given as a down payment. However, there are cases where you can get a mortgage (like FHA loans which are backed by the U.S. government) for as little as 3.5% down, which is why shopping around for mortgages can be important.
Interest: This is the money that the lender will make for lending you the money. The riskier the loan, the more interest you will have to pay the mortgage lender.
Principal: This is the money that you borrowed and are paying back. The more principal you pay over time, the more equity you will have in your home. This means you will own a larger part of the home and the lender will own less of it.
Term: This is how long you will pay the mortgage. Traditional mortgages are 30 years long. The longer the term, the more interest you will end up paying the lender over time. This means that having a 30 year mortgage will end up costing you more at the end than having a 15 year mortgage on the same house.
Pro Tip: If you want to pay off your home in less than 30 years but don’t want to commit to the higher monthly invoice of a 15 or 10 year mortgage, we recommend getting the 30 year loan but paying more than the minimum every month. The extra payments can usually be made without penalty (check with your specific lender) and will help you save on interest over time.
This trick will save you on interest over time, making your mortgage less expensive in the end. But note that the extra money will not count against future invoices, so budget accordingly. For example, if you pay your June invoice plus $100, in July you will still have to pay a full monthly invoice. The $100 you paid extra in June will go towards paying down the overall principal amount.
How: What Type of Mortgage can you get?
These are the two most common types of home mortgage:
- Fixed-rate mortgage: With this mortgage the interest rate (a percentage amount) will stay the same every month until you finish paying off the entire loan. This means that the mortgage company can’t raise your rates. It also means that you might be paying a higher rate in the future compared to everyone else if interest rates go down after you buy your home.
- Adjustable-rate mortgage (also called ARM): With these types of mortgages the lender can change the percentage of interest that you are charged over time. At certain times (usually every five years) the lender has the right to raise your interest rate based on what the interest market index is doing. This type of mortgage is riskier for the homeowner because you might have to pay more when rates are adjusted and you don’t have control over when or how much your rates are raised. There is a limit to how high the rates can go which prevents lenders from excessive increases.
Where: Shopping for a Mortgage
There are many moving parts to mortgages, so keep researching and shop around at different lenders until you find the mortgage that is right for you. You might need a mortgage with a lower down payment or maybe a 15 year loan is best for you. Don’t be afraid to ask your potential mortgage broker questions. It might take a bit of homework, but it’ll be worth it once you get to buy your very own home.
The Jet Team is also available to guide you towards the right people who can help you. We can recommend a number of mortgage brokers who can answer questions and help you become a homeowner in no time!