A Beginner’s Guide to Mortgages

Residential home for sale

If you’re buying a home for the first time, it’s important to learn about mortgages so you can select the best home loan for this major purchase. When you’re aware of your mortgage options, you can save money and find the home with the features that you want. Here are a few tips that will make the process of buying a home a little easier on your wallet and your mind. 

Where to Apply for Mortgages

Typical homebuyers apply for mortgages from traditional banks, credit unions, mortgage brokers, or online lending companies. Some financial experts advise credit union loans over the alternatives because, with credit unions, the approval process can be more forgiving, the interest rates may be lower, and the service may be more personalized.

Understand Mortgage Interests and APR 

When you apply for a mortgage, your lender will be required by the Truth in Lending Act to disclose the annual percentage rate (APR) and interest rate of the loan. This enables you as a borrower to know the actual cost of the mortgage and compare loans from loan competitors, so you’ll know which mortgage is right for you. It’s important to note that our monthly mortgage payment is based on the loan’s interest rate. 

If you’re taking out a fully amortizing loan, every mortgage payment will include the interest and principal. You should know that you only pay interest on the portion of your mortgage that is still unpaid. This is why your mortgage payments will have a higher interest initially and will slowly decrease as time passes. So, every payment you make will reduce your overall principal mortgage loan amount. It’s helpful to refer to a mortgage calculator so you can organize your finances accordingly. 

Remember that lenders will charge more than the interest rate for your mortgage. The annual percentage rate includes the one-time fees and costs that come with borrowing. The APR is expressed as a percentage rate that you are charged yearly and is the actual cost of your mortgage after you pay fees and interest rates. Fees that are associated with buying a home can include origination fees, discount points, prepaid interest, and PMI premiums, along with closing costs. Your APR is a more accurate reflection of the net cost of your loan every year. 

What Are Mortgage Points? 

Mortgage points pertain to the American process of home financing. One mortgage point is equal to around 1% of the amount of the mortgage loan. For example, if your mortgage loan is $300,000, one mortgage point is $3,000.

Mortgage points fall into two categories: origination and discount. 

Origination fees are charged by lenders to take care of loan processing costs. These fees are often a percentage of the total loan amount and represent a mortgage point instead of an actual dollar amount. So, if the origination fee is $1500 and the mortgage loan is $150,000, the lender should inform you that your mortgage has a 1% origination fee, which translates to one origination point. 

Remember that your credit history is taken into account when determining the amount of origination fees you’re obligated to pay. You can not deduct origination points when you file your taxes.

Discount points, on the other hand, are tax-deductible. The points are a type of prepaid interest that you pay when you close on your home. You pay the interest directly to your mortgage lender to reduce your interest rate. So, you’ll receive a lower monthly mortgage payment when you pay more upfront and receive discount points. Mortgage points usually reduce your rate by about one-eighth to one-fourth. The discount varies depending on your lender and can change as a result of the housing market. 

Mortgages and FICO Scores 

Whether you’re looking to purchase a more traditional family home, a penthouse, or condo, you’ll probably need a mortgage to complete the deal. If you apply for a mortgage, lenders will look at your credit score to determine how big of a lending risk you are. Before you enter the pre-qualification process, make sure you know your credit score and the factors used to determine your score. 

Your credit score is a way for creditors to determine how likely you are to repay your debts. If your score indicates that you’ve paid some, but not all, of your past loans, or if you’re in the process of improving your credit, you may be approved for a mortgage. However, your interest rates will likely be higher. Some lenders understand that there are several legitimate factors that could explain a low or average credit score. Some lenders will take this into consideration to increase your chances of loan approval. 

This helpful information can ease some of the anxiety that comes with applying for a mortgage. The more prepared you are, the sooner you can get into the home of your dreams. 

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