Beginners Guide to Mortgage

A Beginners Guide to Mortgage Loans

If you’re unsure, overwhelmed, or just plain excited at the prospect of buying a home, you’re not alone! This is exactly how most first-time home buyers feel, and that’s OK.

This guide is designed for the complete beginner and will provide details so you can enter into a mortgage discussion with confidence. Let’s get started!

A mortgage starts with you

Know your personal situation

The topic of homeownership is surrounded with a lot of rhetoric—do any of these sound familiar?

Buying a home is the best investment you can make.

You shouldn’t rent because you’ll have nothing to show for it at the end of your lease.

Both of these statements are sometimes true and sometimes false—their validity largely depends on your financial situation, the market, and your life goals. Ask yourself why you want a home and answer honestly, talk with others involved in the decision, and think about the future.

Know your financial situation

All of the information that follows about mortgage will vary depending on your financial situation which includes things like your credit score, your income, existing debt, and much more. That said, let’s dive into the specifics of mortgage.

What is a mortgage?

A mortgage is a legal document that pledges a property to the lender as security for payment of a debt. For more definitions regarding mortgages and the lingo of lending, please check out our mortgage glossary.

A mortgage basically consists of three parts:

  1. Down payment
  2. Monthly payments
  3. Closing costs

Down payment

This is the initial upfront funds you pay to the seller of the home. Most of the time, the down payment is calculated as a percentage of the total cost of the home. It can vary from the low single digits to up to 20%. Some mortgages will actually offer no down payment. Again, the dollar amount of your down payment largely depends on your unique financial situation. Keep in mind that the amount of money you use for a down payment can affect the other terms of the mortgage.

Monthly payments

Every month you’ll pay a certain amount of money to pay off your mortgage. Part of the payment will go toward paying off the principal (the cost of the home), part will go to the interest (the cost of borrowing money from a lender), part may go to mortgage insurance, and another part may go toward property taxes. These sections of your monthly payment depend on the type of loan you choose.

Closing costs

These are costs or fees incurred by buyers and sellers when transferring ownership of a property. Closing costs might include an origination fee, property taxes, charges for title insurance and escrow costs, appraisal fees, and more. Keep in mind, closing costs are negotiable.

Those are the basic parts to a mortgage. Next, let’s look at the details of a home loan.

Different loans for different folks

When buying a home, there are basically two types of loans—conventional loans and government loans.

Conventional loans – While there are a wide variety within this category of loans, generally speaking, conventional loans have higher standards for credit scores and require larger down payments. While the standards for qualification are stringent conventional loans offer several benefits such as a shorter approval process, no mortgage insurance for down payments of 20% or more, and they are usually more attractive to sellers than government loans.

Government loans – These loans are backed by the US government, and therefore offer more relaxed qualifications for approval and the upfront cost is usually significantly less than a conventional loan. The process for a government loan is typically longer, and they are potentially less attractive to sellers. There are plenty of great reasons to use a government loan which include FHA loans, USDA loans, and VA loans.

Feel free to use the links provided to learn about each type of loan to see which is appropriate for your situation.

Understanding interest rates

As discussed earlier, interest is the money you pay to the lender for providing the loan. It is calculated as a percentage of the total amount of the loan and included in your monthly payment.

There are two types of interest rates when it comes to home loans: fixed and adjustable.

Fixed interest rates are just what they sound like: You’ll pay exactly the same amount of interest every month for the life of your loan.

Adjustable interest rates can change with the market after a set amount of time, which means the amount of interest you pay can change from month to month. Just how much the interest rate goes up or down depends on the structure of your loan.

Now you understand the basics of mortgage!

We hope that this guide has provided you with the knowledge and confidence to think critically about home ownership and financing. If you have any questions or would like more details, please do not hesitate to contact a loan expert at TexasLending.com.

 

Current Rates

VA Purchase
30 Year Fixed

As of: April 20, 2018

4.250%
RATE
4.506%
APR

Rate/Term Refinance
30 Year Fixed

As of: April 20, 2018

4.000%
RATE
4.229%
APR

Rate/Term Refinance
15 Year Fixed

As of: April 20, 2018

3.375%
RATE
3.751%
APR

Cash Out Refinance
30 Year Fixed

As of: April 20, 2018

4.625%
RATE
4.825%
APR

FHA Purchase
30 Year Fixed

As of: April 20, 2018

4.000%
RATE
4.911%
APR