Selecting a home loan can be overwhelming with so many choices. It is worth the investment to research options to identify the lender and product that fits best with your situation. This guide provide some high level information as you embark on selecting a home loan.
Loan Term: The length of the loan contract, typically expressed in years. A 30 year mortgage is the most common term.
Interest Rate: The rate that determines the amount of interest owed. The rate is multiplied by the remaining loan balance to determine the interest amount.
Escrow: An account setup by the lender to be used for insurance and taxes. Each payment typically contains an escrow amount that is placed into the account on the payment frequency. When insurance or taxes are owed the lender will use these funds to make the payment. The escrow due amount owed each month can change periodically based on changes in the insurance and property tax amounts
Principal and Interest (P&I): Principal is the payment amount that is used to reduce the loan balance. Interest is the borrower costs owed based on the interest rate
Down Payment: A sum of money paid by the home purchaser at time of closing that covers a part of the total home cost.
APR: APR is the annual cost of a loan to a borrower — including fees. Like an interest rate, the APR is expressed as a percentage and includes other charges or fees such as mortgage insurance, most closing costs, discount points and loan origination fees.
Loan Rate: The rate that determines the amount of interest owed. The rate is multiplied by the remaining loan balance to determine the interest amount. It represents the annual cost of a loan to a borrower and is expressed as a percentage
Purchase Mortgage: Purchase mortgages are mortgages used to finance the purchase of a home. You can have a purchase mortgage without a refinance loan. But you can’t have a refinance without a purchase mortgage in the first place.
Refinance Mortgage: Refinances are used to “refinance” an existing mortgage. This allows an existing borrower to change the terms of a loan. This is typically done when interest rates are currently lower than when the original loan was obtained.
Fixed Rate Mortgage (FRM): A fixed rate mortgage locks in both your interest rate and your monthly P&I payment for the life of your loan. Your monthly payment of principal and interest won’t change, though your overall payment can, depending on how your taxes and homeowners insurance fluctuate.
Adjustable Rate Mortgage (ARM): An adjustable rate mortgage means the interest rate can fluctute during a period of time. Typically the rate is fixed for an initial period then changes on a set period the remainder of the loan term. The interest rate will fluctate based on an index such as the London Interbank Offered Rate (LIBOR). These loans are beneficial when the borrower does not anticipate keeping the loan longer than the initial fixed period because the initial interrest rate is typically lower than a fixed interest rate loan option
Other items to consider for an ARM loan
Interest Only Mortgage (IO): An interest only mortgage will have some or all payments only consiste of the interest owed. Most interest-only loans are structured as an adjustable-rate mortgage (ARM) and the ability to make interest-only payments can last up to 10 years. After this introductory period, the payment increases to include both principal and interest.
Federal Housing Adminstration (FHA): FHA loans are backed by the Federal Housing Administration, an agency under the jurisdiction of the U.S. Department of Housing and Urban Development (HUD). FHA loans are insured by the FHA, which simply means that the owners of your mortgage are protected against loss if you default on your loan. These loans are attractive due to a loan down payment minimum of 3.5%. There are a number of requirements that must be met to qualify for this loan type
Department of Veterans Affairs (VA): A VA loan is a government-backed mortgage option available to Veterans, service members and surviving spouses. VA loans can be attractive due to a no required down payment and no property mortgage insurance.
U.S. Department of Agriculture (USDA): A USDA home loan is a zero-down-payment mortgage for home buyers in eligible towns and rural areas. USDA loans are guaranteed by the USDA Rural Development Guaranteed Housing Loan Program, a part of the U.S. Department of Agriculture
Conventional Loan: A conventional mortgage or conventional loan is a homebuyer’s loan not offered or secured by a government entity. Conventional loans typically cost less but have stricture requirements.
Conforming Loan: A conforming loan is a type of mortgage that complies with the financial boundaries laid out by the Federal Housing Finance Agency (FHFA) and adheres to Freddie Mac and Fannie Mae’s funding guidelines. Requirements include a minimum credit score of 620, a debt to income ratio lower than 45%, down payment greater than 3% and steady income for two years.
Jumbo Loan: A nonconforming loan that exceeds the maximum loan limit for an area. In most areas this is anything over $766,550. In certain high-cost areas, a jumbo loan can be anything over $1,149,825.
Mortgage points are upfront fees you can pay your mortgage lender in exchange for a lower interest rate. Typically, one point costs 1 percent of the amount you borrow and reduces your interest rate by 0.25 percent.
Pre-Qualification Letter: Prequalification generally means that a mortgage lender collects basic financial information from you to estimate how much house you can afford. The information gathered is typically self reported and not verified.
Pre-Approval Letter: A pre-approvalis a more official step that requires the lender to verify your financial information and credit history. preapproval is a stronger indication of what you can afford and adds more credibility to your offer than a prequalification.
Private mortgage insurance (PMI) is a type of mortgage insurance you might be required to buy if you take out a conventional loan with a down payment of less than 20 percent of the purchase price. PMI is arranged by the lender and provided by private insurance companies. It insures the lender against loss caused by borrowers failing to make loan payments. If the borrower falls behind on mortgage payments, PMI does not protect them and the home can still be lost to foreclosure. The amount you pay in PMI depends on your loan and down payment size, whether it's a fixed or adjustable rate mortgage and your credit score.