What is a Mortgage?
A mortgage is a loan used to purchase a home or other real estate. The property itself serves as collateral, meaning the lender has the right to seize it if the borrower fails to make payments. Mortgages are typically repaid over a set period, commonly 15 or 30 years, with monthly payments that include both principal (the loan amount) and interest (the cost of borrowing).
A mortgage is one of the most significant financial commitments most people will ever make.
Key Factors to Consider When Applying for a Mortgage
When selecting a mortgage, keep these things in mind
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Interest Rate & Loan Term
Your interest rate and repayment term will significantly impact the overall cost of your loan. -
Credit Score & Financial Health
A strong credit score & stable income improve your chances of securing a favorable loan rate. -
Down Payment Requirements
While some loans allow low or no down payments, a higher down payment can lower your interest rate and monthly payments. -
Closing Costs & Fees
Mortgages come with additional costs, including lender fees, appraisal fees, and title insurance. Understanding these expenses can help you avoid surprises at closing. -
Prepayment Penalties
Some lenders charge penalties for paying off a mortgage early. It’s important to review your loan terms to avoid unnecessary fees.
How much mortgage can I afford?
Your affordability depends on your income, debts, credit score, and down payment. Your loan officer will help determine your max sales price and loan type options.
How does my credit score impact my mortgage rate?
A higher credit score generally results in lower interest rates, as it signals to lenders that you are a low-risk borrower. A lower credit score may lead to higher rates or difficulty securing a loan.
How much down payment do I need?
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Conventional loan:
Typically requires 20%, but you can sometimes get away with as little as 3–5%. -
FHA loan:
Requires as little as 3.5% down, but you’ll need to pay mortgage insurance. -
VA loan:
For veterans, active-duty service members, and their families, VA loans often require no down payment. -
USDA loan:
For homes in rural areas, you may qualify for a no down payment loan.
What is the difference between a fixed-rate, adjustable-rate mortgage (ARM) and Temporary Rate Buydowns?
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Fixed-rate mortgage:
The interest rate remains the same for the entire loan term, which gives you predictable monthly payments. -
Adjustable-rate mortgage (ARM):
The interest rate can change after an initial fixed period, often leading to lower rates in the beginning but potentially higher payments later on. -
Temporary rate buydowns:
Typically funded by the seller concessions or a lender credit. This is a way to lower your monthly payment for a certain amount of years (typically 1, 2 or 3) before your loan adjusts to your fixed rate.
What is mortgage insurance and do I need it?
- If you put down less than 20%, lenders require Private Mortgage Insurance (PMI) for conventional loans or FHA mortgage insurance.
- PMI protects the lender in case you default on the loan. You can remove PMI once you have 20% equity in your home.
What are points, and should I pay them?
- Mortgage points (or discount points) are fees you pay as part of your closing costs to lower your interest rate. Each point costs 1% of the loan amount and can reduce your rate by about 0.25% or more depending on loan factors. Paying points can be worth it if you plan to stay in the home long enough to benefit from the lower interest rate.
What is an escrow account?
- An escrow account is a third-party account where your lender collects money for property taxes and homeowner’s insurance. This ensures that these bills are paid on time.
