Everything you need to know about mortgage rates and loans
If you’re thinking about buying a home, you may be wondering, “How much house can I afford?” The answer isn’t simple, and it depends on how much money you can borrow. By familiarizing yourself with the process of taking out a home mortgage, you can figure out how much home you can afford. You also can discover how to find the best lender for your particular situation and get the best rate.
So, the question now is: What is a home mortgage? A home mortgage is a loan used to purchase a house, a condo or any other type of residential property that will be used as a primary residence or for investment — like a rental, second home, etc. Many factors go into determining the loan amount and terms, including the home’s sales price and location, your down payment, the current interest rate, and the length of the loan.
Government-backed or conventional
15-year or 30-year term
Fixed or adjustable
As low as 3%; 20% to avoid insurance; 0% down programs from the VA and USDA
There are two main types of home loans:
Conventional loans are not backed by the government, but conform to standards set by the two government-sponsored enterprises, Fannie Mae and Freddie Mac. They are typically better suited to borrowers with good or excellent credit profiles.
These are loans insured by the U.S. Department of Veterans Affairs (VA), Federal Housing Administration (FHA) or U.S. Department of Agriculture (USDA). This government backing allows lenders like banks and credit unions to approve mortgages for borrowers with riskier credit profiles.
Each of these loan types is offered through banks and other lenders, including big names you may be familiar with, such as Chase, Wells Fargo, Bank of America, U.S. Bank and Quicken Loans. You also may be able to take out a mortgage from a small community bank or credit union, or a mortgage bank that specializes in mortgages. Search and compare lenders to find a lender that caters to your specific needs.
Typically, mortgages with down payments of less than 20 percent will require the borrower to purchase mortgage insurance. For FHA loans, such insurance is called a Mortgage Insurance Premium (MIP). For conventional loans, it is called Private Mortgage Insurance (PMI).
When you buy a house, you want to get it for the best possible price. But it’s important to look beyond the list price. Your home-loan rates can have a huge impact on the price you ultimately pay for your home.
Many factors determine your mortgage rate, including the amount of the down payment, the borrower’s credit score and the loan term. In addition, rates vary based on whether you select a fixed-rate mortgage or adjustable-rate mortgage (ARM).
Points are another factor that can influence the interest rate on your home loan. Points are upfront fees borrowers pay to lower their interest rate. Points are best for borrowers who intend to live in their house for a long time. If you think you will sell the house in the near future, the upfront fees may not save you that much in interest.
Another way to get the best home loan rate is comparison shopping. Contact lenders to get and compare personalized rate quotes.
The primary advantage of a fixed-rate mortgage over an ARM is consistency: the interest rate is set once the loan is funded, resulting in a mortgage payment that is the same for the life of the loan (unless you refinance the mortgage, which could result in a lower monthly payment).
On the other hand, an ARM has a fixed interest rate only for a certain period of time, usually between 3 and 7 years. After that, the interest rate can change. Although it is possible the interest rate could lower, there is a good chance the interest rate could increase.
Most mortgages are paid off over either 15 years or 30 years. Each loan term comes with its own advantages and disadvantages.
Are you asking yourself, “How much home can I afford?” When this question first pops up, you may not know how to find the answer. Getting prequalified or preapproved for a mortgage can be a good starting point. But what’s the difference between the two?
Both mortgage prequalification and mortgage preapproval are ways for lenders to let you know approximately how much money you can borrow from them. But each process is a little different.
Prequalification is a more preliminary process than preapproval. Typically, lenders only perform a soft credit check when they do a prequalification, if they check your credit at all. Such a credit check won’t have any impact on your credit score.
For a preapproval, lenders perform a more rigorous check of your finances and may perform a hard credit check, which will have some impact on your credit score, although it should be relatively small. You will likely fill out an application, and the lender will approve you for a specific loan amount.
Neither prequalification nor preapproval is a promise to lend you that amount of money, however. A lender will not commit to lending you money for your home purchase until you have selected the home you plan to buy and the lender has approved it.
Buying a house is a complicated process — one that can make even a veteran homebuyer’s head spin. If you’re a first-time homebuyer, you may feel overwhelmed. We’ve compiled a checklist of the steps you should take as you search for first-time homebuyer loans.
If your credit has seen better days, you may be wondering if there are any home loans for bad-credit borrowers.
Many government-backed loans are accessible to borrowers with less-than-ideal credit. FHA loans, for example, accept borrowers with scores as low as 580 with a down payment of 3.5 percent (although the actual credit requirements vary by lender). Borrowers with scores less than 580 may still be able to take out an FHA loan if they make a 10 percent down payment.
If you are a low-income borrower, homeownership may seem forever out of reach. It is possible to get approved for a home loan if you have low income, however.
Options include FHA and USDA loans as well as VA loans if you, or your spouse, have served in the military. All of these loans are backed by the government, which allows private lenders to fund loans they may not be able to fund otherwise.
The USDA also offers direct loans for low or very-low income homebuyers who are without “decent, safe and sanitary” housing. Read more about USDA loan income requirements. In recent years, conventional loan products geared toward low-income homebuyers have become available. Both Fannie Mae and Freddie Mac offer mortgages that cover up to 97 percent of the cost of the home.
Another resource for low-income borrowers is down payment assistance programs. These are programs, often administered by state or local jurisdictions, that assist first-time or low-income homebuyers with a down payment, subject to eligibility requirements.