The time has come you have decided that you are ready to buy. After doing your homework with building your savings for a downpayment and improving your credit score, you are ready to talk to a lender about a mortgage. 

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A mortgage is a loan and also defined as a secured collateral. Meaning that your mortgage is a legally binding agreement between your lender and you, where the property you are going to buy is held by the lender. That's right, you pay the lender and they hold the title to the property until you pay it off. The property is the collateral. This means that if you default on your mortgage (stop paying) the lender has the right to the property and this is where we hear the word foreclosure.  

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Before we get into the nuts and bolts of a mortgage, here is one tip seriously worth considering. Ask your lender about bi-monthly and or bi-weekly payments. Although they sound the same, they are slightly different. If you do bi-monthly payments, you would make 24 payments in a year. If you do bi-weekly payments, you would make 26 payments, thus paying one extra month. After 12 years, bam, you have already payed year 13!!!! At year 24, you are on year 26! And you will have had less interest over the life of the loan. Wow, talk about easy and sweet on the savings!

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So what makes bi-monthly so special? Well paying twice a month allows the interest to not grow so much because Interest is capitalized per-day (per diem). If you pay twice a month you will pay less towards interest and more towards principal. Of course the difference is minimal, but over a 30 year mortgage it adds up. Remember, every hard earned penny counts!

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Let's get back to the action. Mortgages rates are based on a few factors:

 

1. Debt to Income Ratio: This is how much you owe divided by how much you make before taxes. This is done on a monthly basis as your mortgage payment will likely be a monthly payment. Debt that is used in this calculation is for credit cards, qualified (non-private) student loans, auto loans, rent, and housing. There can be a few more factors here, but these are the big ticket items. Please note that your cell phone bill, gym membership, Netflix, cable, etc., are not included as they are considered non-essential bills. Debt to income ratios before the mortgage should be around 28% without a mortgage and including the mortgage, around 43%. Each lender works their numbers to assess the risk of lending a little differently so you may be able to have a higher Debt to Income ratio if your income is consistent and high enough to compensate for a mortgage. 

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2. Credit Score: If your debt to income ratio satisfies the lenders standards, they will use your credit score as an indicator of your likelihood to pay back the loan. The higher the credit score, the lower the Annual Percentage Rate (APR) on your mortgage. Lenders are not likely to give a mortgage to someone with less than a 580 credit score. If you have a score in the low 600's it may behove you to spend the next 6-months to try and knock out some debt and bring it up as many points as possible. If you are committed to buying a home now and have a low score, you can work to improve it during your time of ownership and refinance when the time is right. I advise this more strongly if you are going to live there for a long time, not if you plan to be there for 5 years and move into a new home. 

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3. Downpayment: The amount of money you can put down says a lot to your lender. If you are capable of putting down 20%, this really shows that you have a greater likelihood to manage your money. This also takes pressure off the lender in that you are now invested in your property and are statistically less likely to default over the life of the loan. 20% is more than most people can afford, especially on their first home purchase. 5% down is the "new" conventional loan standard. This is much more attainable, however, there are loan programs available with 3.5% down and even less if your income and county satisfy the guidelines for a Rural Development loan (RD), which allows for 0% down. Do I recommend this? It is not my decision to make, and it might be right for you, but it takes a very special circumstance to have no money down and expect to pay a mortgage for the foreseeable future. Ultimately, a mortgage type is your call. It is important to work with a lender you trust and get all your questions answered. I like to think that if your best friend or family member asked you the details of your mortgage, you would be able to talk the talk with confidence. After all, this is the biggest financial decision of your life. 

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Mortgages come in different flavors of size and type. There are fixed rate mortgages that you "lock in" a rate (APR) for the life of the loan. This means you have the same interest rate and and also pay the same monthly mortgage payment for the life of the loan.  Mind you, there may be some fluctuations in taxes/insurance, but your principal and interest payment portion should remain the same. The life of the loan is also known as the loan term. We commonly hear or think of mortgages as 30 year loans. However, you can have a 20 year, 15 year, and 10 year fixed rate mortgages. If you can take a shorter term than 30 years and COMFORTABLY pay, then you set yourself up for a quicker payoff with much less paid in interest. When you meet with a lender, give a look at the monthly payment differences between a 30 year and a 20 year loan; you may be pleasantly surprised. 

 

There are also adjustable rate mortgages (ARM), where you get a rate for a set number of years (usually lower than the 30 year rate), but it is subject to change and can be a risk. Say you have a 7 year ARM and after 7 years the market interest rate is much higher than when you secured the loan, your new interest rate or adjusted rate will reflect the changes in the market. It can also work that your new rate is lower than your last because of market conditions. This is the risk you take. Given that ARM mortgages typically have lower APR than fixed rate, for folks who can pay down a loan aggressively, this is worth considering. 

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Now that we have talked about important factors and you have a basic understanding of the key components; the true nuances and specific mortgages that you may qualify for would be best described and fielded by a lending professional. If you would like to speak to my go to lenders, please check out my preferred lender page. Morgan and Cathy are fantastic at what they do and they will be sure to give you the information you need to make an informed decision.