As your local bank, we want your mortgage to serve you well. Here are some commonly asked questions and answers to prepare you for a successful journey to homeownership.
Q: What type of mortgage should I get?
A: There are several different types of mortgages to choose from. Each loan program has specific benefits. Many buyers go with a 30-year conventional fixed-rate loan. This option gives you the security of fixed principal and interest payments over the life of the loan. With an adjustable-rate mortgage, your interest rate stays the same generally for 3, 5 or 7 years. You often get a lower initial rate and monthly payment. An FHA loan allows you to make a lower down payment and have easier credit qualifications. If you're a veteran, a VA loan could be the best option for you, and if you plan to buy a home in a rural area, a USDA mortgage could give you a no-money-down option. Your lender will go over all of your options and help guide you to the best one for you.
Q: Is it better to get a fixed-rate or adjustable-rate mortgage (ARM)?
A: Most mortgages being originated today are fixed-rate. A fixed-rate mortgage makes sense when interest rates are low. However, there are some circumstances where an adjustable-rate mortgage may be better. For example, if you expect to sell the house before the fixed-interest period ends and the rate starts to float, an ARM could end up saving you thousands of dollars. Or, during periods of falling interest rates, an ARM can allow you to get a low initial rate, and will save you money later if rates drop further.
Q: Should I "lock" my interest rate?
A: A rate lock means that you're guaranteed today's mortgage interest rate for some predetermined period, typically 30 to 60 days. If interest rates have been trending upward, it's generally a good idea to lock in your rate.
Q: What are discount points?
A: Discount points are money that you pay up front on your mortgage in exchange for a lower interest rate. One "point" is equal to 1% of the loan amount, so on a $200,000 mortgage, one discount point would be $2,000. Discount points are tax-deductible, and mathematically, if the interest savings over the life of the loan is greater than the points paid, it can be worth it. A mortgage calculator can help you determine whether discount points are a good idea by comparing the effect of various interest rates on your mortgage.
Q: How much money will I need to put down?
A: A down payment is the cash you pay upfront to get a home loan. It is deducted from the total amount of your mortgage and represents the beginning equity — your ownership stake — in a house and property. Most lenders are looking for 20% down payments. That’s $60,000 on a $300,000 home. With 20% down, you’ll have a better chance of getting approved for a loan. And you’ll earn a better mortgage interest rate. However, there are numerous loan programs out there that let you put a lot less down. FHA loans for instance require only 3.5% down.
Q: What are closing costs? And about how much are they?
A: Closing costs are all of the charges you pay before your loan is completed. These can include origination fees, title insurance, prepaid escrows, and more. While closing costs can vary significantly, anticipate paying about 2% to 3% of the home's price in closing costs.
Q: What kind of credit score do I need to get a mortgage?
A: In general, to get the lowest interest rate on a mortgage, you’ll need a credit score of 760 or higher. But a credit score of only 580 or higher is needed for first-time homebuyers to qualify for a Federal Housing Administration (FHA) loan with 3.5 percent down. If your credit score is lower than 580, you’ll need a 10 percent down payment.
Q: How long does it take to close a mortgage?
A: A mortgage takes about 30 days to originate. A lot happens between you submitting your mortgage application and you taking ownership of your home, including gathering documentation, getting a home inspection, the seller making repairs, and the loan going through underwriting.
Q: What documents will I need to submit?
A: Your lender may ask for many different items, but in general, start gathering the following:
Q: What is a pre-qualification?
A: A pre-qualification is a basic review of your finances to determine if you would qualify for a mortgage. Usually, a pre-qualification is based on unverified information you provide and does not include a credit check or any documentation, and is therefore not a firm guarantee of a loan.
Q: What is a pre-approval?
A: Unlike a pre-qualification, a pre-approval can be a highly useful tool in the homebuying process. It's basically the same as applying for a mortgage, but without a specific home attached to it. As part of a pre-approval, a lender will check your credit, verify your income and employment, and commit to lending a certain amount of money. A pre-approval can show sellers that you're serious about buying a home, and that you're likely to be able to follow through on a bid, and close on their property.
Q: What is an escrow account?
A: When you obtain a mortgage, you'll most likely be directed to put money into an escrow account to guarantee the lender that the ongoing expenses of owning the property will be handled -- specifically taxes and insurance. You'll pay a lump sum into the escrow account at closing (also known as your "prepaids"), and add to it further with each of your monthly mortgage payments.
Q: How is my mortgage payment determined?
A: Typically there are four parts to your mortgage payment: The principal is the repayment of your outstanding balance. The interest is the payment of the interest charged on the outstanding balance. Annual property taxes are divided into 12 monthly payments and deposited into your escrow account. The final part is insurance, which includes homeowner's insurance, as well as any other hazard insurances you're required to have, such as flood or windstorm. If you put less than 20% down on your loan, this can also include private mortgage insurance.
Q: Will my monthly payments change during the loan term?
A: Most likely, yes. Even with a fixed-rate loan, your payment is likely to change over time due to increases in property taxes and insurance expenses, which cause your escrow payments to be higher.