Home Buyer Guide : Know Your Mortgage
Updated: Jun 3
When considering your financing options, you'll want to review many different things about the loans offered to you. In this section you'll find a basic overview of home loan features and the things you should consider as you shop for a lender or loan.
Know Your Lender
Home loans are available to consumers from thrift institutions – commercial banks, mortgage companies, credit unions and mortgage brokers. You may also obtain a loan
through a mortgage broker. A mortgage broker is unlike other lenders in that the broker does not lend money to you directly. A broker will help find you a lender and secure the terms of your arrangement.
Mortgage Broker vs. Traditional Lender
A broker may have access to several lenders and therefore can offer you a wider selection of loan products and terms. He or she can help you shop for the best deal based on your circumstances. (A Broker is not obligated to find you the best deal possible, so be sure to ask questions.)
For their work, brokers are paid a fee in addition to the lender's origination fees. Brokers set their own compensation, so you'll need to ask anyone you speak to how their fees are determined.
Know Your Loan Types
Not all home mortgages are structured the same. There are several borrowing options for home buyers and the type of loan that you choose should work for your unique financial situation.
Fixed Rate (Traditional) Loan
These loans are usually structured with repayment terms of 15, 20 or 30 years. The lender will agree to charge a fixed interest rate over the life of the loan. With this loan type, your monthly mortgage payments will remain the same for the length of the term.
Adjustable-Rate Loans (ARMs)
Also known as variable-rate loans, ARMs often offer a teaser rate for the initial period of the loan. This introductory interest rate is usually lower than rates offered for fixed rate mortgages. The interest rate will fluctuate over the life of the loan based on market conditions. Changes in rate happen at certain time periods, and the lender can set both a maximum and minimum on the rate of fluctuation.
Federal Housing Administration (FHA) Loans
Federal Housing Administration (FHA) insured loans are made by private lending institutions such as banks, savings & loans, or mortgage companies to eligible borrowers for the
purchase of a home. To secure an FHA loan, a borrower must apply and qualify with a certified FHA Lender.
Additionally, eligible borrowers must be able to pay a minimum of 3.5% of a home's purchase price. If the loan is approved, FHA will insure a portion of the loan's value to the lender.
Veterans Administration (VA) Guaranteed Loans
VA Home Loans are available to qualified veterans and their spouses. Private lending institutions issue the loans which are in turn guaranteed by the Veteran's Administration. The VA does not require any down payment on VA Guaranteed Loans and allows the borrower to receive a competitive, fixed interest rate.
Know Your Rate – And Your Terms
When you start shopping for a loan, you'll start looking at interest rates. The interest rates, terms, and fees for a mortgage will be based on your qualifications as a borrower and on the current lending market. Keep in mind though that finding the right loan is not just about finding the lowest interest rate possible. Mortgage institutions offer loans of varying terms – typically 30, 20, or 15 years. Shorter term loans can save you thousands of dollars over the life of your loan if you can afford a higher monthly payment.
You'll want to get a complete picture and break down of what a given offer means to you on a monthly basis as well as how much money you'll be spending over the life of the loan.
At a minimum, you should request quotes with a few different scenarios from a few lending institutions and compare the financial impact of each situation before you determine your best course of action. Shopping around is worth your time!
Know Your Fees
Most loans have fees in addition to the total amount you are borrowing to finance your home. You can sometimes borrow the money needed to cover these fees, but that will obviously increase the overall amount of debt you undertake. Some fees are paid up front, and others are not due until closing.
The lender or broker can charge you points on your mortgage. One point equals 1 percent of the loan amount. These are simply fees paid to the lender or broker that are often linked to the interest rate, and are usually paid in cash to the lender or broker at closing. A lender may offer you a lower interest rate, but charge more points, so it's important to compare offers.
Loan Origination Fees
The institution that actually loans you the money will generally charge on origination fee for processing the loan. They are often expressed as a percentage of the amount of the loan.
Certain lenders will charge a fee to investigate your creditworthiness and determine if you are likely to repay your loan.
Typically paid at closing, a mortgage broker may charge you a fee in addition to the origination fee. If you are working with a broker, be sure to check with them what their fee is.
Transaction / Settlement / Closing Costs
These fees lump together several charges for: application fees, title examination, abstract of title, title insurance, property survey fees, deed preparing fees, other mortgage fees and settlement documents, attorney fees, recording fees, notary fees, appraisal fees and credit report fees.
Know Your Down Payment and Private Mortgage Insurance
The largest upfront cost in purchasing a home is the down payment. Most traditional lenders expect borrowers to put at least 20% of a loan's total amount down.
Borrowers who are unable to do so are required to purchase Private Mortgage Insurance (PMI). This insurance protects the lender in case of default by the borrower.
Be sure to get a clear indication of the down payment percentage required by your lender. You will also want to know what kind of documentation your lender requires to verify that you have funds for the down payment.
Lender Interview Cheat Sheet
What kind of loans do you offer?
What kind of loan would you recommend for me? What are the advantages and disadvantages of this loan structure?
What is the current interest rate? Is the rate quoted the lowest for that day or week?
What is the Annual Percentage Rate (APR) of an offered loan?
Is the loan rate adjustable or fixed?
What are the discount points and origination fees?
What are all the costs of the offered mortgages?
If the rate is adjustable - how will rate and loan payment vary?
What are the qualifying guidelines for this loan?
What is the lender’s required down payment for this loan?
What documents will need to be provided?
What are the closing costs?
Will the lender guarantee the GFE (Good Faith Estimate) of settlement charges and loan terms?
Does the lender offer a loan rate lock? Is there a fee for the rate lock?
Is there a prepayment penalty?
Are you equipped to approve loans in-house?
How much time do you need to fund the loan?
Will mortgage insurance be required?
Can the term of the loan be extended?
Is there a cap on payment adjustments?