Whether you’re a first-time homebuyer or relocating to a new state and need to find a place to live, chances are you’re always going to have questions about mortgages. Not only can they be confusing and overwhelming for first-time homebuyers, but mortgage rates change. So, even if you’re a seasoned pro, there’s always an opportunity to brush up on how mortgages work and what you can expect from them.
While homeowners may have a variety of questions, there are a few questions that are more common than others. Here are the top four most frequently asked questions about mortgages:
What Kind of Mortgage Should I Get?
Perhaps one of the most common questions lenders get asked is what kind of mortgage a homeowner should get. There are four main types of mortgages:
- Conventional mortgage/Fixed-rate mortgage: A type of loan that is secured through a private mortgage lender, credit union, or bank. Fixed-rate mortgages come with a fixed interest rate, meaning they will not change throughout your mortgage. Applicants will need to have a credit score of at least 620, an acceptable debt-to-income ratio of at least 36%, and at least 20% down payment.
- Adjustable-rate mortgage: An adjustable-rate mortgage, or ARM, has an interest rate that is initially set below the average market rate; however, this rate will increase as time goes on. Furthermore, the duration of this lower interest rate could be anywhere from one month to up to 10 years. When it does increase, it will usually surpass the interest rate of a conventional mortgage. The benefit of this type of mortgage is that it will be more affordable than other options for up to seven years of the mortgage. ARMs are most beneficial for homeowners looking to purchase a starter home or those who expect to come into a significant amount of money shortly.
- Government-insured home loan: This type of loan is exactly what it sounds like – a loan that is backed by the government. This means that the government guarantees repayment to the bank or lender if you are unable to make payments and default on your home. All government-backed mortgages follow guidelines from the Federal Housing Finance Agency (FHFA). Government-backed mortgages include VA loans (available to active duty military and veterans), FHA loans (available to first-time homebuyers), and USDA loans (available for those purchasing a home in a “rural” area that has a certain population number).
- Construction home loan: While these are less popular, those who are building their new home from scratch can qualify for a construction loan, which is a short-term loan that only covers the costs associated with building your home. So, if you are building your home for yourself, you will have to apply for one of the aforementioned mortgages once construction is complete.
As you can see, each type of mortgage comes with its own stipulations and eligibility requirements, so understanding the differences between them will help you decide what kind of mortgage is your best option.
2. How Do I Get the Best Mortgage Rate?
Buying a home is an investment, so it goes without saying that you want a good rate. The first thing you have to keep in mind is that the better your credit score is, the more likely you are to have a lower rate. This is because those with a history of on-time payments are usually more reliable in terms of paying the mortgage lender back.
However, that’s not to say lower credit scores can’t still get a mortgage. They absolutely can; however, they will have to pay a higher rate. Here’s a breakdown of how credit scores are categorized:
- 629 and below: poor credit
- 630-699: fair credit
- 700-739: good credit
- 740 and above: excellent credit
So, to get the best rate, increasing your credit score is the best way to do this. Even a 20% jump from 630 to 650 could offer you a better rate. However, you can also shop around for the best rate. Different lenders will be able to work with you and potentially offer you something different, so it’s always a good idea to do your research to find out who is offering the best rates, try to improve your credit score by paying off a card with the lowest amount, or if you can, save money for a down payment. All of these actions can help secure you the best mortgage rate.
3. How Do I Save for a Down Payment?
A lot of first-time homebuyers wonder how they can save for a down payment on a home, especially since this will be a large chunk of change. The easiest way to do this is to use a home buying calculator/affordability calculator to determine how much you can genuinely afford. While it’s tempting to look at homes on Zillow, it can be a waste of time if you’re looking at and saving homes that are outside your budget.
By using a home buying calculator, you can determine what you can afford. You can also learn how much you’ll need to save or secure for your down payment. This essentially takes the guessing out of the process. It can help you be more informed and confident about the home you’re buying.
Like taking steps to improve your credit score, saving for a down payment can be a slow-burning process. However, you can make it easier with a savings app or deposit money directly into your savings account.
4. Should I Refinance My Home?
This question is for existing homeowners, but it’s one that’s frequently asked, especially if they need to pay off debts. Refinancing your mortgage is the process of getting a new one to pay off your old one. And while it seems that doing so may not yield any financial benefits, the opposite is actually true.
Refinancing allows you to possibly secure a better rate, as well as cash out any differences. These can pay for home repairs or improvements and even credit card debt. Refinancing your mortgage can be extremely beneficial during times of economic inflation when interest rates tend to rise. If you’re considering refinancing your home, it’s best to consult with an experienced mortgage lender. They can advise you of the benefits or potential implications.
Do You Want to Get a Mortgage or Refinance? Call the Team at City Creek Mortgage
Mortgages don’t have to be scary. If you have questions, contact the experienced team at City Creek Mortgage for help. Our team is available to take your call at 801-501-7950. We’ll make the process of securing a mortgage or refinancing your home as simple as picking up the phone. We’re in the process together!