26 Aug The Bottom Line: Mortgage Basics
At City Creek Mortgage, you’ll find a professionally trained team of mortgage professionals ready to walk you through your mortgage basics. We believe the more you know and understand your mortgage details, the more confident you’ll feel in your home purchase.
Our team recognizes that you’re purchasing more than a house – you’re buying a home. We know how impactful that can be, and we want you to be happy about the entire process.
If you have questions about any part of the mortgage process, please ask. Knowledge is power!
Back to Mortgage Basics
Making a jump to homeownership is a goal for most Americans, but purchasing a home is a big step and should be done with careful, thoughtful consideration.
You may have already begun learning all you can about purchasing a home, and all that research may have left you with more questions than you had when you started. Don’t worry! You’ve come to the right place.
Let’s start at the very beginning. The loan you use to purchase a house is a mortgage. Mortgages are a necessity if you don’t have the cash to buy outright. (Hardly anyone does!)
To qualify for a mortgage, you must meet specific eligibility requirements. A person interested in purchasing a home usually has a stable and reliable income, a debt-to-income ratio of less than 50%, and a good credit score. Don’t fret! If you don’t meet one of those criteria, we can work together to get you on the right path.
Mortgages are “secured” loans. That means the borrower (you) promises collateral to the lender if you cannot continue making payments. In the case of a mortgage, your collateral is the home you’re buying. If you cannot make payments on your mortgage, your lender can take possession of your property – a process known as foreclosure.
How Does a Mortgage Work?
Once you’ve been approved for a mortgage, your lender gives you a specific amount of money to purchase your home. You agree to pay the lender back – with a set amount of interest – for many years. Your home isn’t technically yours until you’ve paid the entire mortgage down to a zero balance.
The amount of interest you’ll be paying depends on two things – current market rates and the level of risk undertaken by your lender. The higher your credit score and the better your financial history, the better you appear to a lender. The more responsible you appear, the better your interest rate.
The amount of money you are allowed to borrow is dependent on the amount of money you can afford to pay back (think monthly payment), and – most importantly – the fair market value of the home as determined by an appraisal. The lender cannot lend you more than the home appraises for.
Mortgage Basics: Lingo
Once you get involved in the mortgage process, you’ll begin to hear terms with which you may not be familiar. For example:
This is the amount of cash you provide upfront to purchase your home. In most cases, you must put forth a fair amount of cash, “put money down,” to secure a mortgage.
The amount of your down payment depends a lot on the type of mortgage you’re applying for, but it’s widely accepted that the larger your down payment, the better your loan terms and the less expensive your monthly payment.
Use online tools like a mortgage calculator that help you see how your down payment affects your monthly payments.
If only homeowners just had to think about the actual cost of the home. But there’s more to a home purchase than the cost of the house itself. There are other expenses to consider, like property taxes and homeowners insurance. To help you, lenders set up an escrow account to pay these expenses.
An escrow account is like a checking account managed by your lender. You cannot earn interest on the funds, but the account is used so your lender can make payments to homeowners insurance and taxes on your behalf. To fund your escrow account, payments are added to your monthly mortgage payment.
While lenders don’t always require an escrow account, you’ll have to pay your property taxes and insurance on top of your monthly mortgage payment. That type of situation is unusual because it’s in the lender’s best interest to ensure your taxes and homeowners insurance are paid.
The amount of money kept in your escrow account solely depends on how much your property taxes are each year and the cost of your homeowner’s insurance. Since these expenses can change, your escrow payment may change, too. Sometimes that means that your mortgage payment may increase or decrease.
Interest rates are a percentage added on to the amount of money you’ve borrowed from your lender in exchange for the lender allowing you to borrow the money you need. There are two types of mortgage interest rates: fixed and adjustable.
Fixed rates never change. You can count on a fixed-rate loan to provide a predictable payment each month, making budgeting easier.
Adjustable rates change based on the market. Most adjustable-rate loans begin with a period of fixed interest – usually 5 or 10 years. When your fixed-rate period ends, your rate can adjust up or down every six months to a year. It’s important that you understand your monthly payment is likely to change.
About Us and How We Can Help With Mortgage Basics
Our team at City Creek Mortgage understands that buying a home can feel intimidating. We’re here to help. If you are ready to buy a home, give us a call. We can walk you through the entire process.