Mortgages are loans used to purchase a home. Usually, there’s an initial down payment required and the loan is secured by the value of your property. Since lenders take risks when lending you money, it’s essential that you qualify for the most competitive interest rate possible.
What is a Mortgage and Why Do I Need One?
A traditional 30-year fixed-rate loan may be the most popular type of mortgage. But you have other options such as adjustable rate mortgages (ARMs). ARMs usually feature lower interest rates than their 30-year counterparts, meaning you could save money over time with these loans.
Selecting Your Loan Program
Most lenders provide several different mortgage types, such as conventional and jumbo loans. Each has its own credit requirements, fees and insurance. Some are insured by the government while others rely on private insurers.
What Types of Mortgages Can You Get
A conventional loan, the most popular option, is a fixed-rate mortgage backed by the government. These can be obtained through banks, credit unions and online institutions alike.
Another option is a home equity line of credit, which lets you borrow against the value of your existing home. Usually with low interest rates and monthly payments that accumulate over time.
Some borrowers use a reverse mortgage to access the equity of their home for tax benefits and other purposes. It can be an advantageous way to finance renovations or other costs, provided the borrower has enough cash reserves to cover monthly payments without incurring penalties.
How to Apply for a Mortgage
The initial step in applying for a mortgage is gathering your financial info and speaking to a lender about the amount you wish to borrow. Lenders will consider your debt-to-income ratio, credit score and employment history when determining if you meet the qualifications.
Additionally, you’ll need to provide proof of your income and savings. This could include paystubs, W-2 forms and income tax returns. Having a savings account open is recommended as it helps save for down payments and covers any unexpected expenses that may come up during the process.
Down Payments and Other Costs
Buying a home is an expensive investment, so many people attempt to save as much money as possible upfront. That’s why lenders require at least 20% down payment, which could help you qualify for a lower interest rate.
Savings accounts are another popular way to save for a down payment, as they typically pay you some interest on funds deposited. Unfortunately, savings accounts don’t keep up with inflation and offer relatively small amounts of interest compared to other investments.
Finding A Great Mortgage Deal
The mortgage process begins with a lender reviewing your finances, such as your credit score and debt-to-income ratio. They then decide whether to grant you a mortgage, how much it will be and its terms.
Mortgage lenders can come in the form of banks, credit unions or nonbank lending institutions like Rocket Mortgage or Guaranteed Rate.