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Home Loans 101
To become a homeowner, you need to learn the basics first.
What is a Mortgage?
A mortgage is a type of loan that you use to buy your home. Your lender, often a financial institution or bank, will allow you to borrow a set amount of money and pay them back over a certain period of time (with interest). If you don’t have the funds to buy a house in full but enough for a down payment, applying for a mortgage will provide you with the financing you need.
Glossary: Important Mortgage Terms to Know
Amortization
The practice of spreading your mortgage payments over the lifetime of your loan. Your loan has two components: the loan balance and the interest. Every monthly payment goes toward both. In the early years of your loan, more of your payment will go toward paying off the interest. In the later years, more of your payment will go toward paying off the balance.
Debt-To-Income (DTI) Ratio
The percentage of your gross monthly income that goes toward your debts. You can calculate your DTI ratio by dividing your monthly debt payments by your gross monthly income. Your gross monthly income is your income before taxes or deductions.
Total monthly debt payments / Gross monthly income = DTI Ratio
Interest
A charge for borrowing money, which you pay in addition to the full loan amount. Your lender will calculate your interest rate — a percentage of the full loan amount that you pay each month.
Appraisal
An estimate of how much your house is worth based on a professional inspection by an independent third party.
Deed
The physical document proving that you own your home. You will receive a deed once you close on your loan.
Preapproval
A document that tells you how much you can afford to take out in a home loan based on your credit score, income, and assets.
Closing Costs
The fees required to close on your home. In addition to a down payment, your lender charges closing costs before finalizing your loan. These costs cover expenses such as property taxes, pest inspections, and other relevant charges, which usually add up to 3-6% of the loan amount.
Down Payment
The initial amount you pay upfront to purchase your home. For conventional loans, you usually need to provide a down payment that equals 3% to 20% of your home’s purchasing price. Generally, the larger your down payment, the lower your interest rate and the lower your monthly payments.
Principal
The full amount you take out in a mortgage loan, also known as the loan balance.
What are the Most Common Types of Loans?
To decide which loan is right for you, let one of our expert mortgage lenders guide you through your choice.
15-Year vs 30-Year Mortgage
The difference between a 15-year and a 30-year mortgage is so much more than the monthly payment. While both loans lock in your interest rate and require consistent monthly payments, here are the basic differences:
30-Year Fixed-Rate Loan
Long period of time to pay off your loan
Lower monthly payments
Higher interest rates
15-Year Fixed-Rate Loan
Shorter period of time to pay off your loan
Higher monthly payments - allows you to build equity faster than with a 30-year loan
Lower interest rates
Which One is Right For You?
The loan type you choose depends on many different factors, including your financials. To examine your situation in full, schedule a consultation with Champions Mortgage today.
FAQs
How much house can I afford?
Generally speaking, you can purchase a home with a value of two or three times your annual household income. However, the amount that you can borrow will also depend upon your employment history, credit history, current savings and debts, and the size of the down payment you are willing to make. You may also be able to take advantage of special loan programs for first-time buyers to purchase a home with a higher value. Give us a call at 855-853-1522, and we can help you determine exactly how much you can afford.
When does it make sense to refinance?
Many people still think that you should only refinance if your new interest rate will be at least two points below your current rate. In the past, that might have been true, but the cost of refinancing has dropped significantly recently — it is never the wrong time to think about a new loan! A refinanced mortgage is often worth its cost several times over, considering the benefits that come and the lower interest rates we can provide.
What is the difference between a banker, a broker and a lender?
Bankers
Bankers open checking and savings accounts and provide auto financing and credit cards to individuals or businesses. They sometimes offer home mortgages, though their bank may restrict what they can deliver.
Mortgage Brokers
Unlike a banker, a broker does not lend money. Instead, they negotiate loan terms between a borrower and a lender. Most brokers charge either the borrower or the lender a fee for their services on a specific loan.
Mortgage Lenders
A lender is a financial institution that makes loans directly to you. They offer a wide array of products and programs and are not incentivized by opening up checking and savings accounts. They are focused on giving borrowers the best home loan possible for their individual needs. Champions Mortgage, for instance, is a mortgage lender.
Why is my credit important?
Before lenders decide to approve you for a loan, they need to know if you are willing and able to repay that loan. To assess your ability to repay, they assess your debt-to-income ratio. To assess how willing you are to repay, they use your credit score.
The most commonly used credit scores are called FICO scores, which were developed by Fair Isaac & Company, Inc. Your FICO score ranges from 350 (high risk) to 850 (low risk). Credit scores only take into account the information contained in your credit reports. They don't consider income or personal characteristics. These scores were invented specifically for this reason — credit scoring is meant to be a way to assess willingness to repay the loan while specifically excluding other demographic factors.
Your credit score considers your current debt level, past late payments, length of your credit history, and other factors. Your score reflects both the good and the bad in your credit report. For example, late payments lower your score but consistently making future payments on time will raise your score.
Don’t see your question?
Our team of professionals is waiting for your call. Contact us directly for mortgage advice at 855-853-1522 or email us.