Breaking down a mortgage into different factors will provide you with the perspective that you need for your initial home purchase and for the long run. As you apply with different lending companies, there are 7 key factors that you’ll need to understand.
1. What is Your Loan Size?
The size that you get approved for is the amount available to spend on a home. It does not mean that you need to spend the full amount. For example, if you are approved for $200,000, you can still purchase a home for $150,000 and only borrow the amount that is needed. If you are putting cash down on a home, your affordability will equal the amount of your loan size plus the money down. For example, if you are approved for a $150,000 loan and have $50,000 for a down payment, you can afford a $200,000 home.
Loan sizes up to $415,000 are typically considered to be standard loans. If you're seeking approval for an amount larger than that, you’ll typically need to apply for a jumbo-sized mortgage, which has its own rates and terms.
2. What is the Interest Rate?
Any time you apply for a mortgage, you will be presented with an interest rate. This rate is an annual percentage that you will have to pay on the mortgage. This is one of the most competitive factors when searching for mortgage lenders. Finding a mortgage company with the lowest interest rate can help you save hundreds or even thousands of dollars each year, depending on the rate of payments and overall home costs.
Interest rates change daily, so it's a good idea to compare and review websites before making a final decision. The average rates vary from 3.0% to 4.0% of the total mortgage cost for most lenders.
3. What is an APR?
The APR is the “Annual Percentage Rate” that applies to a home mortgage. This rate is typically preferred over the interest rate because it reflects the true amount that impacts your loan. The APR includes the interest rate, mortgage processing fees and points, so pay particular attention to it as you budget for your home mortgage.
4. What are the Fees and Closing Costs?
After a mortgage is approved, your new home must go through a closing process. This process includes a number of lender fees and other essential costs. They might include loan origination fees, attorney's fees, survey fees, title search fees, escrow deposits, and much more. As you apply for a mortgage, it's a good idea to look at waived fees, promotional prices, and reduced prices on your closing. As the mortgage moves forward, you will receive a detailed breakdown of these fees.
5. What is a Loan Term?
The term of your loan indicates how many years you will be making payments. This type of term can also have an impact on your overall APR and the total amount spent on a home. For example, if you agree to a 15-year mortgage, you will usually have higher monthly payments with a lower interest rate. If you set up a 30-year mortgage with a company, you will likely have lower monthly payments but a slightly higher interest rate. Comparing rates and terms against your budget will help you make the best decision.
6. What Are Fixed & Adjustable Rates?
The interest that you purchase on a mortgage can be either fixed or adjustable. A fixed rate means that you agree to pay the same interest rate through the duration of the loan. An adjustable rate can change from year to year based on the housing market. You may start with a low fixed rate for a guaranteed amount of time. Once the period ends, you are subject to interest rate changes on an annual basis. This can alter your monthly payment and increase your risk of paying more for the mortgage.
7. Are There Additional Features?
Pay attention to the small details while shopping for mortgage lenders. For example, mortgage lenders may offer reduced closing costs for signing up with them. You may also get lowered interest payments or reduced mortgage insurance fees by choosing monthly auto-payment options for your loan. This type of payment will automatically deduct your mortgage payment from a chosen bank account each month.
Refer to this helpful guide when you’re ready to start comparing your mortgage options.
Now that you know more about the home mortgage process, be sure to read our reviews and learn more about some of the industry’s leading lenders.