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NMLS #1547953

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Preparing To Purchase a Home

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Exploring Your Mortgage Options

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Getting Approved

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Working With an Agent

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Finding a Home

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How To Make an Offer

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Preparing To Close

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Closing on Your Home

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Managing Your Mortgage

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1. THE THREE MAIN ELEMENTS OF A MORTGAGE

There are three main elements for every mortgage, which are:

  • A term
  • A rate type
  • A loan type

Understanding how these elements work together will allow you to select the perfect mortgage.

LOAN TYPE

The type of mortgage is dependent on the loan amount and the involvement of private investors, or a government agency.

FHA LOANS

Qualifying for these loans is easy, as you only need a low FICO® score and a small down payment. However, you’ll need to pay a fee known as mortgage insurance, which makes these loans costly in the long-term. Any FHA-approved lender can provide you with an FHA loan. The Federal Housing Authority (FHA) ensures these loans, which means that they protect lenders against any losses if the homeowners end up defaulting on their loan.

CONVENTIONAL LOANS

Qualifying for these loans is harder, but they’re more affordable in the longer-term than FHA loans. If you make a down payment of 20% or more, you won’t need to pay private mortgage insurance. This will help you save a lot of money on your monthly mortgage payments.

VA LOANS

These are meant specifically for active-duty service members, veterans, and eligible spouses. VA loans allow you to purchase a house without any down payment or private mortgage insurance.

JUMBO LOANS

These mortgages go beyond the limits of conventional loans. You’ll need to get a jumbo loan if the loan amount is between $484,351 and $3 million.

RATE TYPE

Buying a house means you will probably need a mortgage. There are two types of rates, fixed and adjustable. It’s recommended to pick the one that helps you meet your goals.

FIXED RATE MORTGAGE

This means the rate will be fixed throughout the length of the loan. That means that the monthly mortgage payments will remain predictable and consistent. It’s ideal for homeowners who want to make regular payments that don’t exceed their budget and for those who’re planning on staying in their house for several years.

ADJUSTABLE RATE MORTGAGE

It will not change for the first 5, 7, or 10 years of the loan; after that, the rates will go up or down every year based on the market conditions. It’s the best option for homeowners who’re thinking about refinancing or moving before the starting fixed-rate period ends, and you can get the lowest rate as well.

TERM

The term is the duration of life of your loan, and in general fixed-rate mortgages have 15-year or 30-year terms. In adjustable rate mortgages, there is generally a 30-year term.

BENEFITS OF A LONGER TERM

Having a longer term allows you to keep monthly payments low and frees up cash that you can use to build your savings, or for home improvement projects.

BENEFITS OF A SHORTER TERM

With a shorter term, you’ll be paying off your mortgage earlier, allowing you to build equity faster in the home while paying less interest.

2. THE MANY PARTS OF A MONTHLY MORTGAGE PLAN

Buying a house means your monthly payments are divided into three separate parts, which are the principal, the interest, and the insurance and taxes (generally grouped together).

  • The principal is used to pay the balance of your loan, and the money you put towards the principal helps increase the equity amount of the property.
  • The interest is a fee given to the lender for borrowing money.
  • The insurance and taxes are used for covering the homeowner’s insurance premiums and property taxes. You will only have this part in your payment if you open an escrow account, which allows the lender to hold money that’s been used for paying your insurance premiums and property taxes. An escrow account ensures you don’t need to worry about paying insurance bills or taxes, as the lender handles everything for you.

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Further Reading

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