If you’re a first-time home buyer, the process of securing a mortgage can seem overwhelming. There’s a whole new vocabulary to learn, and you must make a sober assessment of your financial situation and what makes sense for you and your family.
But when you’re making a decision this monumental, it’s important to understand the terms and underlying costs that go into your monthly payment. At Gateway Mortgage Group, we’re committed to clear and transparent communication, so we’ve provided a few simple terms and concepts to understand.
Don’t trust online rates. Rates on mortgages change daily and can even fluctuate hour by hour. The rates you see online are often little more than advertising and rarely reflect the real rate you’ll get. Your final mortgage rate is based on a number of factors, including your credit score, down payment, property appraisal, loan type and more. It is a good idea to meet with a local mortgage professional to help you with the countless mortgage options, assess what is best for your financial circumstances, and this all works towards getting a realistic idea of what your final rate will be.
Fixed-Rate Mortgages. Like the name suggests, with a fixed-rate mortgage the rate remains the same throughout the life of the loan and can carry a higher rate than adjustable rate mortgages. Typically, you’ll start with a 30-year fixed rate mortgage, but 10-, 15- and 25-year options also exist.
Fixed-rate mortgages are ideal for any home buyer who intends to own their home for an extended period of time and wants to lock in their interest rate. And because fixed rates can be higher, it may be a little harder to qualify but having a predictable monthly payment year after year can go a long way to stabilizing your budget. Use our Mortgage Calculator to see what your fixed-rate mortgage may look like over the lifetime of the loan.
Adjustable-Rate Mortgages. Also known as an ARM, the adjustable-rate mortgage gives you a lower interest rate for an initial period (usually 3, 5, 7, or 10 years). After that period lapses, your monthly mortgage payment and interest rate may change yearly based on current interest rates.
The pros and cons are obvious: it may be easier to secure an ARM since the interest rate and monthly payment are typically lower than fixed rate mortgages. If you expect your annual income to increase soon or expect to live in that particular home for a limited amount of time, an ARM may be for you. Check out Gateway’s Adjustable Rate Mortgage Calculator to see how interest rates may impact your monthly payments over the life of your loan.
Now that you have some understanding of two basic types of mortgage loans, it will help to brush up on some of the factors that influence your mortgage rate.
Credit score. As with most things in life, a higher credit score typically means more favorable loan terms (like interest rates, down payment or documentation requirements). By assessing your payment history, credit utilization, credit history, new credit accounts and credit account mix, lenders can assess your relative risk level and adjust your rate accordingly.
Down payment. What you put down may have an impact on the interest rate you’ll pay. When you offer more up front, you reduce the lender’s risk, and they may be more willing to compromise on the loan rate. Conventional wisdom says putting down 20% up front will give you a favorable rate but discuss all of the terms with your Gateway Loan Officer to see what’s right for your situation.
Loan term and type. Lenders generally prefer promptness with payments, so the shorter your loan term, the more likely your mortgage rate will be lower. For instance, 15-year fixed mortgages would typically have a lower interest rate than 30-year fixed mortgages. Similarly, some loan types require little up front but may require you to purchase private mortgage insurance to protect the lender against default.
Have any questions about mortgage terms or loan types? Take a look at our Homebuyer’s Guide. Then contact one of our local, caring mortgage professionals at a Mortgage Center Near You. We’d be happy to talk to you.