For a first-time homebuyer, getting a mortgage can be a daunting experience—but don’t be scared away by the jargon surrounding the lending experience. To guide you to the right direction, we have compiled this list of frequently asked mortgage questions.
How much of a down payment will I need to buy a home?
This will depend a great deal on your lender and your loan, but you should expect that a down payment of between 5% and 20% of the purchase price will be required. Certain types of loans, such as VA loans, generally require no down payment at all. Because there can be so much variance in cost between loans, you should be sure to shop around for a loan that suits your needs.
What’s the difference between being pre-qualified and pre-approved for a loan?
Though these terms sound the same to a layman, they mean something very different. Being pre-qualified means your lender has done a basic evaluation of your financial situation to give you an estimate of the amount of loan you could qualify for, based on information you provided. It’s an idea of what you may qualify for. Getting pre-approved requires a more thorough check by your lender to tell you exactly what kind of loan you can get and approves you for a specific mortgage loan amount.
Should I get pre-qualified or pre-approved before looking for a home?
Though you don’t need to, starting down the path to getting approved for a loan by getting pre-qualified and pre-approved will let you know exactly how much home you can afford; which will make house hunting a lot easier. Being pre-approved will also let you move quickly when you find a property you want without having to rush through loan paperwork before you can make an offer.
What’s the difference between a fixed rate and an adjustable rate mortgage?
A fixed rate mortgage has a single, fixed interest rate over the life of the loan. An adjustable rate mortgage has an interest rate that can change over the life of the loan. Typically, the initial interest rate only changes after a set period of time and can change periodically after that; usually based on current interest rates, a margin and an index. Details would be outlined in the Note.
There are more costs to your loan than interest rate, and the APR considers them to give you a better idea of the cost of the loan. APR includes the interest rate as well as points, fees, and some closing costs.
What are closing costs and who has to pay them?
To finalize your mortgage, there are a number of fees you will need to pay, which may include legal fees, title fees, recording fees, survey fees, appraisal fees, inspection fees, taxes, realtor commissions, escrow, application fees, and points. The specific fees you will have to pay depending on your location and your lender and you may find you are responsible for some while the seller is responsible for others.
What are mortgage points?
Your loan may allow you to pay for points that lower your interest rate. Depending on the cost of the points and how long you will be staying in the home, it may be worth paying for points up-front to reduce your costs over the life of the loan. Be sure to do the math before you decide.
What is mortgage insurance and do I need it?
If you pay less than a 20% down payment on your home, your lender may require you to pay for mortgage insurance or private mortgage insurance which insures your lender in case you default. Once you reach 20% equity in your home, there is a process to enable you to cancel this insurance and lower your monthly payments.
What is equity?
This is how much of your home you actually own, based on the appraised value of the home and the amount you have left to pay off.
What is escrow?
Depending on your loan, you may have to pay into an escrow account as part of your monthly payment. This money goes to pay for taxes and insurance on the house, and can be a convenient way to be sure you have enough money for taxes by paying into the escrow account throughout the year.
What does it mean to refinance my home?
Refinancing your home is essentially taking out a new loan on the same property, which can get you a lower interest rate or change the duration of your loan. Before you decide to refinance, consider the amount of time you’ll be staying in the property and the amount you will have to pay in closing costs on the new loan to determine whether refinancing will save you any money.
What is a prepayment penalty?
Some loans may have a fee for paying off the loan early. If you plan on paying down your loan quickly, you will want to be sure you don’t have a prepayment penalty.