Buying a home is not like buying a T-shirt. If you could go to the store, find a four-bed-three-bath ranch home you like, and check out all in one day, the world would be a much different place. However, because most people don’t have the requisite hundreds of thousands of dollars at the ready to pay for an entire house, buying a home requires loans.
Unfortunately, acquiring a home loan is not exactly straightforward. First, they are composed of many small, complex parts that require research and expense. Secondly, there are a few different types, from which you must choose the one that suits your financial plan. Finally, you can obtain a home loan from various lenders, each of which has its own merits and weaknesses.
Hopefully, this guide will tell you everything you need to know about home loans, so you will be knowledgeable enough to get your first home.
What They Are
First, the basics: Most home loans are mortgages, which are loans secured against property ? most commonly real estate, but any valuable physical assets will often do. Taking a mortgage to buy a home allows you to pay the seller a small portion up-front, usually about 20 percent, while the bank pays the rest. Then, for the term of your mortgage, which can last up to 30 years, you pay the bank back for your loan. If you fail to pay a sufficient amount every month, the bank will take your house in a process called foreclosure.
Typical mortgage loans consist of four parts: principal, interest, taxes, and insurance, which are often referred to as PITI. Here is what each element of PITI means:
- The principal is the initial amount you borrowed to buy your home. Depending on a few personal factors, a single lender might not provide the full cost of your home, necessitating several different loans.
- Interest is the cost of borrowing money. Expressed as a percentage of your principal, your interest rate is determined by your credit history, income, and a handful of other factors. A rate of 5 to 6 percent is standard, but lower rates allow you to borrow more or pay the loan faster.
- Property taxes are charged by your city, state, or federal government. They are calculated as a percentage of your property’s value. Some lenders request high-risk borrowers to pay property taxes monthly to protect their investment from seizure by the government.
- Home insurance ensures you’ll receive compensation in case your home is damaged. Different insurers will safeguard against different disasters: fire, flood earthquake, vandalism, theft, etc. Some lenders also request mortgage insurance, which ensures lenders will receive money even if you can’t make payments.
Which One to Choose
Though all mortgages contain the same components, not all mortgages are the same. In fact, there are different types of mortgages, and knowing the pros and cons of each will help you choose the right one for you. Here are the most common options for the typical borrower:
- With a fixed-rate mortgage, you’ll always know what your monthly payment will be. No matter your financial situation, no matter how long your term, you will never be surprised by a particularly high (or low) payment.
- An adjustable-rate mortgage offer affordably low monthly payments – for a time. For a few years, this low payment is fixed, but when that time runs out, lenders can raise your mortgage payment every year. This loan is best if you don’t plan to own your home for long.
- Most mortgages have limits on principals – except jumbo mortgages, which cover loans upwards of $417,000. Jumbo loans can be fixed or adjustable, so if you plan to buy an extremely valuable property, you should search for a lender offering this loan type.
- The Federal Housing Administration offers home loans with low interest rates, called FHA loans. These loans are valuable if you have poor credit, low income, or have struggled to find an agreeable lender in the past.
- VA home loans have almost no down payment requirements and no need for mortgage insurance. However, only veterans and their families can apply for this mortgage because it is offered by the S. Department of Veterans Affairs.
Where to Get One
Unless you are seeking a mortgage from a specific government-assisted program, like the FHA, you can approach nearly any financial institution and ask for mortgage rates. Typically, banks and credit unions have the fewest options because they want you to participate in their (usually expensive) mortgage programs. Mortgage brokers, which exist online and in regional locations, may seem less esteemed, but they have more options to fit your unique financial situation.
No matter what loan you want or where you live, you must shop around before committing to a mortgage. You should investigate for hidden fees by reviewing the Good Faith Estimate worksheet – which law requires lenders provide. Ultimately, you want to secure a home loan from a lender you can trust, so speaking candidly with mortgage professionals about your needs is the best way to get a mortgage you can and will pay.