Intro to Home Mortgages in Hendersonville NC
Unless you are Scrooge McDuck, you’ll probably need a mortgage (other people’s money) to buy your home. This means you’ll need to understand the various types of mortgages that banks offer. Before you dive into understanding mortgages, make sure you are financially fit and that have the highest credit score possible.
There are two basic types of mortgages based on what types of interest rates each offers. Interest rates is the cost of borrowing the money expressed as a percentage. The most common are fixed-rate mortgages where the interest rate stays the same over the length of the loan. The most common term (length of time) is 30 years but 20 and 15 year are also available. As of this writing interest for 30-year fixed-rate loans are just over 4%.
The difference between the interest rate and annual percentage rate (APR) is that the APR includes other fees required to get the loan, such as points, loan origination fees, and other bank fees.
The other types of loans are adjustable-rate mortgages, more commonly shortened to ARM, where the interest rate changes over the length of the loan (usually every 6 months to 1 year).
A third type, hybrid loans, combine an initial term at a fixed-rate and then converts to an adjustable rate after that time period. The length of the fixed term usually ranges from 3 to 10 years and these loans are often listed as 3/1, 5/1, 7/1, and 10/1 ARMs.
The last variation is a balloon loan. Balloon loans seem like hybrid loans with one major difference – the full loan balance is due as one lump sum payment at the end of the mortgage term. This is likely to be tens of thousands of dollars which you must pay if you cannot refinance into another type of loan. Be wary of these loans.
Fixed-rate loans, particularly the 30-year, is the most popular loan in the U.S. for good reason. It offers consistency and predictability so home owners know what they will pay each month for 30 years. You’ll pay a slightly higher interest rate versus shorter term fixed-rate mortgages and ARMs for this consistency. On the positive, the payments are lower than 15 or 20-year fixed loans.
One downside to the 30-year fixed rate loan is that most of the payment will go to interest in the first 10 years before you start paying down the principal of the loan. This is one reason why well-known personal finance guru, Dave Ramsey, recommends 15-year fixed mortgages. All fixed-rate mortgages require solid financials and credit score to be approved.
Why would anyone choose adjustable-rate loans? There are a couple of situations. The borrower is betting what is likely to happen in the future to interest rates. For example, if interest rates are at or near their historical high, you might choose an ARM hoping the rates will soon drop. The other, and more likely reason is if you are not planning on staying in the home for a long time. In that case, you will gladly accept the lower interest rate of an ARM thinking you will move again before it significantly changes. Ultimately, no one can reliably predict what will happen with interest rates and the currently low interest rates have lulled borrowers into a false state of security. Just consider the range of historical interest rates which reached an average high of 16.64% in 1981 before steadily dropping over the next couple of decades.
Points and Other Details
Points are up-front interest charged by the lender. Each point is equal to 1% of the purchase price, so $2,500 on a $250,000 loan. Sometimes borrowers choose to buy additional points in exchange for a lower ongoing interest rate. For example, buying one point may decrease the loan’s interest rate by 0.25%. Buying down the interest rate may make sense if you expect to stay in the home for a long time.
Also remember there can be many other initial fees associated with getting a loan, so ask for an itemized list of charges and breakdown of costs before you commit to that lender.
Finally, most lenders will require an appraisal (third-party opinion of value), survey (to confirm property boundaries), and title insurance (in case there is a dispute on who owns the property going forward).
Mortgage lending is competitive these days thanks to the aggregators like Bankrate.com and others but the fees still vary. The other consideration is how responsive and reachable the lender will be since you must have mortgage approval before the end of the due diligence period. Borrowers gain a sense of comfort in knowing they can drive to a local mortgage lender and get answers quickly.