Shopping That Mortgage For Your New Home – Know Your Options

When you first start searching for your new home, you might feel like a kid in a candy store. Walking through the meticulously appointed model homes and seeing photos of newly built houses with atriums, spas baths, game rooms, and water views, you may be inclined to think “I want that and that and that.” But when the rubber meets the road, or in other words, when your dreams meet reality, it’s often a big ‘wakeup call.’ Although it’s exciting to see what’s out there, until you find out just how much home you can afford, it’s merely a dream. Because, unless you plan to pay cash for your new home, it’s all about the ‘mortgage.’ So, if you are considering purchasing a new home this year, make sure you know your options. 

Here’s a quick primer. Components of a Mortgage Basically, a mortgage consists of these components: principal, interest, amortization period, term, and maturity date.

1. The principal is the original amount you borrow, excluding the interest. It’s also the amount that remains unpaid, or the outstanding balance.
2. The interest is a lender fee that is usually expressed as a percentage that is calculated against the principal.
3. The amortization period is the time it will take you to pay off the loan in full by making monthly payments that consist of both principal and interest.
4. The term is the number if years that the mortgage loan is designed for, usually 15 years or 30 years, although there are other terms available.
5. The maturity date is the date that the final payment is due.

Realizing these components creates a wide variety of options for Americans. Before you can decide what will work best for your family when you purchase your new home, you need to consider what kind of monthly payment will fit into your budget. Your monthly mortgage payment encompasses certain housing expenses known as PITI, which is shorthand used by industry insiders for principal, interest, taxes and insurance. As a rule of thumb, lenders prefer that your monthly payment doesn’t add up to more than 28 percent of your gross monthly income.

Twenty percent of residential mortgage market loans are insured or guaranteed by federal government agencies (Federal Housing Administration, Department of Veterans Affairs, and Farmers Home Administration). Conventional loans issued by lenders account for the remaining 80 percent of residential mortgages.

Interest-Only: A loan that requires a buyer to pay only interest for a specified period, usually five years, before it is required to start paying on the principal. A downside to this arrangement if you’re not prepared is that once the interest-only period ends, the mortgage payment will increase because the principal is added and your interest rate may also rise. You always have the option of putting down extra money toward the principal at any point during the loan, however.

Long-Term Loan: This is the most common type of loan. Any mortgage loan with a term of 30 or more years. Long-term loans have lower monthly payments but higher interest rates.

Short-Term Loan: Any loan with a term less than 30 years. Shorter term loans have higher monthly payments but lower interest rates so you can save big on a loan and be mortgage-free in a relatively short time, especially if you make extra payments on the loan during its term. It is more difficult to quality for a short-term loan because of the higher payments.

Fixed-Rate Mortgage (FRM): A loan with the same monthly payment throughout the term of the loan. It is based on an interest rate that is locked-in when you sign the loan papers. This rate is usually higher than the one used for an adjustable rate mortgage but you never have to worry about a fluctuating monthly payment amount.

Adjustable Rate Mortgage (ARM): The initial mortgage payments on an adjustable rate mortgage are typically lower than the amount you would pay if you had a comparable fixed-rate mortgage. After the initial fixed rate period expires, adjustment intervals kick in and your rate is adjusted according to the schedule and based on an index. There are man types of ARMS.

This is only the tip of the iceberg. Understanding your mortgage options can be confusing. Mortgage brokers versus mortgage bankers? Conforming or non-conforming loans? What is a jumbo ARM loan? Oy Vey!!

A good real estate agent can serve as your guide as you maneuver through the entire home buying process, including helping you decipher what mortgage options are available to you, providing insights and tips that can save you money, and referring you to trusted lenders. Charlotte Real Estate Voice is here to help!

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