Basic Knowledge of Financing a Home
Typically for people looking to buy a home, they will be financing a large portion by applying for a mortgage, also known as a home loan, from the builder / developer, a bank or other financial company. There are a variety of mortgage programs available with varying loan terms and interest rates, so it's wise to know the process pretty well.
The most common type of home loan is a 30-year fixed rate mortgage. For the loan's duration, 30 years, you'll be making monthly payments on the principal amount (the amount you borrow) as well as interest. The interest is the lender's profit for them allowing you to borrow the money.
Two Types of Mortgages
- Fixed Rate Mortgage
- • Permanent interest rate
- • Interest rate will be higher than Adjustable-rate mortgage
- • Perfect for buyers who want to remain in the home for a long term
- Adjustable Rate Mortgage
- • Initial interest rate is generally less than a fixed-rate
- • Interest rate is fixed for 6 months, 3, 5, 7 & 10 years
- • Interest rate is subject to change to higher rate after initial fixed period
- • Ideal for buyers who plan to own the home for a short term duration
- Jumbo Loan
- • A mortgage loan more than $417,000
- • Interest rate tends to be higher but at times are the same as conforming limits
- • Down payments for jumbo mortgages range from 5-10 percent based on the requested loan amount
- Government Loan
- • Any loan backed by the federal government
- • Lenders typically offer lower interest rates since they are insured
- • down payments range from zero down for VA mortgages to 3.5% for FHA loan
- • Acronyms: VA - Department of Veterans Affairs, FHA - Federal Housing Administration, USDA - United States Department of Agriculture, FmHA - Farmers Home Administration
Other Key Elements in a Loan
Private mortgage insurance (PMI) - insurance the borrower needs to pay to protect the lender in the event you go into default. If your down payment is under 20% of the purchase price, be prepared to pay PMI. For FHA loans, it is called MIP and is attached to the loan for its entirety.
Escrow or impounds - Your mortgage payment will include a portion that is applied to property taxes and insurance.
Index - Applicable to adjustable rate mortgages. Your interest rate is tied to an index such as the LIBOR, 1 year Treasury, COFI, etc.
Margin - Applicable to adjustable rate mortgages. Based on your credit and/or loan program, loan product will have a margin, ranging from 2-5, that is added to the index which gives you the actual interest rate.