What’s a Mortgage?
Homeownership is on the minds of many these days, especially with the real estate market getting as much attention as it is. Whether it’s expanding into a bigger home to fit a growing family or to house a home office or downsizing to be more efficient with your utilities or for safety reasons, homeownership can be a great investment in your future.
What is a mortgage?
Put simply, a mortgage is a type of loan used to obtain property such as a primary residence, aka your dream home. A mortgage in financial terms is as follows: an agreement between lender and borrower to purchase a home without having all the cash up front. The agreement gives the lender legal rights to repossess the property if a borrower fails to meet the terms of a mortgage such as not paying the money you borrowed along with its accrued interest. Payments are most usually owed in the form of a monthly bill that includes principle (amount owed based on amount borrowed) plus interest (agreed upon amount above and beyond the principle that gets paid to the lender).
A mortgage loan is also used for an existing homeowner looking to refinance their home for a better interest rate (and more money in their pocket). More on that later!
Do I need a mortgage?
Mortgages are the most common way for aspiring homeowners to achieve the dream of homeownership. Although some home purchases are made with cash, seeking to gain a mortgage through a lender is more typical, as most people don’t have the amount of cash in hand or “liquid” (readily accessible) that is needed to purchase a home.
A mortgage is the most secure and attainable way for people in the community to invest in themselves and their family when buying a home.
Is getting a mortgage considered “good debt”?
In short: it depends. There are many factors considered when a lender looks at a potential borrower’s mortgage application. The following are the most important ones:
- A stable, reliable income. You’re employed or self-employed with a proven history of earning paychecks.
- A debt-to-income ratio near 43%. This means that you’re earning more money than you owe on other loans, credit card bills, payments, etc.
- A decent credit score. For a conventional mortgage, lenders are looking for a credit score around 650, along with other qualifying criteria.
If one or more of those three factors are not present at the time of your mortgage application, you will most likely be denied a mortgage loan. If this happens, don’t be discouraged! It’s a great opportunity to take a step back, evaluate your financial situation and credit score and create a plan of action.
If all three of those factors are present, you will most likely be considered for a mortgage loan. However, you shouldn’t necessarily sign on the dotted line just yet. Even if you are approved, consider your borrowing power (how much the lender is willing to loan you), your offered interest rate (the better your credit score, the better your rate), and the available properties on the market.
For example, if you want to live in a town where the average home price is $200,000 but you’re only approved for $175,000, it may be beneficial to look in another town with more affordable options or pause your home search until you’ve saved more money or are qualified to borrow more.
How do I begin the process of obtaining a mortgage?
First, we suggest having your finances in order before you fill out an application. This means creating a list or spreadsheet of all of your income, assets, debts and recurring monthly payments. If you have a budget, update that with any new income sources, debt balances, etc. You may feel nervous to see your finances up close, but we promise it’s actually empowering!
Doing this will give you an estimate of how much money you’d be able to spend on a mortgage per month. You’ll also need to consider the amount you’ll pay for:
- property taxes
- homeowner’s insurance
- closing costs on a mortgage
- down payment (so you’re not borrowing 100% of the home’s value)
- homeowner expenses (think snow removal, maintenance and repairs, any updates or renovations)
Having this done before you approach a lender or mortgage application will prepare you for the reality of what you’ll be able to afford in relation to how much you’re offered to borrow.
Pro tip: You don’t have to accept the full amount a lender offers you! In fact, we highly encourage that you don’t. If you’re approved for $300,000 but your dream house is $225,00 only borrow what you need to secure the purchase. And, using the calculations from the list above and your current expenses, you’ll know how much you have available in your budget for monthly loan repayments and can avoid overextending your budget.
Are there different types of mortgages?
Yes! There are many types of mortgage loans and it’s important to note that it’s not one-size-fits all. There are a whole host of options for different financial scenarios, such as conventional, VA, FHA, fixed-rate, adjustable-rate, and refinanced mortgages.
Let’s break down the most popular types of mortgage loans:
- Conventional. This is the most popular option among borrowers and is ideal if you have a great credit score and a low debt-to-income (DTI) ratio. Conventional mortgages are funded by private financial lenders and either held locally or sold to a larger government organization such as Fannie Mae.
- Federal Housing Administration (FHA). This is also a very common option among borrowers. FHA loans are funded by government agencies and offer more flexible requirements such as lower credit scores or higher DTI.
- Fixed-rate. This loan locks in the interest rate offered during your approval process. The pros are consistent payments and the same interest rate for the life of the loan. Cons are that your rate won’t decrease.
- Variable-rate. This loan adjusts your interest rate with variations in the market. Pros are that you may see your rates decrease. Cons are that you could see unexpected rate increases that may extend passed your budget.
Other considerations when choosing a mortgage loan are the term length, such as 15-, 20- or 30-year terms. The longer the term you choose, the smaller your monthly payment and the more money you pay in interest over time. The shorter the term, the larger your monthly payment will be but you’ll pay less money in interest over time.
Considering homeownership and a mortgage may seem overwhelming, but with the guidance of an expert lending specialist you’ll be in trusted hands throughout the entire process.
At Auburn Savings, your financial wellbeing is important to us! For more information, visit the Mortgages section on our website. Or, if you have any questions or want to get the mortgage application process started, give one of our mortgage specialists or branch locations a call.