For many first-time homebuyers, the process of navigating through a home loan can seem a lot like learning a foreign language. Before you dive in to that new mortgage, though, it’s important that you understand exactly what your lender and real estate agent are talking about when they use industry jargon. Here are a few critical terms to learn.
Prequalified or Preapproved
Before you begin house hunting, you should swing by your lender’s office and talk to them about getting prequalified or preapproved for a loan. Prequalification is a simple process that will give you an estimate of how much you might be able to qualify for based on the information you provide to the lender. Preapproval is the next step, and can help you figure out exactly what you can borrow and prepare you to put down an offer after you get a credit check and determine exactly how much of a loan you will be able to get.
The traditional home loan requires that you put between 5 and 20 percent of the purchase price down, and finance it with a fixed rate for 15 or 30 years. If you have bad credit or a short credit history, you might not qualify for these conventional loans. That doesn’t mean you can’t purchase a home, it just means you will need to talk to your lender about what options are available for you.
Fixed or Variable Interest Loans
The interest rate on your mortgage determines your monthly payments. On fixed-rate loans you will have a single interest rate that is locked in at today’s market rates that will remain on your loan for the duration that you have it. A variable interest rate often starts out lower, then may increase in the future if interest rates in the market go up. Talk to your mortgage loan company about what this might mean for you and your payments to make sure you get a loan you will be able to pay in the future.
Mortgage Insurance or PMI
Gone are the days when you could get a home loan for little or no down payment at a very low interest rate—those terms for loans disappeared in the housing bubble crash of 2008. Today the banks and lenders generally require that you have at least 20 percent equity in your home, and if you don’t (for example if you put down 5 percent), you will pay private mortgage insurance (PMI). Once you pay down your loan, or if your home increases in value over time, you can petition your lender to get this cost removed.
You might also be confused about the process of closing your loan, which involves things like closing costs, potentially paying “points”, and how escrow works. If that is the case, talk to the loan specialists at Altius Mortgage to learn more today so you can confidently go into your next home purchase.