Understand interest rates, loan terms, and mortgage types
There are two basic types of interest rates you amy receive, either a fixed rate mortgage or Adjustable Rate Mortgage (ARM).
- Fixed rate mortgages have interest rates that do not change throughout the life of the loan.
- ARMs are variable rates, meaning the rate changes periodically during the life of the loan. For example, a 5/2 ARM means the interest rate remains fixed for 5 years, but changes every 2 years then after.
A loan term is how long you have to pay off your mortgage loan. For example, common loan terms for mortgages are 30, 20, or 15 years.
The type of mortgage you will receive is based your individual situation. There are different types of mortgages available.
- Conventional Mortgages are not guaranteed or insured by any government agency and are typically have fixed terms and rate.
- FHA Loans are mortgages are offered by the Department of Housing and Urban Development and Insured by the Federal Housing Administration. When you choose an FHA Loan you will pay for mortgage insurance, which protects the lender from a loss if the borrower defaults on the loan.
- Special mortgage loan examples include but are not limited to USDA Loans, VA Loans and Jumbo Loans. Most special loan programs are restrictive and you will have to meet certain requirements such as veteran status or income levels.
Know how much you can spend
In order to gauge how much you can spend when purchasing a home contact a bank, credit union, mortgage lender, or mortgage broker to find out you can borrow. Borrowed amount is based on your income, periodic obligations, down payment, and credit history.
The difference between a broker and bank, or lender, is that a broker originates a loan but only to be funded by a bank or a lender. A bank/lender both originate a consumer loan application and fund the loan.
Get your prequalification letter and look for homes
The bank, credit union, mortgage lender, or mortgage broker will give you a prequalification letter showing the amount of loan you are qualified to borrow. A property with a specific address is not required in order to be prequalified for a mortgage loan.
Shopping for a home after receiving your prequalification letter can relieve a lot of stress knowing how much you are qualified to borrow. Searching for homes to buy is the fun part of the process. There are many websites available for aid you in your home search.
The U.S. Department of Housing & Urban Development (HUD) has also developed a Home Buying Wish List, which can narrow down "must have" features in a new home, and a Home-Shopping Checklist to help compare homes when looking for a new home.