Mortgage Strategy: Everything You Need to Know
From the moment you take out a mortgage, you are committing to a long-term loan, which means long-term planning. A mortgage strategy can help you find a loan that fits your needs and your budget. Employing a mortgage strategy with the right provider can make ownership a joy and not overwhelming.
The First Steps in Your Mortgage Strategy
To lay the foundation of your mortgage strategy, you need a step by step mortgage guide. The first steps are to learn what mortgages are and how they work.
What Is a Mortgage?
A mortgage is made up of two main parts:
The interest on your loan
Your principal is your loan amount. Your interest is a percentage of the principal. The lender charges you interest for the privilege of borrowing money to be repaid over time. Your mortgage payment is a monthly installment that includes an amount towards the principal and the interest.
Calculating this monthly payment is based on the terms of your loan. This calculation is the principal plus interest according to your interest rate. The mortgage rate is the annual percentage rate (APR) that is assessed for the total cost of your loan. The APR includes both the interest rate and loan fees. Another rate you should become familiar with is annual percentage yield (APY). APY is important to understand to gauge the actual annual costs on the compounding interest of your mortgage.
This calculation helps you see if you can afford the loan or not. You need to figure out if it fits your budget. Is it a payment you can manage over the long term? These are essential questions for you to answer as you move through your mortgage strategy.
Types of Mortgages
Before choosing a mortgage, you need to know what types of mortgages are available. Each type has different guidelines and calculations to consider for your mortgage strategy. Different loans have different down payments or credit history requirements. Some loans are also guaranteed by the federal government if certain eligibility requirements are met.
Conventional loans are for borrowers with good credit and stable employment and income history. They usually require a 20% down payment and are not backed by the federal government. It is possible to make a 3% down payment with an additional fee for private mortgage insurance (PMI). Borrowers that meet the credit and income criteria can qualify for conventional loans that are backed by Fannie Mae or Freddie Mac. These are loan enterprises that are sponsored by the federal government, also known as GSEs.
Conforming loans are conventional loans that are bound by maximum loan limits set by the Federal Housing Finance Agency (FHFA). The limits vary geographically. Currently in most counties, it is set at $647,200. Regions with higher housing costs are generally set at a higher limit. In some areas, however, even these higher limits are too low for the housing stock on the market.
Nonconforming loans cannot be bought or sold by Fannie Mae and Freddie Mac. The loan amount or the underwriting guidelines exceed the limits set by the FHFA for conforming loans. They are considered riskier loans (because they cannot be guaranteed by Fannie Mae and Freddie Mac) for the lender and require large cash reserves, a down payment of 10-20%, and an exceptional credit history.
Federal Housing Administration (FHA) Insured
FHA loans are for low to moderate income buyers who are purchasing for the first time but cannot qualify for a conventional loan. They require a down payment of 3.5% of the purchase price. The credit score requirements for an FHA insured loan are less stringent than conventional loans. The borrower is considered riskier to the lender, so the federal government guarantees the loan from FHA approved lenders. Borrowers pay an annual Mortgage Insurance Premium (MIP) upfront as insurance protection for the lender from default over the life of the loan.
U.S. Department of Veterans Affairs (VA) Insured
VA loans are 100% guaranteed by Veterans Affairs for homebuyers who are qualified military service members, veterans, or their spouses. They require no down payment and no PMI or MIP. They have fewer closing costs and usually better interest rates. They do require a funding fee, which is a percentage of the loan amount, to help offset the cost to taxpayers.
This funding fee is waived for:
Veterans receiving VA benefits for a service related disability
A surviving spouse of a veteran who died in service
A veteran who received a Purple Heart
U.S. Department of Agriculture (USDA) Insured
USDA loans are reserved for low-income buyers in rural areas who do not qualify for a conventional loan. They are guaranteed by the USDA. Borrowers must meet the USDA eligibility rules. The loans require little to no down payment. In some instances, the USDA may provide a down payment contribution on your behalf.
What is the best interest rate for a mortgage? The answer varies depending on the type and length of your loan. Mortgage rates fall into two categories:
Fixed Rate Mortgages
Variable Rate Mortgages
Fixed Rate Mortgages
The interest rate on a fixed mortgage is set for the life of the loan. Basically, locking in your interest rate. Fixed rate mortgages are best if you plan to live in the home for a long time.
You can choose a shorter term (10-15 year) loan with a fixed rate mortgage. You pay a higher monthly payment, but over a shorter time. In the end, you can save money on interest by paying the loan back faster. It is also a quicker way to build equity in your home.
As with most decisions in your mortgage strategy, you need to figure out what fits within your budget. Our mortgage experts can help you make a comprehensive plan.
Variable Rate Mortgage or Adjustable-rate Mortgage (ARM)
The interest rate on an ARM mortgage varies over the life of the loan. Usually, the interest rate is locked in for a specified amount of time (anywhere from 3-10 years), and then the rate changes. These loans can be perceived as risky because the variable rate may make them more expensive than you can afford over time. It is also important to understand that an ARM mortgage can also be strategic depending on your mortgage plan. It is difficult to predict what future interest rates will be, so it is always important to have a mortgage advisor in your corner.
The Next Step in Your Mortgage Strategy
After learning the basics, the next step in your mortgage strategy is to learn:
How to get the best mortgage rate
How to choose the best mortgage
Getting the Best Mortgage Rate
Looking for mortgage deals can pay off over time. A fraction of a percentage point can seem small on paper, but over the life of the loan translates into real money in your pocket. Taking upfront action saves you money for years to come.
As a part of your mortgage strategy, you can work on both your credit score and your bank account before you apply for a loan.
Your Credit Score
Check on your credit score and credit reports from credit bureaus. Check for inaccuracies and clean up the report before applying for a loan.
Work to raise your credit score. For example, pay down credit card balances and make payments on time.
Your Bank Account
The money you have today and the money you are able to earn affect the budget you can afford. Shore up your bank account before taking out a mortgage by:
Saving for a down payment
Working to increase your income
Paying off your current debt
What Is the Best Mortgage for You?
Learning what to look for in a mortgage is a part of your mortgage strategy. Doing your due diligence will help you find the right mortgage for you. We are here to help.
Know What You Can Afford
Choosing a mortgage that you can afford is first and foremost. You want to own your property, not have your property own you. Once you figure out how much you can afford, stick with it. Mortgage lenders are in the business of selling you a loan. You are in the business of paying it back. Don’t let anyone talk you into something you can’t afford.
Closing Costs Are Real
Figure in your closing costs, not just your down payment. This should be a part of your savings goal, along with what you have set aside for your down payment. Mortgage Brokers like us at NorthPort will give you a transparent breakdown of your closing costs.
Length of Your Loan Matters
Calculate it out and make a decision that works for you. A 15-year loan will cost you more every month but my be better in the long run because you will pay less interest. The trade-off is yours to weigh, and we will help you understand your options.
Shop for Mortgage Lenders
Apply with more than one or two lenders. Three is a magic number, but you can apply with even more. Think of it as shopping around for the best deal. An alternative is to use a Mortgage Broker, someone to shop for the best rate on your behalf.
Questions to ask when choosing a mortgage lender:
What types of loans do you offer?
What will my APR be?
Can you give me a loan estimate?
What is your loan processing timeframe?
Is your underwriting handled in-house?
Ask for Help
Your mortgage strategy may also include choosing a mortgage advisor to help you navigate the mortgage process. This is a long-term commitment, and getting it right has long-term payoffs and drawbacks. Asking for a little help may be the part of your mortgage strategy you need the most.
Your Perfect Mortgage Strategy
Once you know the ins and outs of mortgages, you will have the tools to create your perfect mortgage strategy. It will make your long term commitment something to enjoy and not regret.
Contact us today to speak with an expert about mortgages. Let us assist you in getting a mortgage that is tailored to your goals, situation, and needs.