Home Mortgage Loans Explained

Whether you are a first-time home buyer or a home buyer trying to refinance your home, all the information that comes with these processes can become confusing and make you feel like you could be making a big mistake. Different basic types of home mortgages come with their pros and cons. Also, PMI and impounded payments of property taxes and home insurances can add even more confusion to any homeowner or future homeowner.

The more knowledge you can gather from your mortgage specialist or your real state specialist before you start these processes, the more prepared and confident you will feel. Below you will find a clear summary of the main points you need to be aware when searching for the right home mortgage loan.

The Five Basic Types of Home Loans

There are five primary types of home mortgage that you should know when you are getting ready to buy or to refinance your home. They are conventional, jumbo, government-insured, fixed-rate, and adjustable-rate loans.

  • Conventional Loans: Conventional or traditional loans are not insured by the government; therefore, making it a little more difficult to qualify. In these type of loans, the lender usually requires a 5- 20 percent down payment on the house. Your credit score must be at least of a 620 rating, and your debt-to-income ratio should not exceed 45 percent.
  • Jumbo Loans: Jumbo loans are conventional loans that go over the maximum conforming loan which is $453,100. They are more difficult to qualify than other traditional loans and require more paperwork. For premier rates, Lenders will usually require a credit score minimum of 700 rating and proof of liquid assets of typically 10 percent of the loan value.
  • Government-Insured Loans: The government protects these loans, and in case the buyer should default on the payments, the government will pay it off to the lender. They are Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans) and the U.S. Department of Veterans Affairs (VA loans). In these loans, lenders will require a minimum credit score of 580 rating and depending on the program zero to 5 percent down payment will be required. These loans are the most commonly accepted because of their insurance.
  • Fixed-Rate Loans: Fixed interest home loans are loans that keep the same interest rate the entire term of the loan. Government-issued loans are usually fixed-rate loans. Conventional mortgages can also be fixed-rate, and they come in length of 15, 20, and 30 years. These loans the interest rate can be slightly higher because they cannot be readjusted.
  • Adjustable-Rate Loans: As the name suggests, these loans have rates that are adjustable, and they are conventional loans. They start with an initial percentage rate, and adjust after a few years, they change according to the current mortgage marketing. They can start with lower rates, but when the time comes for the rates to be adjusted, they can become too high forcing the homeowner to opt to refinance or sell the property.

What is PMI?

For most loans, when less than a 20 percent down payment takes place, then lenders will require PMI (Private Mortgage Insurance) which protects the lender in case of a default on the mortgage payments or foreclosure. PMI is usually requested as a one payment upfront or divided into 12 payments and added to the monthly mortgage payment. PMI is calculated based on the lenders PMI rates table. The amount loaned is multiplied by the rate, and the total is the yearly PMI amount due for the homeowner to pay.

To have PMI removed from your mortgage, you must have at least 20 percent equity in the home. Once you reach 20 percent in equity in your home, you can ask the lender to remove PMI.  Another way to remove PMI is to pay down the house until it has 20 percent in equity. Unfortunately, for FHA loans, PMI is for the life of the loan, so the owner can refinance to remove the PMI, once it has 20 percent in equity.

Home Taxes & Home Insurance

For everyone who owns a home, they must pay property taxes; however, the rules and amount may change from one state to another state. Local tax assessors are the one who determines the property taxes amount, and it is usually based on location and the value of the home. Property taxes are sometimes added to the mortgage payments, or they can be paid directly to the local tax department; it depends on each lender. Once the mortgage is paid off, payments are made directly to the taxation department.

When it comes to home insurance, understanding its coverage is essential. All lenders will require homeowners to maintain their homes insured. It guarantees the lender that they will be paid in case the property has damages resulting from fire, windstorm, hail, water damage (excluding flooding), riots and explosion. Other causes of loss, such as theft and the extra cost of living elsewhere while the home is being repaired or rebuilt are also part of a home insurance coverage.

Home insurances also cover legal issues for your family or as well as when a pet bites the mailman. Insurance also covers items not in your house, but in other properties as well. The factors that can change the prices for home insurances are the size of the property, the rebuilding costs, the crime rate in the area, areas with natural disasters, and previous claims existing on the property. The best ways to save on home insurance are paying higher deductibles or taking advantage of multiple-discount policies.

As a homeowner, it can be very overwhelming to assimilate or sort out all these critical factors that are part of your monthly mortgage payments. Making the right decision on the type of mortgage and the amount of down payment for your finances is not an easy task. Let us get together and discuss your options.

We can help you with all the information you will need to make the best decision towards your home buying or refinancing process.

Contact Us Today

References

Kearns, D. (Jun. 12, 2018.). Five types of mortgage loans for homebuyers. Bankrate. 

CFPB. (Jul. 28, 2017.). What is private mortgage insurance? Consumer Financial Protection Bureau. 

Draper, C. (Mar. 21, 2017.). Property Taxes & Your Mortgage: What You Need to Know. Credit.Com.

RMMIA. (n.d.). Homeowners Insurance Basics. Rocky Mountain Insurance Information.