Mortgages: What you need to know to shop for a mortgage

Introduction

It’s something you’ve thought about for years: owning a home of your very own. You’ve saved some money, your credit is in order, but now that you’re ready to get started, you think, “How do I begin this whole process? What’s the first thing I should do? And what should I NOT do?”

In less than 5 minutes, we’ll break down the complex world of mortgages and explain why they have become purposefully complicated over the years. By the end, not only will you have a healthy dose of mortgage expertise, but perhaps more importantly, you'll know the basics of how to save when shopping for a mortgage.

This guide will help you learn to avoid overpaying and leave you feeling empowered and confident when choosing a mortgage. We will start with the basics of:

• What a mortgage is

• Types of mortgages

• Fees and Costs

• The lending process

• Shopping for a mortgage

Backing into the mortgage process without being armed with the necessary knowledge is a good way to find yourself wondering if you chose the best deal when all is said and done. Let’s go over some useful information that can prevent the stress that comes with second-guessing your situation.

Table of Contents

• What is a Mortgage?

• Types of Mortgages

• The Hidden Costs: Beyond Principal and Interest

• The Mortgage Process: Knowledge is Your Best Defense

• Shopping for a Mortgage: Don't Leave Money on the Table

• The Bottom Line

• Helpful Resources

What is a Mortgage?

Let's face it: mortgages are complicated. And that complexity isn't an accident - it's one of the ways that lenders and financial institutions keep their margins strong and make more money. The fact is that some lenders count on borrowers not knowing their options and going with a more expensive loan when cheaper loans are out there, if they only knew where to look. Knowledge is power, and understanding mortgages can save you thousands of dollars over the life of your loan. Let's break down what you need to know to make informed decisions and avoid leaving money on the table.

At its core, a mortgage is a loan used to purchase a home. You borrow a large sum from a lender and agree to pay it back over time, typically 15 to 30 years, with interest. Your home serves as collateral for the loan, which means the lender can take possession of it if you fail to make payments.

Key Components:

1. Principal: The total amount you've borrowed.

2. Interest: The cost of borrowing the money, expressed as a percentage.

3. Down Payment: The initial payment you make, typically 3-20% of the home's price.

4. Term: The length of time you have to repay the loan, usually 15 or 30 years.

Types of Mortgages

There are several kinds of mortgages out there, each with its own pros and cons. Many of them are generally only used for unique situations. For most homeowners, the first two options below are their primary choices to consider:

1. Fixed-Rate Mortgages

• Interest rate remains constant throughout the loan term.

• Predictable payments, making budgeting easier.

• Higher initial rates compared to ARMs.

• Best for: Long-term homeowners who value stability.

2. Adjustable-Rate Mortgages (ARMs)

• Interest rate can change after an initial fixed period.

• Lower initial rates compared to fixed-rate mortgages.

• Potential for significant payment increases if rates rise.

• Best for: Short-term homeowners or those comfortable with financial risk.

3.  FHA Loans (Federal Housing Administration)

• Lower down payment requirements

• More flexible credit requirements

• Ideal for: First-time homebuyers or those with less-than-perfect credit

4. VA Loans (Department of Veterans Affairs)

• Available to eligible veterans and active-duty service members

• No down payment is a common perk

• Competitive interest rates

5. USDA Loans

• Low or no down payment options

• Designed to promote homeownership in rural communities

• Ideal for: Homebuyers in eligible rural areas

The Hidden Costs: Beyond Principal and Interest

As you probably know, your mortgage payment isn't just about paying back what you borrowed. Otherwise, banks and other lenders wouldn’t make any money, and they’d have no financial reason to offer loans. Here's what makes up your total payment (often referred to as PITI):

• Principal and Interest: The amount borrowed plus the cost of borrowing.

• Property Taxes: Annual taxes based on your home's value, often collected monthly by your lender.

• Insurance: Homeowners insurance and, potentially, private mortgage insurance (PMI).

Some lenders may also include HOA fees, if applicable.

The Mortgage Process: Knowledge is Your Best Defense

We know what it means to seek a mortgage, the types of mortgages, and the associated costs involved. Now it’s time to get down to the nitty-gritty: what happens when you’re ready to get the ball rolling? The more prepared you are when you begin deciding which lender to approach, the smoother the process will be. Here are the main steps involved in a typical mortgage process:

1. Check your credit: Your credit score significantly impacts your interest rate. Know where you stand.

2. Save for a down payment: The more you can put down initially, the less you'll pay in interest over time.

3. Get pre-approved: This gives you a realistic budget and shows sellers you're serious.

4. Shop for your home: Stay within your pre-approved budget to avoid financial strain.

5. Make an offer: Work with a trusted real estate agent to navigate this process.

6. Complete the mortgage application: Be prepared for extensive documentation requests.

7. Home inspection and appraisal: Protect yourself by ensuring the home's condition and value.

8. Underwriting: The lender's deep dive into your finances. Be responsive to information requests.

9. Closing: Review all documents carefully before signing.

Shopping for a Mortgage: Don't Leave Money on the Table

Lenders count on borrowers not shopping around. After all, the borrower walked through their doors and they’ll say just about anything (within reason) to keep them from reaching out to competitors. Don't fall into this trap. It’s perfectly legal - and reasonable - to request loan estimates from multiple lenders and compare them carefully. Look at:

• Interest rates

• Annual Percentage Rate (APR)

• Closing costs

• Loan terms

• Any special features or requirements

Comparing different lenders' offers can be tricky if you're not familiar with How to read a Loan Estimate. So, when you're ready, remember that Fincast shops your Loan Estimate for you across many lenders at once, while protecting your identity, to find you the best deals the first time.

The Bottom Line

Mortgages are purposefully complex, and the truth is that some lenders hope that borrowers don’t do their due diligence and learn their rights. But understanding how mortgages work is crucial to making smart financial decisions. Educating yourself and shopping around can potentially save tens of thousands of dollars over the life of your loan. Remember:

• Mortgages are long-term financial commitments with significant implications.

• The complexity benefits lenders - don't be afraid to ask questions.

• Always shop around and compare offers before committing.

• Consider working with a mortgage broker or financial advisor to navigate the process.

Knowledge is your best tool in negotiating a mortgage that works for you, not just the lender. Take the time to understand your options and seek professional advice if needed. Your future self will thank you for the effort you put in today.

Helpful Resources

Want to dive deeper? Here are some great sources of information:

• Consumer Financial Protection Bureau's Mortgage Guide

• HUD's Homebuying Programs

• Mortgage Calculator

Have any more questions about mortgage types, options, rules, and tips? Don't hesitate to ask!