Ever wish you learned financial basics in school? If so, you’re far from alone. That’s why we created our Back to Basics series – to round out your understanding of key financial concepts.
In this piece, we’ll take a closer look at residential mortgages. So, first things first, what is a mortgage?
How do you get a mortgage?
Like any other loan, you need to meet certain criteria to get a mortgage. Factors like your credit history, income, debt and assets are assessed by lenders to determine if you qualify for a mortgage, how much money you can borrow and certain terms of your mortgage like your interest rate.
Before touring open houses, you want to start with “pre-approval,” a process in which the lender determines how much you’re qualified to borrow. New England’s housing market is competitive right now, so this is a critical first step to help you determine how much house you can afford.
Your mortgage won’t be finalized until you’ve made an offer on a home and it’s been accepted. At this point, your mortgage information will be verified one more time before it's finalized in a process called underwriting, which is when a home loan is officially approved/denied. Once the mortgage is approved, you’ll pay your down payment and closing costs and then move into your new home!
How do mortgage interest rates work?
Interest refers to the charges tacked on to the principal amount you borrow. The more you can put down for a down payment, the less you’ll pay in interest overall because you will need to borrow less money to make up the cost of the property you’re buying.
Down payment assistance helps many first-time buyers clear the down payment hurdle. If you’re a first-time homebuyer and meet the specified income and credit requirements, you might be eligible to apply for grants, loans and other programs to help you afford a down payment.
PRO TIP: Carefully review the terms and conditions of all financial agreements to know if and how the money you borrow needs to be repaid.
How much you pay in interest also depends on a few other factors:
What is an escrow account?
During the homebuying process, you will likely make a “good faith deposit” to show your intent to buy a home. If the sales goes through, this money goes toward your down payment. But if not, it can potentially go to the seller. To make sure this money goes to the right party, it’s held in an escrow account.
Once the purchase of the home goes through, a different type of escrow account is set up to hold funds for taxes and homeowner’s insurance. This money is taken out of your monthly mortgage payments and funneled into this account until it’s time to pay taxes/insurance. Escrow accounts are usually managed by escrow companies or mortgage servicers.
What is PMI?
There are pathways to homebuying that do not require buyers to pay 20% for a down payment, but these buyers are often required to pay PMI – Private Mortgage Insurance. The option to pay a lower down payment along with PMI helps many low to moderate-income buyers qualify for loans.
PMI protects the lender if there are any problems with your mortgage payments. In most cases, this is required with conventional mortgages that are not part of a specific government program. There are some instances when PMI is not required, but buyers may end up paying higher interest rates instead.
What special mortgage programs are available?
All mortgages fall under either conforming or nonconforming loans. Conforming loans meet the guidelines to be sold to either Fannie Mae or Freddie Mac (real estate investing companies), while nonconforming loans do not.
Conforming loans are most common, and are often cheaper and more standardized. Nonconforming loans cater to people whose needs fall outside of what conforming loans offer. For example, jumbo mortgages allow buyers to borrow a larger amount of money, and state and federal programs reduce the barriers for some people to qualify for mortgages.
Rockland Trust offers government-backed loans, including Federal House Administration (FHA) home loans and Department of Veterans Affairs (VA) loans, as well as state loans, including MassHousing and Massachusetts Housing Project's loans. All of these programs are designed to help those who need some extra financial assistance get into homes without breaking the bank. Our mortgage loan officers have extensive experience and can help explain the options available to you.
Now that you know the basics of all things mortgages, consider checking out our other homebuying content on the Learning Center. When you’re ready to take the next steps in your homebuying journey, our mortgage team will be ready to guide you through the process!
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