Mortgage Basics
As you consider purchasing a home you should become familiar with the types of mortgages that are available. While a lender can assist you with the specifics later in the process, it’s a good idea for you to do a little research on your own.
The best mortgage for your particular needs can depend on several factors. Are you a first time home buyer? Do you plan on living in the home for many years or will you be moving in two or three? How much down payment can you afford? What are the current interest rates? You have a wide choice of financing options available to you. Some choices are yours to make and others are based on your specific circumstances.
- Fixed-rate mortgages - Conventional Fixed-Rate Mortgage Loans are typically available in terms of 15, 20 and 30 year terms. Choose a fixed-rate mortgage if you prefer the certainty of a fixed monthly payment without the risk of the interest rate changing. Fixed-rate ensures that your payment principal and interest remains the same each month, which can make budgeting a lot easier. However, if your loan has an escrow account that is collecting for taxes and or insurance, that likely will change over time and cause your total monthly payment to change annually.
- Bi-Weekly Program - This program offers the same certainty of the interest rate over the life of your loan as the Conventional Fixed-Rate Mortgage, except your mortgage payments are billed and collected on a bi-weekly basis. Instead of 12 payments per year, you are paying 26 bi-weekly payments per year. This is an effective way to build equity faster in your own. This program does require an Automatic Payment.
- Low down payments - Historically, the standard down payment for mortgages has been 20%. Today many lenders realize how difficult it can be to come up with such a large amount of cash, and will help buyers with special loan programs. Conventional Fixed-Rate Mortgages have a down payment option for as low as 3% for first-time homebuyers.
- Designed to meet the needs of borrowers who have strong credit and employment profiles but cannot make the standard down payment
- Funds for down payment, closing costs, and/or prepaid items may be obtained from the buyer's own funds, gifts from a family member or grants from an employer, non-profit, or government agency.
- Homeownership Opportunities Program (HOP): We partner with the Federal Home Loan Bank of Indianapolis to offer HOP grants. Qualifying first-time home buyers who can provide at least $1,000 of their own money toward the purchase of their home, could receive up to $10,000 in grant assistance.*
- We’ve also taken the extra step to develop a unique mortgage option that can be used in combination with the HOP grant to help qualifying individuals and families with low to moderate incomes make their first home a reality. Not everyone will qualify for these special financing programs, and some may need to develop a more realistic time frame to achieve their goal. Wherever you find yourself financially, our team offers the advice, education and tools to help put you on the path to home ownership. Request more information here >
- FHA - The Federal Housing Administration insures this mortgage. The required down payment can go as low as 3.5%. Customers like FHA loans because they have more liberal qualification requirements. This is a fixed interest rate, monthly payment loan option. Your monthly payment will include monthly payments towards collecting for taxes, insurance and monthly mortgage insurance premiums that likely will change over time and cause your total monthly payment to change annually. In addition, FHA allows all of your down payment to be a gift from a family member, relative, or non-profit organization.
- VA - VA loans are guaranteed by the U.S. Department of Veteran Affairs and is available to veterans, active duty military, reservists and for those that are an eligible family member of a former service member. This is a fixed interest rate, monthly payment loan option with little or no down payment. Your monthly payment will include payments towards collecting for taxes and insurance, that likely will change over time and cause your total monthly payment to change annually. VA loans share similar liberal qualification requirements to FHA and often with lower closing costs. You can purchase your new home or refinance your current VA loan using the program.
Getting the best interest rate - One way to get a better interest rate is to pay what are known as "points." A point (short for discount points) is prepaid interest assessed at the time of closing by the lender. Each point is equal to 1% of the loan amount and a portion is tax-deductible that year.
Lock in - While you're in the process of shopping for a home and mortgage, interest rates can change. Ask your mortgage lender if you can "lock in" to the current rate being offered. It's good to lock in when rates are rising, but not when they're dropping. The lock in lasts for a specified period and will expire if you haven't closed before then.
What are ratios?
When you apply for a mortgage, the lender will look at your entire financial picture to determine how much money they will let you borrow. Lenders use income and debt ratios to determine how much you will be able to borrow. Ratios are nothing more than comparing your income against the amount of debt you owe.
When you apply for a mortgage, the lender will look at your entire financial picture to determine how much money they will let you borrow. Lenders use income and debt ratios to determine how much you will be able to borrow. Ratios are nothing more than comparing your income against the amount of debt you owe.
They'll use several guidelines including one called the Debt-to-Income Ratio. This ratio compares your total debt to your total gross income (including your spouse's) and is important when determining someone's ability to repay a loan. Total debt includes your mortgage plus any auto loans, credit cards, and loans of any other kind.
For example, if 20% of your total gross income already goes to pay your current debt, 16% of your gross income is the maximum most institutions will lend you to buy a house. Again, this is a guideline and actual percentages may vary a little depending on a home buyer's circumstances.
Another ratio lenders look at is the Loan-to-Value Ratio (LTV). This ratio is calculated based on the value of the home compared with the mortgage amount. The down payment you have will impact the LTV ratio.
How Much Downpayment Do I Need?
An important component in determining how much you can afford to pay for a house is the down payment, which usually comprises 20% of the total cost. Purchasing a home that is selling for $98,000, for example, would require a down payment of $19,600. If you don't have 20% down, don't give up. There are many ways to accomplish your goal.
An important component in determining how much you can afford to pay for a house is the down payment, which usually comprises 20% of the total cost. Purchasing a home that is selling for $98,000, for example, would require a down payment of $19,600. If you don't have 20% down, don't give up. There are many ways to accomplish your goal.
Today many lenders realize how difficult it can be to come up with such a large sum of cash, and will help some buyers take advantage of special loan programs. If you qualify, VA loans are often made with no down payment, and FHA loans can require a down payment as low as 3.5% of the purchase price.
If you don't qualify for a VA or FHA loan and you are unable to pay 20% up front, one alternative is Private Mortgage Insurance (PMI) which can reduce your down payment dramatically. PMI protects the lender in the event the buyer defaults on the loan. The cost of this insurance will be added to closing costs and your monthly payment. Because mortgage insurance adds to your overall monthly payments, it reduces your Debt-to-Income Ratio and effectively reduces the amount you will be able to borrow.
To avoid paying PMI, many young people purchasing their first house get help from their family for the down payment in the form of a monetary gift. This is acceptable, however you must produce a letter from your benefactor stating that the money is a gift and no repayment is required. But if this isn't an option, you still won't have to pay PMI forever. Once you've sent in enough payments that the principal paid and down payment together reach 20% equity, you should no longer be required to pay for Private Mortgage Insurance. So it's to your advantage to pay as much as you can, as often as you can, above and beyond your minimum payment.