Office of Enrollment Management

Home Mortgages

Buying a Home

Mortgages, secured loans, are used to purchase a home, land to build a home or other real estate (Investopedia). Homes are often a person's largest investment and so you must understand the terms of the debt you are taking on. Buying a home is often sprinkled with new vocabulary, such as amortization or earnest money.  Explore mortgage terminology. 

A home should be no more than 30% of our gross income, calculate how much home you should purchase. Be cautious to consider your other financial obligations, such as student or car loans. 

Now that you have decided on how much home you should purchase, what's next?

1. Obtain a prequalification letter from your lender.

You can shop around to find the best rates in these stages.  A prequalification letter uses your credit score and provides documentation to a realtor or seller that you are a serious buyer.

2. Find your dream home. 

Use a realtor to look for homes and help you through the buying process. The realtor's commission will be paid when a home is sold by the seller.  The realtor is an expert in buying and selling homes so they can help answer questions along the way and provide advice to protect you, the buyer.

3. Secure the mortgage that fits your needs. 

Types of Mortgages

There are many types of home mortgages and often they can be overwhelming. The three main categories are conventional, Federal Housing Administration (FHA), and VA (US Department of Veterans Affairs) loans.

Convention loans have down payments as low as 3%, require a higher credit score, are not backed by a government agency, and larger down payments reduce interest rates.  FHA and VA loans have down payments as low as 3.5%, require a lower credit score, are backed by the government, and have relaxed lending requirements to make housing more affordable.

Dive deeper into the advantages and disadvantages of conventional and FHA loans.

There are also physician mortgage loans for doctors and other high income professionals.  Explore more about physician's loans through White Coat Investor. 

Down Payments

A down payment is the amount of cash that is put down on the purchase.  If you purchase a home for $150,000, a 10% down payment would be $15,000 in addition to closing cost. It is recommended to put down 20% in order to avoid private mortgage insurance (PMI). Some loan types offer a 0 to 3.5% down payments to allow homes to be more affordable.  Lower down payments often means increased interest rates.  The higher the interest rate is the more it will cost you over the term. 

Length of Mortgage

The length of the loan is known as the term. You can obtain a mortgage term of 10, 15, 20, 25 years. More than 90% of homebuyers take a 30 year mortgage (Time).  Interest rates are usually higher the longer the term is. Decide which term length will be the best for you.  Remember that the monthly payment is not the only consideration. The longer the term length the more you will pay in interest.  Calculate both a 15 and 30 year payment on the home you want to purchase.

15 year mortgage has a 15 year payment duration, lower interest rate, higher monthly payment, equity is built faster, lower tax deductions, less cash flow to invest.  30 year mortgage has a 30 year payment duration, higher interest rate, lower monthly payment, slower equity building, higher tax deductions, more cash flow to invest

Fixed or Adjustable (ARM) Rate

A fixed rate mortgage has the same interest throughout the life of the loan.  It will not adjust when interest rates increase or decrease.  Adjustable rate mortgages (ARM) typically have low interest rates to begin, but often move upward. This may be noted as 5/1  ARM or 7/1 ARM.  This means that the introductory rate will be for 5 years and 1 adjustment made during the life of the loan.

Private Mortgage Insurance (PMI)

PMI is required by lenders if the buyer puts down less than 20% on the home. If PMI is required by a conventional or FHA loan, it may be removed based on how it was set up in the loan terms. Be sure to read the fine print. PMI protects the lender from the borrower defaulting. Read more about PMI. 

As a homebuyer, you are the lender's consumer. Shop around for the best rates, reduction in PMI, and loan terms.  Use your knowledge to negotiate better terms. One lender may have the best interest rates, but higher PMI. Share that information to negotiate the terms. They want you as a customer. 

4. Close on your home. 

A realtor will help you prepare to close on your home.  

Obtain homeowner's insurance. 

Homeowner's insurance will protect one of your biggest assets. 

Get an inspection of the property

Negotiate repairs or reduction in home price due to the findings. Do not skip this step.  This could potentially save you thousands in the long run. You can walk away from a contact on a home if an agreement cannot be made on the inspection findings. 

Purchase title insurance.

This protects you against ownership claims not found prior to your purchase. This means that a long lost relative cannot claim ownership thus revoking your ownership to the property because it was not legally sold to you.

Read the loan terms. 

Read the loan terms and ask questions.  Your lender, realtor and closing attorney are all resources to answer questions.  Understand what you are agreeing to do. 

Homeownership is an exciting step in a financial journey. It can be overwhelming in the process.  Research and ask questions to better understand the process.