Understanding Home Loans - Mortgages 101
Getting a mortgage can be a complex process, especially for a first-time home buyer. When you're looking at your loan options, you'll want to find out the difference between mortgage types so that you'll know which is best for you and fits comfortably into your monthly budget.
Sometimes the best way to learn about a process is to see it through the eyes of someone who has experienced it. So we sat down with Christine Chin, a first time homebuyer in New York City. She described the steps in the process, and what she learned along the way.
Lining Up Financing
Getting prequalified and then preapproved lets you know what your loan program and the amount you can borrow will look like in advance. This can give you a big advantage at different stages of your house hunt, from helping you prepare your budget and set your expectations, to strengthening your negotiating position with the seller when you're making an offer on a home.
"It really helped to know in terms of budgeting," Chin says.
The process was straightforward. The bank--in this case the same one where Chin and her husband kept a checking account--asked for some additional credit and loan information, then preapproved the couple for a mortgage. Sometimes, this is also referred to as prequalified because some lenders require you to have a home picked out before they will preapprove the mortgage request.
Selecting a Mortgage Product
An adjustable rate mortgage (ARM) usually starts with a fixed term--often five or seven years--and then resets periodically, usually every six to twelve months, in line with current interest rates. This means the interest rate--and the monthly payment--can fluctuate over time, so you should carefully consider your ability to handle potential increases.
Chin chose a 30-year fixed-rate mortgage. "It had the lowest monthly payment, and I liked having a fixed rate so I knew exactly what I would be paying every month."
Another way to lower the interest rate on a mortgage is by buying points, which are fees paid to the lender at closing in exchange for a lower interest rate over the life of the loan (each point represents 1% of the loan amount). Whether buying points makes sense for you depends in large part on how long you plan to stay in the home. The longer you stay, the more you can benefit from buying points.
Getting a Good Faith Estimate
"It listed estimated fees we would owe the lender when closing came around, so we knew what to put aside." Typically, closing costs come to about 3% of the total loan amount, depending on where you live and the size of the loan.
Preparing for the Closing
Once everything was approved by the bank and the lawyer, the couple signed all the paperwork, handed over a cashier's check for their down payment and closing costs and received the keys to their new home.
Says Chin, "It was a great feeling."
Interested in learning more about the home buying process? Check out these AOL Real Estatevideos:
- Video: Home Inspections: It Pays to Know What You're Buying
- Video: Can Fixer-Uppers Work for First Timers?
- Video: Common Mistakes Home Buyers Make
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