How Does Mortgage Work?
This loan is offered by CU Member Mortgage. For more information on how to get a mortgage loan with a credit union, click the button below.
Typically, a mortgage loan is a long-term commitment. However, it is important to find a mortgage to fit your needs. The most popular term is 30 years. Understanding the process can make you more comfortable and confident in your negotiations. A mortgage requires you to pledge your home as the lender's security for repayment of your loan.
Generally for a purchase transaction: Down payment + Amount of mortgage loan = Purchase price
When you sign a mortgage agreement, you are agreeing to repay the principal plus interest. During the first few years, most of your payments will be applied toward the interest you owe. This is because the interest each month is calculated on the outstanding balance. As the balance is reduced, so is the monthly interest. During the final years of your loan, your payment amounts will be applied primarily to the remaining principal.
You can choose a mortgage with an interest rate that is fixed for the entire term of the loan. A fixed-rate mortgage gives you the security of knowing that your interest rate will never change during the entire term of the loan. An adjustable-rate mortgage (called an ARM) has an interest rate that will vary during the life of the loan, with the possibility of both increases and decreases to the interest rate.
As the buyer, you pay in cash a down payment, which is a percentage of the purchase price of the home. The down payment represents your equity in the house. Lenders often view mortgages with larger down payments as more secure because you have more of your own money invested in the property.
A lender may charge a loan origination fee or discount points. Simply put, a point is a unit of measure that means 1 percent of the loan amount. The more points you pay, the lower the interest rate. Usually, for each point you pay for a 30-year loan, your interest rate is reduced by about 1/4 (.25) of a percentage point. Paying points can be good if you plan on keeping the mortgage loan for more than three years.
The closing (or, in some parts of the country, settlement) is the final step. At the closing, your mortgage is activated, and you are given the keys to your new home. Closing costs are a mystery to most first-time buyers. One reason is that they are not standard and vary from state to state. Items may include transfer taxes and recording taxes, title insurance, survey, attorney fees, discount points, appraisal, and document preparation fees.
Check out the Lender Comparison Chart. The chart can be used to get the information you need to make an informed decision on which mortgage lender offers the best deal for you.
Tips for First-Time Buyers
Mortgage, down payments, up-front cost. These words and the fact that buying a home is one of the largest purchases most of us ever make can drive someone to rent an apartment. Do not let these words scare you out of buying your first home. Many of us seek help from our friends and family but sometimes that is not always the best solution. Here are some common questions asked by first-time home buyers:
How much can we afford?
The rule of thumb says you can afford twice your family’s gross annual income. But the final answer depends on the nature of your income, the amount of debt you are currently carrying, the size of your down payments, and the type and term of the loan. Generally, housing expenses for your mortgage, insurance, taxes, and special assessments should not exceed 25 to 28 percent of your gross monthly income.
What is the minimum down payment required?
First, a down payment is an initial payment you make when you purchase a home. This varies depending on the price of the home. Typically, you will need a down payment of 5 percent of the price of the home, though Federal Housing Association (FHA) and Veterans Association (VA) loans require smaller down payments between 0 and 3 percent.
What other up-front-cost are there?
Up-front-cost are all the costs you may have to pay to purchase your home. A down payment is just one of the up-front-cost. Up-front-cost may also include a real estate appraisal, credit report, documentation, lock-in fees, etc. Together this cost can amount to 2.5 to 3 percent of the loan. There are also prepaid expenses for interest charges during the period between closing and the first payment, real estate taxes, etc. Finally, there are attorneys’ fees, accessed by the title company, that will handle the actual closing and another incidental cost.
Is the cost negotiable?
Sometimes you can; sometimes you can’t. It just depends on the deal. You may be able to negotiate on fees by offering to pay a higher interest rate. Typically you would pay .25 percent higher interest for every point you save.
What types of mortgages are available?
A mortgage is a loan on a house; that is all it is. There are three types of mortgages available: a conventional mortgage, an FHA-insured mortgage, and a VA mortgage. You have a choice of a fixed rate, adjustable-rate mortgage (ARM), a 30-year term, a 20-year term, or a 15-year term; and monthly, bimonthly, biweekly, or weekly payment schedules.
Is a 15-year term or a 30-year term best?
With a 15-year mortgage, you own the homes in half the time you typically pay .5 to 1 percent less annual finance charges, and your total interest charges are even lower because you pay off the debt sooner. But your monthly mortgage payment is higher than with a 30-year mortgage, so you may not qualify for as large of a home as you wish to buy. A suggestion would be to take the 30-year loan so you can afford the house you want. Then as your income increases, make additional payments sufficient to make the loan pay off in less time.
Why do lenders require Private Mortgage Insurance?
Private Mortgage Insurance (PMI) protects the mortgage lender against loss should you default on your mortgage. This is required unless you make a minimum of 20 percent down payment.
What is a discount point?
A point is a prepaid interest. It is another factor in the purchase of your home. If you want to have lower long-term payments, you would have points added to your loan. If you want to pay less at the time of purchase, then you would try and lower the points, but as a result, the loan rate would be higher. A discount point is an amount equal to 1 percent of the loan amount. Generally, the lower the rate you receive, the higher the points. When comparing rates, always ask for the rate and corresponding points. However, the market rate would be zero discount points.
What will our monthly payment be?
Your monthly payment consists of principal and interest and possibly an escrow amount to cover real estate taxes and mortgage life insurance. The actual amount will depend on the size of the loan, the interest rate and the term, and whether it is a fixed rate or adjustable rate.
Can we get pre-qualified for a mortgage loan?
Yes. Typically it is as simple as a phone call to your credit union. A pre-qualification is based on information provided by you and is subject to written verification. Therefore, this is not a guarantee you will be approved for a loan, but it will give you an idea of what price range you should look at, how much money you will need and what type of monthly payment you will incur.
