Home Mortgage Shopping Guide

Reviewer:  Aaron Creighton | December 3, 2018 

Mortgages are not created equal. Whether you’re new to mortgages or on your fifth, boost your knowledge with our complete guide to understanding home mortgages.

 

 

 

 

Home Mortgage Overview

Let’s face it, home ownership is the American dream. But the median listing price for homes on the market at over $250,000, according to Zillow, so most homebuyers need to finance their purchase with a mortgage instead of paying cash.

But finding the right mortgage can be just as important as finding the right house! Getting the right terms, the right rate, the right features, and the right broker can save you time, money, and stress.

This guide explains how mortgages work, the basics of mortgage fees and the mortgage process, and the different types of loans available. You’ll get an overview of the top mortgage lenders in the United States so you can find the best deal for your loan.

How Home Mortgages Work

A mortgage is a secured loan with your home as collateral, so the lender actually owns your home until you’ve paid them all of the money for it. You will make payments on the loan each month, which includes interest, until it is paid off. After you pay off the mortgage, the lender will give you the title to the property, and you’ll finally be the outright owner of your home.

 

When you choose a mortgage, you have four major decisions to make: the lender, loan type, loan term and interest rate type.

Types of Mortgage Loans

The first decision you’ll have to make is which type of mortgage to get. There are two major types of mortgage loans: conventional and government-backed.

Conventional loans do not offer the same guarantees but often have lower interest rates, because better borrowers typically get better rates. Features:

• Not guaranteed by any government
• Contract between homebuyer and private lender
• Requires a down payment from 5 to 20%
• Requires insurance if paying less than a 20% down payment

Government-backed mortgage programs allow lenders to offer mortgages to people who would not otherwise qualify for them by guaranteeing the mortgage. This reduces the amount of risk the lender is exposed to. Examples of government-backed mortgage programs include:

• Basic Home Mortgage Loan 203(b) government-insured mortgage program
• FHA 203(k) Rehabilitation Mortgage Insurance program
• The Veterans Affairs Purchase Loan program (VA Loans)
• USDA Single Family Housing Guaranteed Loan Program
• State and local mortgage programs

Mortgage Basics

There are a few things you should know about mortgages before continuing with your research.

• Interest Rates
• Closing costs
• Products
• Customer satisfaction
• Missing Payments

Interest Rates: Lenders charge different interest rates, so it pays to shop around. Over the lifetime of a loan, a small difference in interest rate can add up to big money. Fixed interest rates are closely competitive, but there can be big variations between fixed-rate loan offerings.

Closing costs: There are a number of costs to keep in mind when you purchase your home. These include application fees, appraisal, and loan origination fees. So it’s important to see what these are, and factor them into whether the loan with the lowest interest rate really is the best deal.

Products: Mortgage products most often refer to the different terms (time you agree to pay back the mortgage) these include 15, 20 and 30 year mortgages with fixed or adjustable interest rates. Adjustable-rate mortgages have additional variation because of how often the rate can change and by how much. Some lenders offer government backed programs you may qualify for, so if you want a FHA, VA or USDA loan, find out which lenders participate.

Customer Satisfaction: One of the biggest mistakes homebuyers make is to choose a home mortgage lender based solely on rates and prices. Customer service should be considered, as you may be dealing with the company for years.

Missing Payments: The most important thing to do when you can’t pay your mortgage is to act fast. There are many programs available since the financial crisis that can help homeowners stay in their homes through tough economic patches. Make sure you are communicative and honest about your situation, and lean on trusted advisors.

How to Get a Mortgage

Buying a home is one of the largest purchases you’ll likely make, so do your homework and make sure you’re ready. Start by reviewing your bank accounts and billing statements to get a handle on how much money you’re making and spending each month. If you’re planning to buy a house with someone else (like your spouse), review their finances as well, and then ask yourself some questions:

• Do you have a stable income/job?
• Are you able to put away some money each month into a savings account?
• Do you have a plan for managing debt, like student loans and car payments?
• Do you typically pay your credit card debt quickly? Keeping your credit debt low will help you qualify for a better mortgage.
• Do you have some money already saved up for emergencies? A good rule of thumb is having three months of income saved.
• Do you have some money saved up for a down payment and closing costs? You should avoid using your emergency savings for this, or you could put yourself in a tight situation.