Five Mortgage Questions
Top 5 Questions About Mortgages
Home buyers often have many questions about mortgages. It is something that you don’t do that often, so it can be confusing. It is important to understand the choices, learn about the options and terms, so that you feel comfortable with the process.
Here are five commonly asked questions about home mortgages.
1. How much can I borrow for a home?
There are a number of mortgage programs available to home buyers, and the amount you can borrow is determined by the program’s requirements. In general, there are five main factors that determine whether you qualify for a loan, what the interest rate is, and how much total you can borrow. So keep these factors in mind as you consider your home buying plans.
- Debt-to-income (DTI) ratio: Generally speaking, DTI equals your cumulative monthly debt payments, divided by your total monthly household income – the lower the better.
- Credit history and credit score: A higher credit score can make it easier for you to qualify for a mortgage.
- Employment history: Lenders prefer to see steady and stable employment.
- Savings: You need enough savings for the upfront costs of purchasing a home, plus a buffer.
- Down payment: more money down can make it easier to get qualified – see below.
You can ask a lender for a prequalification before you shop or apply for a mortgage to determine how much you may be able to borrow.
2. How much will my mortgage payment be?
There are two main parts of your mortgage payment:
- Principal: The portion of your payment that will go toward repaying the amount of money you borrowed.
- Interest: The cost of borrowing money from a lender.
It is typical that homeowners will also pay escrow (funds put aside until due) as part of their total payment, which may include amounts for:
- Property taxes: The annual taxes charged by the municipality you live in.
- Homeowners insurance: Required coverage in case your property is damaged by fire, theft, or other hazards.
- Flood insurance: May be required depending on where your property is located.
- Mortgage insurance: Often required when putting down less than 20% for your initial down payment.
3. How much is private mortgage insurance (PMI)?
PMI offsets the risk that lenders take on when buyers put down less than 20%. Annual mortgage insurance premiums can range from about 0.2% to more than 1% of the total loan amount. The amount is based on:
- Type of loan
- Loan-to-value (LTV) ratio
- Credit score
The annual premium is typically paid in equal monthly installments, which rolls into your monthly mortgage payment.
4. How can I pay my mortgage off faster?
There are several options for paying your mortgage off faster, such as refinancing your mortgage to lower your interest rate or shorten your repayment term, or to make additional principal payments on your mortgage when you’re able to fit it into your budget. Refinancing incurs costs but still may be very viable, while including extra money toward your principal avoids the process of signing up for a new loan. Most loans do not have a pre-payment penalty, but always check with the lender.
5. How much is a down payment on a home?
Many buyers think that a 20% down payment is needed and that can get you a better interest rate and lower payments, but the reality is that the average homebuyer puts down somewhere between 5% to 15%. Some mortgage programs even allow as little as 3% down, and if you are a veteran, you may be able to qualify for up to 100% financing.
Educating yourself about mortgages, and speaking with an experienced mortgage loan officer, is the best way to avoid the confusion and intimidation that many home buyers have when it comes to getting a loan.