Mortgage Loans

Home Loans

A home loan, or a mortgage, is an agreement you enter into with a creditor to receive money to purchase a house. Mortgages come in different shapes and sizes, but at the end of the day, it's money to buy a house.

While paying back the loan, the creditor technically owns the property, but it is yours to use, assuming you make your payments on time. Typically, you will need to pay a down payment of 10% to 20% of the property value upfront.

Here are some important points to consider as you browse your options:

• Overall, a 15-year loan will likely be cheaper than a 30-year loan. Although, the 15-year loan will be much more expensive month-to-month.
• One of the key indicators a creditor will look at before offering you a mortgage is your credit score. This number also helps determine your interest rate, which greatly influences the price of your loan.
• You will likely have additional costs on top of the mortgage payments. You’ll need to consider insurance premiums, taxes, maintenance fees, utility costs, and other expenses.
• It is important to only work with reputable lending entities.
• First-time home buyers may sometimes qualify for a special type of mortgage that might be cheaper than other options.
• Unlike other financial products where the APR gives you a general sense of the cost of the loan, a mortgage includes other expenses of which you should be aware. Some mortgages require costly upfront fees and may start at a lower rate that increases over time.
• How long you plan to live in the house should affect the type of loan you choose. Long-term, fixed-rate loans tend to have higher interest rates. If you plan to live in the house for a short period, you may be better off with a mortgage that has a lower interest rate at the beginning of the loan.
• Loans with lower down payments exist, offering more options for those who have not been able to save up to purchase a house.
• Even if you picked the wrong home loan the first time around, there are ways to remedy the situation. Mortgage refinancing is one such option.

What Do You Need to Apply for Mortgage Loan?

To apply for a mortgage loan for a home purchase, you will need to provide several documents. It may be best to speak to a consultant or a few loan officers to find a cheap or low-priced home loan with low rates. You will be able to estimate payments and loan terms before deciding on the best option.

• Tax Returns. Loan officers will need to see your tax returns so they can assess your financial situation. Preferably, they want to see two years’ worth of your tax returns. The loan officer will want to see if your income is stable and consistent with your reported earnings and there aren’t major changes from year to year.
• Pay-Stubs, W2s, and Other Sources of Income. Lenders will ask to see your pay stubs as another indicator of your financial health. If you are self-employed, you may need to show your mortgage lender a 1099 or bank statements.
• Renting History. Mortgage lenders will want to see proof that you have been paying your rent on time and have been consistently responsible. They may ask your landlord to show documentation of rental history so they can determine whether you can pay a mortgage on time. The mortgage lender may also ask for a year’s worth of canceled rent checks.
• Photo ID. You will need to provide a photo ID or some form of evidence to prove your identity.
• Credit History. Mortgage lenders want to avoid issuing loans that will default. In order to determine whether you qualify for a home loan, they will pull your credit report. If you have any negative items on your credit report, you will need to address those with your lender. This helps them to evaluate your level of risk and if you can fully pay back your loan.
• Bank Statements and Other Assets. Another important factor that lenders look into is your bank statements and assets. This includes insurance, such as health, vision, and life insurance. Lenders will ask for these documents in order to make sure you have money put away in case of an emergency.

How to Compare Mortgage Lenders?

When you decide to take out a mortgage loan, you want to make sure you are getting more than just a good interest rate. Here are a few tips to help you find a suitable lender when you decide to purchase a home.

1. Compare rates from numerous mortgage lenders.
2. Get pre-approved for your mortgage loan.
3. Research the requirements and interest payments before you accept the loan. Be sure to read the fine print before signing any legally binding contracts.

How to Apply for a Home Loan Online?

Once you’ve confirmed your credit score is strong and your assets are stable, you can begin to take the next steps and apply for a home loan. It is important to know what type of mortgage you want and the interest you are willing to pay on that loan. Follow the step-by-step guide to help you through your loan application:

1. Fill Out a Mortgage Application. If you are applying online, make sure you have addressed your loan concerns in person with a lender before moving forward. It is safer and more secure to meet with a loan officer or lender before agreeing to the financial responsibility of a mortgage. You will obtain valuable advice and information you may not find online.
2. Review Various Loan Estimates. Make sure you have researched and found a suitable loan for yourself and your home.
3. Choose a Lender. Find a lender you can trust and who will have your interests at heart.
4. Process Loan. Wait for the mortgage to be processed. Loan processing may take about two weeks.
5. Underwriting Process Begins. The underwriter will go over the loan documents to assess your level of risk when it comes to handling the loan in the long term.
6. Get Response. You will find out if your loan has been cleared. If your loan has been approved, you are ready to close the deal!

Mortgage Refinancing

Mortgage refinancing is used to lower the interest rate of a home loan. It involves replacing your current debt with a new one, which may result in a lower monthly payment, canceled insurance premiums, and different repayment terms.

It makes sense that a product like this would exist since your finances are bound to change over time. Halfway into a 30-year fixed-rate loan, many borrowers find themselves in a different financial position than when they started.

Before you refinance your home loan, review three kinds of refinancing products:

• Cash-in refinances – During closing, you pay down what you owe on the loan. This may help you avoid insurance premiums, and it may also reduce the interest rate associated with your loan.
• Cash-out refinances – You take out a new loan with an increased amount owed, receiving the extra amount at closing. A cash-out loan is riskier for the creditor than other types of refinancing, which can translate to a harder approval process.
• Rate-and-term refinances – You alter the term or rate of the loan. In some cases, both are adjustable. This is the most common type of mortgage refinancing.

One reason borrowers hesitate to refinance their loans is that they are worried about paying closing costs all over again. Some creditors may make this easier by adding those costs to the loan. The downside is that the closing costs will end up costing you more, as they will become part of your loan, which is paid back with interest.

Home Equity Loans

Equity refers to the amount you have already paid toward your mortgage. When you have positive home equity, the amount you owe on your mortgage is less than the fair market value of your house.

With a home equity loan, you borrow from your home equity or the difference between the value of your home and how much you have left to pay on your mortgage. You will not be able to borrow all of it. Creditors will usually require you to have at least an 80% loan-to-value ratio, which means you cannot borrow to the point where you owe more than 80% of the value of your house.

For instance, if the fair market value of your house is $500,000, then your loan-to-value ratio could not be over 80% or $400,000 ($500,000 x 0.8). If you had $350,000 left on your loan, that means you might be able to borrow up to $50,000 before reaching the 80% loan-to-value ratio.

A home equity line of credit (HELOC) is similar to a home equity loan, except instead of receiving the money all at once at the beginning, it is used more like a credit card, where you can borrow up to the agreed-upon amount when you need it.

You use your home as collateral for both a home equity loan and a home equity line of credit. That means if you cannot pay what you owe, you risk losing your house.

If you do not want to use your home as collateral, another option might be an unsecured personal loan. Your personal loan agreement should not include any language about losing your house if you cannot pay back the loan.

Some of the reasons people choose a personal loan instead of a home equity loan include having a fixed interest rate, a shorter loan term, and a faster application and borrowing process. Negatives for using a personal loan include higher interest rates, larger monthly payments, and not being able to claim a tax deduction on the interest.

Reverse Mortgages

A reverse mortgage is very similar to a home equity loan, except that it is only for homeowners who are at least 62 years old. It can be used to supplement one’s retirement income, offering either a line of credit or a fixed monthly payment to be paid back when the borrower moves away, sells the home, or passes away.

Those who use a reverse mortgage will see their debt increase as their home equity decreases. When the time comes for the creditor to collect the debt, the home will be sold (or, if the heirs choose to, there may be an option for them to pay off the mortgage and keep the house). If there is leftover equity after the debt has been settled, including all associated fees, that money will go to the heirs.

The most common type of reverse mortgage is the home equity conversion mortgage (HECM), which is insured by the Federal Housing Administration (FHA) and offered by private banks. The limit on how much you can borrow with a HECM is $625,000.

Other types of reverse mortgages include single-purpose and proprietary reverse mortgages. The single-purpose option is geared toward lower-income homeowners, and it has limitations on what the money can be used for. Proprietary reverse mortgages tend to be more expensive than other options, but they are less limited regarding what you can do with the money and how large the loan or credit can be.