If you’re considering buying a home, it’s important to understand the mortgage process and the different types of mortgages available. This blog post provides a comprehensive glossary of mortgage terms and discusses topics such as the mortgage application process, credit score requirements, down payments, mortgage insurance and more.

Navigating the world of mortgages can be overwhelming, but with the right information you can make the best decision for your situation.

What is a mortgage?

Mortgages are loans that are used to purchase homes or other types of real estate. The borrower pledges the property as collateral and agrees to make regular payments that are divided between principal and interest. When a borrower fails to meet their financial obligations, the lender can take ownership of the property, or “foreclose.”

The most common type of mortgage is called a conventional mortgage. Conventional mortgages must meet certain requirements, such as a minimum credit score and down payment. Other types of mortgages include jumbo mortgages and Federal Housing Administration (FHA) loans. Jumbo mortgages are loans that exceed the government’s limits on loan amounts, which vary by county. FHA loans are designed to help homebuyers with less income or higher debt.

Before a borrower can get a mortgage, they must apply with one or more mortgage lenders. During this process, the lender will review the borrower’s financial situation to determine their eligibility. They may ask for bank and investment statements, tax returns and proof of employment. Lenders also look at the home’s title to ensure that it is free and clear of liens from creditors or other parties. This is a key part of the loan closing process and is typically performed by a title company.
What are the different types of mortgages?

The type of mortgage you choose will depend on your financial situation, goals and preferences. You can select from a variety of loans and terms, including fixed-rate and adjustable-rate mortgages. You can also choose from government-backed mortgages, such as those provided by the Federal Housing Administration (FHA), USDA and VA. Other less-common mortgage options include interest-only mortgages and payment-option ARMs, which have complex repayment schedules that are best for sophisticated borrowers. Finally, there are also reverse mortgages that are using your home equity.

A conventional mortgage is one that is not backed by the government and adheres to strict loan limits set annually by the Federal Housing Finance Agency (FHFA). These loan limits are currently $726,200 in most areas of the country and can go as high as $1,089,300 in certain areas with higher costs of living.

A jumbo mortgage is another type of conventional loan that allows you to borrow more than the FHFA’s limits, which are typically lower than those for FHA and VA loans. A jumbo mortgage typically has higher credit and debt-to-income requirements than a conforming loan. Many lenders offer a combination of these types of mortgages, known as piggyback loans, which involve taking out two separate mortgages — one large and one small — that “piggyback” on each other.

What are the benefits of a fixed-rate mortgage?

A fixed-rate mortgage is a type of loan that has an interest rate that stays the same for the life of the loan. These loans usually come in terms of 15, 20 or 30 years and the monthly payments are made up of a mix of principal and interest. The amount of the payment that goes towards principal starts out small at first and then grows larger each month as the loan amortizes (or reduces).

One of the benefits of a fixed-rate mortgage is that the borrower knows exactly what their monthly payments will be for the duration of the loan. This helps borrowers budget their expenses and plan for the future. Another benefit of a fixed-rate mortgage is that it provides protection from rising interest rates.

Fixed-rate mortgages are available in a variety of loan types and terms, and they can be offered by almost all lenders. However, it’s important to note that the interest rates of fixed-rate mortgages will vary from lender to lender. In addition, the term of a fixed-rate mortgage can also affect the interest rate. For example, a 30-year fixed-rate mortgage will typically have a lower interest rate than a 15-year fixed-rate mortgage.

What are the benefits of an adjustable-rate mortgage?

The benefits of an adjustable-rate mortgage (ARM) include lower interest rates and payments in the initial years of your loan. This is because ARMs typically offer a fixed-rate period for an initial five or seven years, followed by an adjustable rate. Because the bank is taking on some risk that rates will rise, it rewards you with a lower initial rate than it would on a traditional 30-year fixed-rate mortgage.

After the introductory period ends, your mortgage’s interest rate will reset to an indexed market rate, plus a margin that the lender sets for itself. Some ARMs may also come with payment caps that limit how high your monthly payments can go.

ARMs are ideal for homebuyers who plan to sell or refinance their homes before the introductory rate period expires. They can also benefit buyers who expect to receive a windfall in the future, such as an inheritance or financial bonus.

However, if you plan to stay in your home for several decades, an ARM could end up costing more than a traditional fixed-rate mortgage. This is because your interest rate and payments will increase over time as markets fluctuate. It is important to understand your responsibilities and financial situation before you choose an ARM.
What are the differences between a fixed-rate and adjustable-rate mortgage?

The biggest difference between a fixed-rate mortgage and an adjustable-rate mortgage is that a fixed-rate loan has a consistent interest rate for the entire loan term. Fixed-rate mortgages are typically offered with 30-year terms, but can also come in 15- or 20-year options.

A fixed-rate mortgage offers a predictability that can simplify household budgeting, as you know from day one how much your monthly principal and interest payment will be. It can also make it easier to compare lender offerings because you can easily calculate the maximum total interest expense over the loan term.

ARMs offer lower introductory rates that can be attractive to borrowers early in their careers, who anticipate income increases that may outpace the higher monthly payments of a competing fixed-rate loan once the ARM’s introductory period ends. However, ARMs can be risky if future interest rates rise significantly.

A borrower’s credit score and mortgage goals will play a big role in which type of loan is best for them. Both options require good credit to qualify, and both have their pros and cons. Consider speaking with a financial professional to weigh your options. And remember that current mortgage rates are at historic lows, making it a great time to purchase a home!

What are the closing costs of a fixed-rate mortgage?

The closing costs of a fixed-rate mortgage generally run between 2% and 5% of the loan amount, including onetime fees like origination, appraisal, attorney’s and inspection fees. They also include prepaid expenses such as property taxes, homeowners insurance premiums and mortgage insurance. Closing costs are usually paid by the borrower, although sellers may agree to pay some or all of them as part of a sale agreement.

Some of the fees associated with a mortgage are non-negotiable, such as the lender’s underwriting fee or an administrative processing fee. Other fees are negotiable, however. You should request a breakdown of the upfront costs and total costs over time from each lender you shop with to see which have the most competitive structure.

For example, lenders often offer “points,” or loan discount fees that allow borrowers to buy down their interest rate in exchange for paying upfront closing costs. While this increases the upfront cost of your loan, it reduces the overall cost of your loan because you’ll pay less interest over its life. It’s important to compare the different options available to you. You can use online calculators to help you make the best decision for your situation.

What are the closing costs of an adjustable-rate mortgage?

Mortgages make homeownership attainable for many individuals, but they can be complex financial commitments. It’s important to consider your own financial situation, consider the different types of mortgages available, and research lenders carefully before you apply for a mortgage. Getting pre-approved before you begin the process can also show sellers that you’re a serious buyer, and it can help you gauge how much home you might be able to afford.

Closing costs are a collection of fees charged by lenders, home appraisers, title companies and other third parties to complete the mortgage transaction. These fees can vary widely, but typically range from 2% to 5% of the loan amount for both new purchase and refinance mortgages.

One of the key disadvantages of adjustable-rate mortgages is that your monthly payments may increase when your mortgage interest rate adjusts. This can be especially significant if interest rates rise significantly. Fortunately, there are ways to avoid this problem, such as purchasing your home with a fixed-rate mortgage or choosing an ARM with a shorter fixed period. Another option is to “buy down” your mortgage rate by paying additional closing costs upfront, which can reduce the amount of your monthly payment that goes toward interest.