Prevent surprises at the closing table. Learn about the programs available to you.
You’ve decided to buy—that’s a major financial commitment. Since you’ll probably have your mortgage anywhere from 15 to 30 years, it’s important to understand what your mortgage quote includes. Your lender will provide a mortgage quote based on several factors.
Length of your mortgage
Typically, the shorter the mortgage term, the lower the rate. Why? Because the lender is taking less risk and, in turn, charge you less for accepting the risk. The term of the mortgage will have an impact on interest rates that you are expected to pay.
Type of mortgage
If you plan to live in your home, you’re likely to have a lower interest rate than if you’re buying an investment property or vacation home. The lender assumes that if the buyer intends to live in their home, there is less risk of them defaulting on their loan.
Equity in your property
Equity plays a key role in your mortgage quote from your lender. Typically, the higher the equity, the lower your rate. To calculate your home’s equity, take the current appraised value of the property and divide it by the amount of the mortgage. If your home is worth $200,000 and your loan amount is $100,000, your equity is 50%. Lenders assume that the more equity in the home, the less likely the homeowner is to default on their loan.
Amount of your mortgage
The amount available for your mortgage depends on the type of loan you’re getting. Two types of mortgages, traditional / conforming and jumbo vary greatly. Fannie Mae has the current conforming loan amount capped at $417,000 and anything over that is considered a jumbo loan.
Type of interest rates
There are two. Fixed-rate and adjustable rate mortgages (ARMs). It’s pretty simple… Fixed-rate mortgages provide stable monthly payments. Adjustable rate mortgages (ARMs) adjust based on the market but may allow you to find a lower rate and lower payment. Most consumers prefer a fixed-rate loan, but with rates staying quite low lately, an ARM could be a good option for someone who is looking to refinance or even purchase a home to live in for a short time. You’ll need to weigh the pros and cons of each type and find what works for you.
These costs may or may not be included in your mortgage amount. Lenders may offer two quotes: one with the closing costs included and one that requires you pay the closing costs at the closing table. This could impact your interest rate—if included, the loan-to-value amount is typically higher, raising your rate.
Direct lenders are often able to offer a lower interest rate versus mortgage brokers because the fees to use the brokers’ services are passed along to the borrowers. Lenders may also charge a “lock fee” to secure an interest rate while your closing documents are being prepared. Also, remember there is an appraisal fee for either a purchase or refinance loan.
As you can see, there are many things to consider in your mortgage quote. Don’t be afraid to ask questions and speak with your lender about any fee that you do not understand. The more you learn during the process, the less surprises you’ll have at the closing table.