Mortgage 101

Purchasing a home is your ultimate goal, but to get there you’ll have to accomplish many other smaller goals along the way. Getting a mortgage happens to be one of the biggest challenges that people face on their path to becoming a homeowner.

In this guide, we aim to give you all the information you need to secure a mortgage on the metro Denver home of your dreams.

Types of Mortgages

Fortunately for buyers, there are a variety of mortgages to choose. It is in your best interest to investigate each of them to determine which is the best for your situation. You probably won’t qualify for all of them. In fact, you may only qualify for one. But if you do qualify for more than one, you may save yourself money (and worry) in the long run if you do your homework before signing on the dotted line.

Fixed Rate Mortgages

Consider a fixed rate mortgage if either of the following describes you:

  • You plan on living in your new home for many years
  • You are not a risk-taker and prefer the stability of knowing how much your payment will be each month. Since most home loans are for 30 years, if you want a payment you can count on for that long of a period, a fixed rate mortgage may be what works best for you. Once your loan amount and interest rate are calculated and locked in, a fixed rate mortgage will guarantee that you will have the same payment over the life of the loan. Making extra payments to principal will allow you to pay your loan off sooner.Additional principal payments may not always be the best choice, however. If interest rates are very high at the time, you take out your loan, with a fixed rate mortgage you’ll be stuck with that high interest for the life of the loan (unless you choose to refinance). Conversely, if interest rates are very low, you’ll come out the winner with interest rates that will stay flat no matter how high-interest rates go in the future.The following are the advantages and disadvantages of the varying lengths and terms of fixed-rate mortgage

15-Year Fixed-Rate:

  • Pay off the loan in half the time of a 30-year loan.
  • Equity builds up more quickly than in a 30-year loan.
  • Payments are higher (which may be a problem if you lose your job or become unable to work)
  • Pay off the loan in 2/3 the time of a 30-year loan.
  • The overall interest paid is considerably less than for a 30-year loan.

30-Year Fixed-Rate:

  • The most common choice, especially for first-time homebuyers, as it’s the easiest of the fixed-rate loans to qualify for.
  • Monthly payments are lower than for 15-year and 20-year loans. This can prove especially helpful if you do not have a lot of “padding” between the amount you can afford to spend and the monthly payment for your desired property.
  • More desirable if you plan on staying in the same home for years since equity builds more slowly than for shorter-term loans.
  • For income tax purposes, this term provides the maximum interest deduction.

Adjustable-Rate Mortgages (ARMs)

  • If you are more comfortable in taking a risk with your money or if interest rates are very high at the time you take out your loan, an adjustable-rate mortgage (ARM) may be the solution for you. You might also choose this type of loan if your planned ownership of the property is short-term or if you expect your income to increase to cover any potential rise in the interest rate.The interest rate when you take out your loan will be lower than a fixed-rate mortgage. Please note that this is true initially, not necessarily long-term.Since an ARM rate rises and falls depending on the prevailing interest rate, your mortgage payment will rise and fall accordingly. If your income is not sufficient to cover the highest possible payments, then this option is not for you. On the positive side, the lower initial payments will allow you to qualify for a larger loan than if you choose a fixed-rate. The downside is that your payments will increase if/when the rates go up.Typically, ARM interest rates are tied to a particular financial index. They may be a Certificate of Deposit index, Treasury or T-Bill rate, Cost of Funds-Indexed Arms or COFi, or LIBOR [London Interbank Offered Rate] and your payment is based on the index your lender uses plus a margin, generally of two to three points. Get the formula used by your lender in writing and make sure you understand what it means.Fortunately, the amount an ARM can increase is limited. There are “caps” on how much your lender can increase your rate, both for one year and for the life of the loan. Plan ahead, and have your lender calculate what the maximum payment would be if your rate went to the highest amount allowed by the cap for your particular mortgage. If you are not confident you’ll be able to pay that amount on a monthly basis, perhaps you should reconsider this type of loan.

Convertible ARMs

If neither the fixed-rate or the adjustable-rate mortgage seems like the best option, maybe the convertible ARM will be right for you. This alternative combines the primary advantage of an ARM with a fixed rate after a predetermined number of years. Obviously, this type of mortgage has more advantages when the initial interest rate is low, and the future rate is not guaranteed.

Government Loans

Another mortgage option available to some people is a government loan, providing that you meet the qualifications for these loans.

  • VA Loans: Veterans may qualify for a loan from the Veterans Administration. There is a limit on the amount you can borrow, so this option works best for those buying a lower priced home.
  • FHA Loans: The Federal Housing Association offers loans to lower-income Americans. Look for the phrase “FHA approved” when looking at ads for homes.

Getting the Best Rates

Naturally, you want to get the best deal for the least amount of money. You want to get the best mortgage rate as well. A lower interest rate means a lower monthly mortgage payment, which can save you money in the long run. Also, it is easier to qualify for a lower payment than a higher one.

You have two routes to finding the best rate. The first is to do all the research on your own. The second is to use a mortgage broker.

Do-It-Yourself

With the advent of the Internet, much of this information is readily available online. Once you have educated yourself sufficiently about real estate loans, all it takes is the time and energy to sift through online resources to find the information you need.

Rates change quickly. That low level you find today might not be there tomorrow. Once you locate the rate you are looking for, submit a loan application and lock it in.

Some sources for interest rates on the Internet include: Bank Rate Monitor E-Loan

When comparing loans, make sure that you’re comparing loans of the same type. For example, you find that “Loan A” for a 30-year loan has a much lower interest rate than “Loan B” (also for 30 years). Upon further inspection, you find that “Loan A” is technically an adjustable rate mortgage. Its payment is based on a 30-year amortization, but becomes due through either payment or refinancing at the end of 5 or 7 years. These refer to as a 5-year or 7-year fixed-rate mortgage. While both said “30-year”, they are not the same type of loan.

Ask the lender for a statement (Good Faith Estimate) detailing all fees associated with the loan. Factors such as “points” (loan fee), interest rate and “garbage fees” (extra fees which some lenders charge) can vary widely from one lender to another. Most important is the APR (Annual Percentage Rate) which shows your interest rate will ALL fees included!

Mortgage Broker

If you do not have the time or experience to “do it yourself,” look for a qualified mortgage broker that can assist in finding the right mortgage for you. Ask friends and associates who have refinanced or purchased if they have a broker they can recommend. You’ll want to find a broker who is energetic, flexible and knowledgeable about finance and loans and someone who has your best interests in mind.

Lately, I have worked with a great Mortgage Broker. His name is Darik Tolnay with AmeriFirst Financial, Inc. They have put together a unique strategy that can give you an edge in Denver’s home market. I would advise strongly to watch his short video. No other company or broker is using this system. If you are trying to purchase a home in competition with multiple buyers, this strategy will put you at the front of the line!

Let me know if Darik’s strategy interests you. Give me a call or fill out the “Get Your Mortgage” worksheet and you will hear from Darik quickly! 

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Cindy Belhumeur, ABR, SRS

Cindy Belhumeur
ABR, SRS


cindy@homesourceinfo.com

303-429-1887

Home Source Group
Residential Real Estate
7728 Vance Drive
Arvada, Colorado 80003