Mortgage Basics

Buying a home comes with a lot of mortgage terminology, but you do not need to become a lending expert to understand your options. You do not have to know all of this before buying a home. It is a lot.

Your job as a buyer is to understand enough to make informed decisions and to have the right professionals explain your options. I can help you navigate the homebuying side and connect you with a qualified lender who can explain the financing available for your situation. Tax questions should go to a qualified tax professional.

Interest: What Are You Actually Paying For?

When you borrow money to purchase a home, you repay the amount borrowed, called the principal, plus interest. Interest is the cost of borrowing that money.

Your interest rate matters, but it is not the whole story. Even a small difference in rate can affect your monthly payment and the total interest you pay over the life of the loan. Your loan term matters too:

• A shorter term generally means higher monthly payments but less total interest paid over time.
• A longer term generally means lower monthly payments but more interest paid over the life of the loan.

What Is Actually In Your Monthly Payment?

You will hear the term PITI a lot during the homebuying process. It stands for:

Depending on your loan, your total monthly housing payment may also include mortgage insurance or HOA dues. When you are looking at homes online, do not judge affordability using only the estimated principal-and-interest payment. The total monthly cost is what matters to your budget.

Fixed-Rate vs. Adjustable-Rate

The right choice depends on your finances, your plans and your comfort with potential payment changes.

Conventional Loans

A conventional mortgage is a home loan that is not insured or guaranteed by a federal government agency like FHA or VA. Conventional loans can be attractive to borrowers with stronger financial profiles. Putting less than 20 percent down may mean paying private mortgage insurance.

What Is PMI?

Private Mortgage Insurance protects the lender, not the buyer. When a conventional buyer makes a smaller down payment, the lender may require PMI, which the borrower pays as part of the cost of financing.

PMI does not necessarily last forever. Depending on the loan and applicable requirements, it may eventually be eligible for cancellation as you build enough equity. Your lender can explain exactly when and how PMI could be removed from your particular loan.

What Is Equity?

Equity is the portion of your home’s value that belongs to you.

Your equity can change as you pay down your mortgage and as your home’s market value rises or falls.

What Is LTV?

LTV is the loan-to-value ratio. It compares the amount you are borrowing to the value of the property.

The more money you put down, the lower your LTV. LTV can affect loan eligibility, mortgage insurance and financing terms. You do not need to calculate this yourself, your lender will.

What Are Mortgage Points?

Sometimes you can pay more money upfront for a lower interest rate. Discount points let a buyer pay an upfront cost in exchange for a reduced mortgage interest rate. One point equals 1 percent of the loan amount.

Whether points actually save you money depends on what they cost, how much they lower your rate and how long you keep the loan. The break-even point matters. If you spend thousands upfront to lower your monthly payment, it takes time for those savings to equal what you spent, and if you sell or refinance before then, paying for points may not have been worthwhile. Your lender can calculate the break-even point for you.

Other Types Of Home Financing

Not every property or buyer fits a standard conventional mortgage. Depending on the situation, you may hear about:

• Construction loans: financing designed for building a home, with funds typically released as construction progresses.
• Manufactured home loans: options vary depending on the home, the land and how the property is classified.
• Jumbo loans: loans above applicable conforming loan limits, with qualification requirements that can differ from standard conventional financing.
• Home equity loans: allow qualifying homeowners to borrow against some of the equity they have built.
• HELOCs: a home equity line of credit also uses equity, but generally works more like a revolving line of credit.
• Reverse mortgages: a specialized product available to qualifying older homeowners to access home equity under specific requirements.

What Does Refinancing Mean?

Refinancing means replacing your existing mortgage with a new loan. Homeowners may consider it to obtain a different interest rate, change the length of the loan, move from an adjustable to a fixed rate, or access equity through certain cash-out options.

Refinancing is not automatically beneficial just because a new rate is lower. Closing costs, the new loan term, how long you plan to own the home and your overall financial goals all matter.