The South Carolina Home Ownership Program was founded in 1979 and has since assisted over 42,000 SC residents, with low and low-to-moderate income, find and buy their dream homes.
Buying a house can be a fairly complicated process and it is easy for first-time buyers to be overwhelmed with a ton of information, including mortgage and its down payment, first-time buyer programs, and finding a good real estate agent. But fret not; here is a roundup of all the basics one needs to know about a home mortgage.
What is Home Mortgage?
A mortgage or a “lien against property” is a loan provided by a lender or a financial institution to enable you to buy a real estate property. The said property functions as the “collateral” against that loan and can be foreclosed upon if it isn’t repaid within the predetermined period.
There are three parts to a home mortgage:
- Monthly Payment – This is the amount that you will be required to pay every month over the duration of the loan. It further consists of four parts – the payment on the principal plus the interest, taxes (like property tax), and insurance.
- Down Payment – It is a lump-sum prepayment of a percentage of the mortgage. The higher the down payment, in general, the lower are the interest rates and fees.
- Fees – These include the additional costs required to be paid upfront when securing the mortgage.
What Are the Types of Mortgages Available?
Mortgages can be classified by – the type of lender, the type of interest rate, and the principal amount.
1. Based on The Type of Lender
- Conventional Loans – These are issued by an agreement between financial institutions like banks or credit unions and the borrower based on the latter’s financial history and their satisfaction of the eligibility conditions.
- Government-Backed Loans – These loans are insured by the following government agencies; the Veterans Administration (for honorably discharged veterans), Federal Housing Administration (for low and low-to-moderate income borrowers), and the US Department of Agriculture. They typically have a lower minimum credit score and down payment requirement.
2. Based on the Type of Interest Rate
- Fixed-Rate Mortgage – The interest rate and, consequently, the monthly payment is agreed upon during the issue of the loan and remains uniform throughout the tenure of the loan.
- Adjustable-Rate Mortgage (ARM) – They typically have a lower interest rate than fixed-rate mortgages during the issuance of the loan, but it varies during the loan tenure and can go higher or lower than the original rate.
3. Based on the Principal Amount
- Conforming Mortgage – They meet the funding requirements of Freddie Mac and Fannie Mae, and the loan amount falls within the upper limit set by the Federal Housing Finance Agency (FHFA).
- Nonconforming Mortgage – The loan values are higher than the upper limit of FHFA, and their eligibility conditions vary between lenders. In general, they have a higher interest rate and down payment and have a more relaxed credit score and financial guarantee requirement.
What is a Loan Estimate and Closing Disclosure?
The Loan Estimate and the Closing Disclosure are two of the most important and legally binding documents required to close the purchase process of a residential real-estate property.
- Loan Estimate – A Loan Estimate is a three-page long document outlining the basic details of the mortgage like estimated monthly payments and closing costs, third party fees, interest rate, and other data to help you compare loan offers from other lenders.
- Closing Disclosure – This five-page long document is furnished at the end of the mortgage underwriting process after you have finalized the lender. It details the same information as the Loan Estimate along with any changes made since then and essentially provides you with the final amount you will owe on the closing day.
Mortgage Points for More Savings
Mortgage Points, or Discount Points, are the fees that can be paid directly to the lender during the closing to buy down a lower interest rate.
Each point will cost you a percentage of your principal amount and will lower the interest rate further. In general, the longer your loan duration is, the more money you will likely save on your interest by paying a higher discount fee.
Fluctuating Interest Rates and Rate Locking
Interest rates are always changing, sometimes even by the hour. Thus, the interest rate that you based your entire mortgage upon can be something very different by the time you finish the underwriting process.
A rate-lock binds the lender to that interest rate as long as you close within a stipulated period. The rate locking fee can be a percentage of your mortgage amount, or an addition to your interest rate, or a one-time payment.
Private Mortgage Insurance
Private Mortgage Insurance (PMI) will only be required if your down payment is less than 20 percent of the home’s purchase price. In this case, the loan will be categorized as “risky”, and you will need to pay a recurring PMI that will protect the lender in case of payment defaults.
A PMI costs anywhere between 0.5 to 1 percent of the mortgage amount per annum and can be paid either monthly or as a premium during the closing procedure.
The PMI payments are terminated once you have paid an amount equivalent to the prescribed down payment towards the mortgage amount or on the date the equity value reaches 22 percent. In case you stop paying your monthly payments, the accrued PMI will be paid out to the lender (along with foreclosure proceedings).
Complicated Yet Crucial; Expensive and Long-Term
If you are a first-time buyer, the prospect of obtaining a mortgage might seem like a tall order, especially with all its complex industry terminologies. However, choosing the right mortgage is absolutely crucial if you plan on keeping your home as a long-term investment.
You can use the information provided here as a guideline to choose the right mortgage type as well as being informed on all the different ways that you can save money in the process.
Have Questions? Ask Trevandin Worley!
Give Trevandin Worley a call today at (864) 252-5120 to learn more about local areas, discuss selling a house, or tour available homes for sale.