home mortgage

Mortgage 101: A Beginner’s Guide

Buying a house can be complicated, but it’s easier to navigate the process if you have a solid understanding of the basics.

If you’re a first-time homebuyer or are starting to think about buying a home of your own in the future, you can learn about mortgages, interest rates, payment options, and more with our easy-to-follow guide.

Let’s start with the basics: What is a mortgage?

Mortgage definition: A mortgage is a binding, legal agreement between a lending institution (typically a bank) and a borrower in which money is lent for a property. The loan is secured by the property and the borrower makes payments per agreed upon terms until the lender is paid in full.

In other words, a mortgage is a loan meant to help people purchase or build a house. There are different types of mortgages, but basically, you receive a lump sum of money to cover the cost of the house (not including the down payment) and are then required to make regular payments until the house is paid off.

Mortgage Types: Fixed-Rate and Adjustable-Rate

There are many different types of home loans, but the two most common mortgage types are fixed-rate and adjustable rate. In basic terms, they are what they sound like. A fixed-rate mortgage has a set interest rate that doesn’t change over the life of the loan. An adjustable-rate mortgage’s interest rate changes after a predetermined fixed period (such as one year, three years, and so on).

mortgage basics

The Basics

The Positives

The Drawbacks

Still confused about the difference between a fixed-rate and adjustable-rate mortgage?

Mercer Savings Bank’s own Gregory Bruns, Vice President of Lending, offers further clarification on the positives and negatives of each mortgage type:

“With fixed-interest rate mortgages, you never have to worry about your payment changing. Adjustable rates can change—that’s the drawback. The positive is that ARMs are easier to qualify for because we as a bank make the decision using our criteria versus a set of written black and white guidelines that can’t be budged. There’s a bit more wiggle room than with fixed-rate mortgages.

For example, for a fixed rate loan you might have to have four specific credit traits. Even if you have three out of four, you still won’t qualify. Or, if you need a credit score of 680 and you have a 678, you won’t qualify. It’s that black and white. But in-house, we could look at that 678, or even a 660, and take that into account with other positive factors, and you could still qualify for an adjustable-rate mortgage.”

Which mortgage rate type is best for me?

It all comes down to personal preference and your financial situation. If you’re on a tight budget, a fixed-rate mortgage is by far your best bet because you don’t have to worry about the payment changing. If you have less than stellar credit, a fixed-rate might not be for you, but an ARM could work.

How can you predict what mortgage rates will do?

Predicting the housing market is near impossible. A lot of complicated variables have an effect on mortgage rates—things like supply and demand, tax codes, the Federal Reserve Board, and more—so it’s difficult to say with certainty whether mortgage rates will rise or fall.

But while no one knows for sure what rates will do, there’s currently a projection that the Federal Reserve will raise rates during this coming year (2018). That means there’s a very good chance mortgage rates will keep climbing. The two don’t directly correlate, but it’s usually a good indication.

So, the best time to get a mortgage in 2018 is sooner rather than later. But again, it’s important to keep in mind that there’s no way of knowing for sure what rates will do. There’s always the possibility of another market downturn, which would cause rates to drop instead of rise.

 

predict mortgage rates

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What mortgage is right for me?

When determining which mortgage is right for you, it’s a good idea to have a firm grasp on your budget to determine how much you’ll be able to spend on a down payment and monthly mortgage payments. As mentioned above, the type of mortgage that’s right for you also depends on your financial situation.

To get a general idea of a manageable mortgage amount, Mint.com suggests using this income to mortgage formula: (Target mortgage payment + consumer debts) ÷ .36 = Gross monthly income needed to qualify.

However, it’s important to keep in mind that the formula amount isn’t the final answer. No matter what number you end up with, you still want to make sure it would fit your budget.

It’s also a good idea to talk to the lending representative at your bank. They’ll be able to provide input as to what kind of mortgage best suits your needs and financial situation.

What determines my mortgage eligibility?

There are a few different factors that lending institutions will take into account when determining your eligibility for a loan. Those include (but are not limited to):

  • Credit score
  • Debt to income ratio
  • Loan to value ratio (loan amount versus the value/purchase price of the property)
  • Savings history

Can I still get a mortgage if I don’t have a full-time job?

Your employment status can affect your eligibility in certain situations. For example, it would skew the debt to income ratio (see above) if you didn’t have a job or any other source of income. But a full-time job is by no means a requirement of a mortgage.

As Bruns explains, “Full time, part time—income is income. Full time hours will naturally be easier to qualify for a loan than part-time, but it’s doable. For example, we do have people that work seasonally, meaning they’re off for three months or so every year. But they budget accordingly.”

What mortgage lender should I choose?

When choosing a mortgage lender, it’s a good idea to start at home. Begin by looking at community banks to see what rates they offer. You can also look online to get an idea of average rates, but when it comes to getting a loan, it’s best to work with local lenders to make it more convenient in the long run.

At a local bank, your bank representative will be familiar with the area and know what the local market conditions are like, as well as property values. He or she will be able to help you through the process with that in mind.

If you go to a local bank, it’s also more likely that the representatives will be able to offer more personalized advice than an online lender. Even if you are a new client at the bank, they’ll take the time to get to know you so they can answer your questions, suggest alternatives, and help find the perfect loan for you.

mortgage lender shaking

The Advantages of Going to Your Local Bank for a Mortgage

Simply put, at Mercer Savings Bank, customers are more than just a number.

As Bruns says, “Being a community bank, we look at the whole picture—not just the credit score. They’re not just a number, they’re a person. Just because their credit might not be the greatest, that doesn’t mean that they can’t borrow. We take extra time to look at other factors that would qualify them.”

Some other advantages of a local bank include:

  • They know the local real estate values in your area.
  • They offer competitive rates.
  • They typically work and live in the community and can answer any questions you may have.
  • They are generally more willing to work with customers who have less than perfect credit scores.
  • They’re much easier to contact versus an online lender.
applying for a mortgage

What to Expect When Applying for a Mortgage

When you’re ready to apply for a mortgage, it typically takes 3-4 weeks to close. That can vary depending on how quickly an appraisal on the house is completed, but that’s generally the timeframe you can expect between applying for the mortgage and having everything all set for purchase.

Some people have questions about when to seek a mortgage—before or after you have a house picked out. Some people choose to visit their bank first to see what they can afford before house hunting while others already have a house in mind but need to determine if they qualify for a mortgage. It’s up to your personal preference, although it might be safer to see what you qualify for and can afford before getting too attached to a house.

One important thing to note: the maximum loan amount you qualify for at the bank doesn’t necessarily take into account your other budget items like cell phone, utilities, student loans, etc. That’s why it’s important to create your own budget with a mortgage payment in mind to see what loan amount is feasible.

What to Bring to Your First Meeting with a Bank Representative

Your local bank representative will let you know if you need any other documents during the loan process, but for your first meeting it’s a good idea to bring the following:

  1. Most recent check stub
  2. Last two years of W-2s
  3. Most recent bank statement

Did you know you can apply for a mortgage loan online with Mercer Savings Bank? You can get started on your online loan application today.

Find the Right Mortgage for You at Mercer Savings Bank

At Mercer Savings Bank, we’re here to help you find the right fit for your needs and budget. We’re a mutual bank, meaning we don’t have any shareholders. It’s part of what’s made us a trusted community bank for more than 130 years.

This is our home, our community. It’s our goal to help our fellow community members achieve their dreams. If you’re ready to buy a home of your own or would like to discuss the possibility with a trusted bank representative, we invite you to contact us or come visit us at one of our Mercer and Darke County locations.

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