Becoming a homeowner is one of the most treasured American dreams. For most homeowners, obtaining a mortgage is one of the traditional steps into making this dream a reality. If you are in the process of considering homeownership, then you may be wondering how to get started. Even if you are already a homeowner, getting a quick refresher course in mortgages may be beneficial to your current needs.
As we enter a new year, 2021 brings high financial hopes for many ready to embark on a new home. The remarkably low interest rates are giving many Americans the opportunity to have their very own home!
A brief overview of 2021’s promising real estate forecast…
Get your packing boxes ready because now is the perfect time to purchase a home! Experts predict a post-pandemic rebound! This relates to the mortgages rates, increase of real estate development, and job recoveries. 2021 is holding extremely low interest rates on average home buys. Less than 3% in most states. These low rates give potential buyers a greater chance at loan approval and affordable mortgages they can safely maintain.
“Heading into 2021 we expect rates to remain flat, potentially rising modestly off their record low, but solid purchase demand and tight inventory will continue to put pressure on housing markets as well as house price growth.” Housing Wire
Let’s start with the basics…
What is a mortgage?
These are also referred to as “mortgage loans.” This type of loan is designed for you to use to purchase or refinance a home/property. Generally provided by banks or broker firms connected to banks. Mortgages are a straightforward way for a person to buy a home without having the full cash amount upfront. Your mortgage rate is the amount of interest a lender charges on the money borrowed to either purchase or refinance a home.
“For instance, if you had a $400,000 mortgage with a 3% interest rate, your annual interest expense would be $12,000 or $1,000 a month. Mortgage rates can be fixed, meaning they stay the same over the life of a loan, or adjustable, meaning they fluctuate after an initial fixed-rate period of time. Available mortgage rates fluctuate over time, they climbed as above 18% in the early-1980s and have been below 4% since the middle of 2019. The average U.S mortgage rate for a 30 year-fixed loan remained at a survey – low of 2.6% since the start of the new year.” Money.com
Who would benefit from a mortgage?
Before we dive deeper into talking about numbers and percentages, let’s discuss some mortgage basics. Mortgages are for most people who wish to purchase a home. They can also be used to purchase larger properties and even land. A mortgage is a negotiable financial instrument for a buyer who cant produce the full asking price for a property. If you’re planning on making this major real estate investment, you should really understand what a mortgage is and how they work.
How do they work?
Mortgages are secured loans. With a secured loan, the borrower promises collateral to the lender in the event that they stop making payments. In the case of a mortgage, the collateral is the home. If you stop making payments on your mortgage, your lender can take possession of your home, in a process known as foreclosure. To prevent the negative outcome of losing your home, you need to review your finances and calculate how much you can actually pay monthly on a loan.
Practical Money Skills shares: “A mortgage has three parts: a down payment, monthly payments and fees.
- The monthly payment is the amount needed to pay off the mortgage over the length of the loan and includes a payment on the principal of the loan as well as interest. There are often property taxes and other fees included in the monthly bill.
- The fees are various costs you have to pay up front to get the loan.
- The down payment is the up-front amount you pay to secure a mortgage. The larger your down payment, the better your financing deal will be. You’ll get a lower mortgage interest rate, pay fewer fees and gain equity in your home more rapidly.”
Your monthly payment is the amount needed to pay off the mortgage over the length of the loan and includes a payment on the principal of the loan as well as interest. Understanding your monthly income and what your monthly payment on a possible mortgage, you need to sit down and write out your monthly expenses and financial income. A great tool for figuring out your finances is a mortgage calculator. An example for using a mortgage calculator is deciding if you will get a loan with an escrow. This is figured against your monthly income and current assets.
Escrow are not a must for all mortgages. They do come into play on some loans if you can’t make the 20% down payment on your loan. Escrows in the real means that your mortgage every month includes: property taxes and insurance bills. Escrows give the bank the security of knowing you can’t default on these bills. If you make a down payment of 20% or more, you may opt to pay these expenses on your own or pay them as part of your monthly mortgage payment.
What factors will affect my interest rate?
When a person(s) acquires a mortgage/loan it gives them the ability to pay off the loan monthly and yearly with interest for a certain amount of years. The interest on a mortgage is determined by a few factors. Two of the most important factors are: present market rates and the level of financial risk you are to the lender. “There’s no universal formula for winning approval of a personal loan application. Requirements such as credit score and income vary by lender, and some online lenders consider nontraditional data, like free cash flow or education level.” NerdWallet
While you have zero control over the current market rates, you do have the ability to make yourself more presentable to a potential lender. Loan companies have one thing in common: They want to get paid back on time, which means they approve only borrowers who meet their requirements.
Here are a few tips from NerdWallet about boosting your chances of getting a loan approved:
- Clean up your credit report
- Balance your debts and income
- Consider a co-signer
How do I obtain a mortgage?
“You will sign a lot of documents to obtain a mortgage, including a promissory note, and in many states, a deed of trust.” Lending Tree
To qualify for the loan, you must meet certain eligibility requirements. As we previously discussed, a lender will only give out loans to individuals who seem responsible enough to repay them. Therefore, a person who gets a mortgage will most likely be someone with a stable and reliable income, a debt-to-income ratio of less than 50% and a decent credit score (at least 580 for FHA loans or 620 for conventional loans). If you are unsure of your current credit score you can check it for free and safely on sites like CreditKarma.
Pros & cons of mortgages…
Positives: A major positive in taking on a loan is it gives you the ability to own your dream home and pay the borrowed money back in a controlled time. Most terms of loans are 30 years or 15 years. Another positive is the opportunity to build credit. As you pay your mortgage every month on time, you will start to improve your credit. When you show finically stability the credit bureaus increase your scores over time, this opens up more opportunities for refinancing or other small loans!
Negatives: If you have a high interest rate. If your credit score or finances aren’t up to par, you may get stuck with a high interest rate. This will leave you paying back a lender much more of the spread of the terms of the loan. A good way to avoid high interest rates is using the tools we shared above as well as speaking with an attorney before choosing which loan you want to go with. Another negative you most certainly want to avoid is foreclosure! If you find you cannot pay your mortgage, you run the risk of losing your property. The lender uses the property as collateral. The best way to avoid this is by following our steps and consulting with a professional about your situation.
Bonus: Low interest rates are a proven way to protect your finances!
Nationwide mortgage rates were extremely low as of the end of 2020. If ever there was a time to take out a mortgage on a home it would be now. With these low rates, it gives a buyer a chance to get their dream home without fear of foreclosure. This would be the safest time to make a long term investment into buying property.
“Mortgage rates are historically low, which means the cost of borrowing is cheap. While 2020 did not surprise with its fair share of surprises, 2021 could still have more surprises in store for us. Still, expectations for the housing market remain generally positive. First, interest rates, which have motivated many buyers in 2020, are expected to remain low and will help ameliorate some of the affordability concerns resulting from rapid home price appreciation seen in 2020. In other words, low mortgage rates continue to provide greater purchasing power, especially for first-time home buyers.” Forbes
Have you gotten your ducks in a row? These are the next steps…
After determining credit score and potential monthly payments, you should start shopping around for the perfect lender or broker who can help you obtain a loan. If you aren’t sure where or how to choose the right lender, we recommend reaching out to a trusted attorney who has many years of real estate law experience. 23 Legal’s attorney Ben Weaver has years of longstanding, positive relationships with local brokers.
“A real estate attorney can be a valuable partner throughout the process of purchasing a home. Beginning at the early stages of the home buying process, your attorney can assist in selecting potential properties and reviewing any contracts or other documentation you are asked to sign by your real estate broker or mortgage broker.” Value Penguin
During the process of obtaining a mortgage (otherwise known as a home loan), you will be signing many legal documents. It’s important to have a knowledgeable trustworthy attorney like Ben Weaver on your side to guide you through the process. Let us help you make your new home dreams come true in 2021!
Read our previous blog to find out the many other ways we can be of assistance in the new year.
Please feel free to contact us for assistance or with any questions you have. Click here to read 5-star client reviews!
Mortgage Related Definitions
- Borrower: A person or company that has received money from another party with the agreement that the money will be repaid. Most borrowers borrow at interest, meaning they pay a certain percentage of the principal amount to the lender as compensation for borrowing. Most loans also have a maturity date by which time the borrower must have repaid the loan.
- Down payment: An initial payment one makes on an asset financed with debt or otherwise paid in installments.
- Escrow: A certificate stating that an asset is being held by a third party on behalf of two parties to a transaction until certain conditions are filled. An escrow agreement is issued by the bank or other institution holding the asset in escrow and is useful to prove to one party or the other that the escrow has in fact taken place.
- FHA: Federal Housing Administration (FHA) Loans – The FHA was created to help people obtain affordable housing. FHA loans are actually made by a lending institution, such as a bank, but the federal government insures the loan. This is often the least costly loan that non-veterans can get.
- Foreclosure: Process by which the holder of a mortgage seizes the property of a homeowner who has not made interest and/or principal payments on time as stipulated in the mortgage contract.
- Interest Rate: The percentage of the value of a balance or debt that one pays or is paid each time period.
- Lender: A person or organization that makes a loan. That is, a lender gives money to a borrower with the expectation of repayment in a timely manner, almost always with interest.
Why Choose 23 Legal
23 Legal offers Real Estate and Estate Planning legal services to individuals, families, community associations and small business owners throughout Chicagoland. We know how intimidating “the law” can be. In fact, when most people think of law offices, they think of stuffy leather chairs, huge wooden desks and pompous lawyers who charge outrageous fees. That’s not us! We believe in 1-to-1; the same lawyer should work with you all the way through. Whether you have an estate planning issue, family trust concern, or you have a legal problem in regard to a new home, business, real estate or remodel, you need a lawyer who cares. That’s where Ben comes in! We are great listeners; more than that, we are lawyers who believe that our clients always come first.