It’s important, whether buying or selling a home, to understand the ins and the outs of mortgages. Since the majority of people who buy a home need a mortgage, having an understanding of the most frequently asked questions can reduce confusion when taking one out.
Bookmark these mortgage FAQs, divided by section, to help you in the process!
Types of Mortgages
What Type of Mortgage Is Best for Me?
Here at Belco Community Credit Union, we offer three types of mortgage loans: Conventional, FHA, and VA loans. These loans each have qualities that make them better suited for certain individuals.
- Conventional loans are your match if you have a strong credit history, stable employment history, minimal debt, and enough funds to put down at least 5% to 20%.
- FHA loans are backed by the Federal Housing Administration. They’re a great option if you prefer a smaller down payment and have a lower credit score. It’s also true that FHA loans are ideal for someone purchasing their first home.
- VA loans provide flexible, low-interest mortgages if you’re a member of the U.S. military (active duty or veteran) and include your family. They don’t require a downpayment and closing costs may be paid by the seller.
Explore More: Types of Mortgage Loans
Explore More: How to Know if its Worth it to Refinance Your Mortgage
What Is the Difference Between a 15-Year vs. 30-Year Conventional Mortgage?
A big difference between a 15- and a 30-year mortgage is the amount of time it takes to pay them off. A 30-year mortgage will have smaller monthly payments, but in the end, you could end up paying back more due to interest over the 30 years. With a 15-year loan mortgage, you could save a significant amount of money in interest, but have higher monthly payments.
Will My Interest Rate Change?
Fixed interest rate mortgages stay the same for the entire length of your mortgage loan. This offers a predictable payment each month and makes budgeting easier.
An adjustable-rate mortgage (ARM) uses a rate that varies based upon the market. Therefore, the monthly payment may change over time as your interest rate increases or decreases along with market trends.
Qualifying for a Mortgage
What Are the Qualification Requirements to Get a Mortgage?
All loan programs have a minimum credit score requirement. Higher credit scores typically point toward a strong credit history. This allows you to qualify for lower interest rates.
You should also budget for your down payment. Some loan programs require you to make a down payment of a certain amount.
Finally, watch your Debt-to-Income (DTI) ratio. Debts should only make up a certain percentage of your income because you’re about to take on a large and important debt by purchasing a home.
Read More: Qualifying for a Mortgage: What You Need to Know
What Are the Advantages of Choosing a Credit Union vs. a Commercial Bank?
As a Belco Community Credit Union member, you could qualify for varied benefits. Some include lower monthly payments and competitive interest rates. Credit unions have in-house servicing that makes applying for a mortgage and payments simple. Commercial banks usually sell mortgages they originate, where credit unions tend to hold the loans themselves.
What Is the Difference Between a Pre-Approval vs. a Pre-Qualification?
If you want the most accurate depiction of what you can qualify for, or you’re about to start searching for a home, a mortgage pre-approval letter is the more accurate of the two. Since pre-approvals require documentation, they’re typically a better indicator of whether you’ll qualify for a home loan or not and for how much.
A pre-qualification is usually only worthwhile if you’re far out from the home search and are just getting an idea of what mortgage options you may have.
What Documents Should I Be Ready to Provide?
This can be lender-specific but usually includes proof of identity, bank and asset statements, pay stubs, and two years’ worth of your W2s. Documentation will differ if you’re self-employed — have your tax returns handy!
It’s important to remember when obtaining a mortgage you’ll likely need to provide updated versions of the documents mentioned above even after your formal mortgage application is completed.
Managing Your Mortgage
When Should I Consider Refinancing?
With a refinance, you can lower your current interest rate on the amount of money you owe. Refinancing your loan to a lower interest rate will in turn decrease your monthly payment. This means paying the bank less and more of your money going toward paying off your home.
Your credit history plays a significant role to determine your credit score. If your credit score has seen a significant improvement from the time you took out the loan, you could qualify for a better rate.
How Do I Make the Most of My Home’s Equity?
A home equity line of credit (HELOC) or a home equity loan are ways to finance large expenses by borrowing against the equity built in your home.
HELOCs can help cover ongoing costs. Home equity loans are suited more to one-time expenses. A HELOC and a home equity loan are also examples of a second mortgage — a loan that uses your house as collateral.
Read More: Home Improvements for Building Equity in Harrisburg, PA
Can I Get Rid of PMI With My Conventional Loan?
If you have a conventional loan and made a down payment of less than 20%, you probably were required to pay Private Mortgage Insurance (PMI). As the life of the loan progresses, you may be able to get rid of PMI by proving your mortgage balance is less than 80% of your home’s value.
Send in extra payments to be applied toward lowering your principal balance. Or, if housing values have risen throughout your neighborhood, get a new appraisal. Talk to your lender and see what you need to do to eliminate your need for PMI.
Find Your Lender Match
It’s great to have answers to some mortgage FAQs, but now you need a mortgage!
Finding the right mortgage lender is a lot like finding the right home. Take the time to shop around and find the best fit for your financial situation and needs. Click below to learn more about choosing a lender and the advantages of using a credit union for your mortgage.