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Basics of Mortgage Borrowing

When you buy a home, you are committing yourself to one of the most expensive transactions you’ll ever make in your life. Given the seriousness of such a commitment, it is important to understand how your mortgage will work, from start to finish.

Preparing for a mortgage

A lender needs to assess your creditworthiness by looking at your credit score. If it’s below 620, you’ll be getting a high interest rate or no loan at all.

If you want to improve that score, you can:

  • Keep low balances on credit cards;
  • Pay down high-interest debt;
  • Pay bills (utilities, rent, etc.) on time; and
  • Look for mistakes in your report, have them corrected and get your score updated

Also, try to save as much money as you can to cover your deposit and closing costs. The more money you raise, the lower the rate you can secure from your lender. Raising at least 20% of the down payment can save you from having to take up expensive private mortgage insurance (PMI).

Get pre-approved

Pre-approval is important in house hunting as sellers give more consideration to offers from pre-approved buyers. This process involves you making a loan application and the lender evaluating your creditworthiness and ability to pay. The evaluation will depend on how much income you make, the stability of that income, and other expenses that you have committed to. From there, the lender can determine how much of a mortgage installment you can afford on a monthly basis, as well as the amount of the loan.

Formal loan applications normally come with some fees, but you can negotiate with some lenders for a lower charge or none at all. Where you believe that the cost may be too high, consider getting pre-qualified by several lenders you are considering. This is free and will give a good indication of the kind of rate you will get.  Identify the lender you think will give you the best deal and then apply for a pre-approval letter before sending an offer letter.

Types of loans

There are typically two types of mortgage rates you can get – fixed and adjustable.

Fixed-rate loans are the most common and preferred by most borrowers. The installment amount remains constant throughout the life of the loan. It makes budgeting easier and consistent. The shorter the duration, the more likely a lending institution will give a higher interest rate.

Adjustable-rate loans, meanwhile, offer a fixed interest rate for a set portion of the loan. After the time frame for paying the set portion is up, current conditions in the market – particularly the Treasury index – are reviewed. The risk here is that when the time comes to review the rate, market conditions may have significantly brought it way above the fixed rate you were previously enjoying. You will end up having to pay higher monthly fees and putting a dent in your budget.

To help manage the costs of any financing, request for a loan estimate form. This document gives a detailed breakdown of the cost and fees of a mortgage. Also, consult with a tax attorney or your realtor for a better understanding of what you are committing to financially.

Tackling the intricacies of getting a home mortgage isn’t as tough as it seems, especially if you have a team of professionals helping you out from the time you decide to engage in a real estate transaction. In King County, Snohomish County, and Pierce County, that would be us – the Metropolist Group. Give us a call at 206-623-5118 or send us an email at [email protected].

Photo by Christophe Hautier on Unsplash