A mortgage is typically part of every homeowner’s journey. Unless you can pay cash upfront, you’ll take out this type of loan for your purchase. Once you are living in the home, you might also look to refinance. For this article, part of our What Homeowners Need to Know series, we asked our Charlotte-area preferred lender partner Highland Mortgage to share mortgage and refinancing basics.
Highland’s Donna Williamson says the first thing to know is that there are several different types of mortgage you might choose from:
Fixed-rate mortgages are the most common type of mortgage loan. With this approach, your interest rate remains the same throughout the life of the loan, typically 15 or 30 years. The alternative is an adjustable-rate mortgage (ARM).
The ARM’s interest rate can fluctuate over time based on market conditions. They often start with a lower interest rate than fixed-rate mortgages, but can be riskier because the interest rate could increase in the future.
Still, ARMs are “not as scary as they sound,” Williamson says, as the government has put protections in place to make sure the rate doesn’t jump too much over the life of the loan. You’ll also see upfront the highest rate you could see, so can decide knowing you have locked in for five to seven years and can see what could happen in the future.
Your interest rate, along with the term of the loan, will impact how much you pay over the life of the loan. Your down payment is another critical consideration. Williamson says most people “don’t realize how little they have to put down. You can actually put down as little as three percent, but usually the minimum is five percent (depending on your credit score).”
Anything less than 20% and you’ll have to pay mortgage insurance. Yet, the rates on this have grown more manageable, especially if you have a really good credit score, Williamson said.
Putting in less of a down payment could be advantageous, she says. Otherwise you could be putting all your available cash into the house. Sure, you’ve lowered the monthly payment, but you are also now house rich and cash poor.
Getting a mortgage is an easier process if you can put 20 to 30% down, but Williamson suggests working with a mortgage or other financial advisor to really evaluate what’s best for you.
There are many reasons to refinance a home. Often people will want to get a better interest rate. However, Williamson notes, if you have paid 15 years of a 30-year mortgage, it may not be worth it. For others, you may get a lower interest rate to save money on your interest payments over the life of the loan. This could help you lower your monthly payment rate.
People often also refinance to tap into their home equity. It can be an affordable way to pay off high-interest debt. Perhaps they are facing a family emergency or have kids going to college. There are many personal reasons someone might want to take cash out of the home equity with a refinance.
Another reason people might refinance is to change the term of their loan, says Highland’s Margaret Bunch. Extending the term can help you reduce your monthly payment. Shortening the term may save you money on interest and help you pay the loan off faster.
Of course, refinancing comes with its own costs, such as closing costs and fees. So, you’ll want to consult with a mortgage specialist or financial advisor before deciding to refinance.
The lender will provide you with a list of items they need to underwrite your loan. This can include bank statements, tax returns, pay stubs and more. They’ll ask you to provide it all upfront to help them make decisions. At the same time, you should also be prepared to answer questions along the way. That bank statement you file may end up prompting them to ask you for more data. Be communicative and honest to keep the process moving along.
If you’re worried about being self-employed and trying to get a mortgage or refinance, Williamson and Bunch are encouraging. “That is our favorite,” says Williamson. With experience helping underwrite loans for those who are self-employed, they can help walk you through the process.
Saussy Burbank’s sales team can also help you through the home buying process. Look to see what we have available in the Carolinas today. Or learn why our buyers love the quality craftsmanship they expect from a Saussy Burbank home.
Thanks for your time and insights, Donna & Margaret!