News

Congratulations! You are ready to buy your first home. This is a very exciting time. You may find the real estate process to be a little confusing though if you haven’t purchased a house before. It has a vocabulary of its own which can seem like a foreign language if you are a first time homebuyer. To help reduce any confusion let’s review common terms that new homebuyers should know.

Mortgage Lender 

The mortgage lender will provide you financing options and help you determine what type of mortgage you can afford. Over the life of the loan you will be paying the mortgage lender each month. Before settling on a mortgage lender many people interview a few to find out which will provide the best interest rates. 

Mortgage Application

After you have determined which mortgage lender to select, you will need to fill out a mortgage application. This document indicates the details of the mortgage you are seeking including how much money you will be borrowing, how long you will be paying off the loan and what the interest rate will be. In addition you will need to provide a variety of personal information such as bank statements, W-2s, and Social Security numbers. The mortgage lender will use this information to verify that you do not have previous credit issues, such as bankruptcy, and that you have an adequate income to be able to pay the mortgage bill each month.  

GFE

A GFE is the Good Faith Estimate. The lender will provide you this document shortly after you submit an application for a mortgage. The GFE provides the best estimate the lender has of the fees and costs you will be required to pay to obtain a mortgage.  

Fixed Rate Mortgage (FRM)

When you select a fixed rate mortgage you will be confident that the monthly payment will be the same each month for the entire duration of the loan. If you have a 30 year loan and pay $1000 per month it will not change even if the bank interest rate changes. People generally like fixed rate mortgages because they can budget based on a consistent monthly payment. 

Adjustable Rate Mortgage (ARM)

An ARM starts off with a fixed interest rate for a specific number of years. After that time period passes the interest rate will vary with the market. Therefore if the market interest rate rises, your mortgage will also increase. If the market rate goes down the mortgage decreases. This type of mortgage is seen as more risky because a significant increase in the market interest rate may mean your mortgage payment increases so high you can’t afford to pay it. Often people select this type of mortgage if they are planning on selling or refinancing at the end of the fixed rate time period. 

Down Payment and Closing Costs

Many people don’t understand this part of the process and how these two items differ. When it is time for the mortgage documents to be signed a “closing” will be held. You will sit down with a lawyer and sign all of the necessary paperwork to take ownership of the house and agree to the details of the mortgage.  The closing cost is the amount of money you owe for the mortgage to be created. The closing cost includes lawyer fees, cost to create necessary documentation, cost to look up town records, homeowners insurance, etc. The GFE provides an estimate of what the closing cost will be so you can plan accordingly.

In addition to closing cost you will also need to provide a down payment. The down payment is the amount of money you will provide to pay for the house at the mortgage signing. A 20% down payment is ideal. This may be more money than a first time homebuyer can afford though as first time homebuyers haven’t had a chance to build equity yet. For a $200,000 house, a 20% down payment is $40,000. To pay a 20% down payment means you would provide $40,000 at the closing and then would mortgage the remaining $160,000.

Mortgage Insurance

Homebuyers that do not provide a 20% down payment are required to have mortgage insurance. The purpose of mortgage insurance is to protect the lender if the buyer doesn’t keep up with their payments. The amount mortgage insurance costs varies depending on the amount of down payment and your credit score.

The above definitions should help familiarize you with the common terminology you will encounter during the home buying process. Lenders realize that first time homebuyers are not mortgage experts. Therefore they should be willing to help you through the process and answer any questions you have. Obtaining a mortgage is likely the largest financial investment you will make in your life. Make sure you ask questions and understand what you are signing up for.

If you are looking for a new home contact us at Brandywine Homes.