When you purchase a new home, you may need to pay for the majority of the sales price with a mortgage. A purchase loan is commonly between 80 and 95 percent of the sales price, but there are variations outside of this range. Some homeowners will keep their mortgage in place until they sell the home or until the entire loan balance is paid off. Many homeowners, however, will choose to refinance their mortgage. By doing so, homeowners can potentially enjoy many financial benefits. Regardless of whether you are setting up a purchase mortgage or applying for a refinance loan, you understandably want to set up a loan that works well with your financial situation and helps you to accomplish you goals.
Determine Your Down Payment for a Purchase
Before you choose a loan program or apply for a purchase loan for your new home, you need to focus on the numbers. Home loan programs generally require you to place a minimum amount of money down. Some are not structured to accept a second lien in combination with the first lien. In addition, there are typically minimum and maximum loan amounts for each program. The amount of money that you want to place as a down payment will impact the loan amount. Because your down payment and loan amount directly affect your new loan payment, it makes sense to use a mortgage calculator to estimate your payment at this stage.
Estimate Your Equity Available for a Refinance
Just as a down payment is a critical factor to consider initially when applying for a purchase loan, your equity is an important factor to pay attention to. Equity is calculated by subtracting the current outstanding loan balance from the property’s current value. Over time, your regular monthly loan balance decreased the outstanding balance that you owe. In addition, your property value may have appreciated since you purchased the property. You may have a considerable amount of equity established in your property now. Most refinance mortgages have a maximum loan-to-value of 75 to 80 percent. This means that your loan balance will be no greater than 75 to 80 percent of the property’s current value. With the loan amount, you will need to pay off all existing liens on the property. Therefore, you need to ensure that the new refinance loan amount is sufficient to pay off the existing loan and to give you an adequate amount of cash back, if desired.
Understand Different Loan Program Options
Now that you have a reasonable idea about the loan amount that you plan to apply for, you can explore loan programs. There are several unique types of home loan programs available to choose from, and each has unique features. A conventional loan is not backed by the government, and it is usually issued by a bank. These loans may have much higher loan-to-values, such as up to 95 percent loan-to-value for a purchase loan. A VA loan is backed by the Veterans’ Administration. These loans have a higher loan-to-value as well, but they also have strict requirements. For example, only current and former military professionals or their widows may qualify. The FHA program is another type of government-backed mortgage. These are backed by the Federal Housing Administration. The maximum loan-to-value is 80%, but you can apply for a higher loan amount if you are willing to pay PMI. This is a type of mortgage insurance that is required for high loan-to-value loans. Another option is a Freddie Mac loan. A Freddie Mac loan is established by a bank with specific requirements that comply with Freddie Mac guidelines. The bank typically sells the loan to Freddie Mac after closing, provided the loan complies with specific guidelines. If you apply for a very large loan amount, a jumbo loan may be your best option. A jumbo loan has a minimum loan amount of $424,100 in most areas.
Compare Rates and Fees
As you can see, there are multiple types of home loans available for you to apply for. After you have determined which loan programs meet your needs based on loan amount and loan-to-value requirements, you can focus on more specific requirements for each loan program. For example, the minimum credit score requirement varies from program to program. From that point, you need to review the rates and fees. You may think that all banks and mortgage companies that offer the same loan program would offer the same rates and fees, this is not correct. The interest rate may reflect an internal fee that is paid to the loan originator, and this internal fee can vary. This fee is one way for banks and mortgage companies to get paid for their efforts, but they can also get paid through direct fees that they charge to you.
At first glance, it may seem confusing to try to set up a home mortgage. After you have determined the loan amount that you are interested in applying for, it may be helpful to speak with a few lending representatives for guidance when selecting a loan program. To ensure that you are steered in the right direction, inquire about the reasons why each lending representative believes one program may be more advantageous for you than others.