FINANCING
If you're like many buyers, a home is the most expensive purchase you'll ever make, and you'll probably need some form of financing.
There are many lending institutions that offer a variety of mortgage products. Financing options and rates can vary widely, so it is important to do your research and shop around to ensure you get the mortgage that best meets your needs at the best price.
I would be happy to refer you to some very good mortgage contacts I have in Los Angeles, or to help you in any other way I can to secure the best possible rate for your home purchase.
Use the mortgage calculators below to assist you in making some decisions around financing your new home.
What is a mortgage?
A mortgage is a loan to help you cover the cost of buying a home. Mortgages are a crucial component of home buying for most people; they help make this expensive purchase possible by having a large financial institution like a bank or lender loan home buyers the money.
Once you have a loan, you pay it back in small increments every month over the span of years or even decades. It’s essentially a long, life-changing IOU that helps many Americans bring the dream of homeownership within reach.
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Bi-weekly mortgage:
A bi-weekly mortgage is a mortgage in which the borrower makes half of their monthly mortgage payment every two weeks, rather than paying the full payment amount once every month. So if you paid monthly and your monthly mortgage payment was $1,000, then for a year you would make 12 payments of $1,000 each, for a total of $12,000. But with a bi-weekly mortgage, you would make 26 payments of $500 each, for a total of $13,000 for the year. This can help the borrower pay off their mortgage loan sooner and reduces the total amount of interest paid over the life of the loan.
Escrow:
Escrow is a legal arrangement where a third party temporarily holds money on behalf of a buyer and seller in a real estate transaction.
Extra mortgage payment:
An extra payment is when you make a payment in addition to your regular monthly mortgage payment. Extra payments can help pay off your mortgage loan sooner.
Homeowners insurance:
Homeowners insurance is a type of property insurance. It protects you from damage to your home or possessions. Homeowners insurance also provides liability insurance if accidents occur in your home or on the property.
Loan amount:
The loan amount is the amount of money you plan to borrow from a lender.
Loan-to-value ratio:
The loan-to-value ratio (or. LTV) is a factor looked at by lenders when qualifying a borrower for a mortgage loan. The LTV compares the amount of a loan to the value of the asset being financed: the amount you are borrowing divided by the price of the property being purchased or financed. So the LTV is 66.66% on a $300,000 house where the amount being borrowed to purchase it is $200,000 (meaning the down payment is $100,000). The lower your LTV the easier it will be to qualify for a mortgage loan. For example, many conventional loans require that your LTV be no higher than 80%. Of course, the greater your down payment amount, the better/higher your LTV will be.
Long-term mortgage:
A long-term mortgage is a loan with a longer length of time. Long-term mortgages typically have higher rates but offer more protection against rising interest rates. Penalties for breaking a long-term mortgage can be higher for this type of term.
Lump sum payment:
A lump-sum payment is when you make a one-time payment toward your mortgage, in addition to your regular payments. How much of a lump sum payment you can make without penalty depends on the original mortgage principal amount.
Monthly mortgage payment:
Your monthly mortgage payment has four components: principal, interest, taxes, and insurance.
Mortgage payment calculator:
A mortgage payment calculator helps you determine how much you will need to pay each month to pay off your mortgage loan by a specific date.
Mortgage rates:
A mortgage rate is the rate of interest charged on a mortgage. The lender determines the mortgage rate. They can be either fixed, staying the same for the mortgage term or variable, fluctuating with a reference interest rate.
Mortgage refinance:
Mortgage refinance is the process of replacing your current mortgage with a new loan. Often people do this to get better borrowing terms like lower interest rates. Refinancing requires a new loan application with your existing lender or a new one. Your lender will then re-evaluate your credit history and financial situation.
Mortgage term:
A mortgage term is the length of time you have to repay your mortgage loan. Mortgage terms can range from 15 to 30 years or even longer.
Pre-tax amount:
Pre-tax is your total income before you pay income taxes but after your deductions. It is also known as your gross income.
Short-term mortgage:
A long-term mortgage is a loan with a shorter length of time. Short-term mortgages typically have lower interest rates. Short-term mortgages offer less protection against changing interest rates because you need to renew them more frequently.
How do mortgage lenders determine how much you can afford?
When you apply for a mortgage to buy a home, lenders will closely review your finances, asking you to share bank statements, pay stubs, and other documents. Here are the main things they review to determine how much you can borrow:
Your income:
How much money you bring in—from work, investments, and other sources—is one of the main factors that will determine what size mortgage you can get. Lenders may check not only your income for the current year, but also for past years to see how steady your income has been.
Debt:
This is the total amount you owe to credit cards, car payments, child support, college loans, and other monthly debts. Lenders look closely at applicants who owe a large amount of debt, since it means there will be less funds to put toward a mortgage payment, even if their income is substantial.
Lenders will compare your income and debt in a figure known as your debt-to-income ratio. Your debt-to-income (DTI) ratio is the percentage of gross income (before taxes are taken out) that goes toward your debt.
To calculate your DTI ratio, divide your ongoing monthly debt payments by your monthly income. As a general rule, to qualify for a mortgage, your DTI ratio should not exceed 36% of your gross monthly income.
Credit score:
Also called a FICO score, a credit score is a numerical rating summing up how well you’ve paid back past debts. It’s based on whether you’ve paid your credit card bills on time, how much of your total credit limit you’re using, the length of your credit history, and other factors. A credit score can range from 300 to 850; generally a high score means you'll have little trouble getting a home loan with great terms and interest rates.
Frequently Asked Questions
Please reach us at info@LARealEstateAgency.com if you cannot find an answer to your questions.
A mortgage payment typically consists of four components, often referred to as PITI: principal, interest, taxes, and insurance.
This is the total amount of money you borrow from a lender. A portion of your monthly mortgage payment will pay down this balance.
This is an additional percentage added to your principal that lenders charge you to borrow money to buy a home.
Property taxes—what you pay the government for services such as public roadways and schools—are often included in mortgage payments. You can typically find an estimate of the property taxes you can expect to pay on real estate listings.
Most mortgage lenders will require you to purchase home insurance to protect your property from damage, theft, and other accidents.
In addition to these costs, your house payment might also include these expenses:
- HOA fees: If your home is part of a homeowners association, you may be required to pay a fee for maintenance or other services the HOA provides.
- Mortgage insurance: If your down payment is less than 20% of the cost of your house, many lenders will require you to pay an additional fee called private mortgage insurance, or PMI.
Mortgage pre-approval is a statement from a lender who’s thoroughly reviewed your finances and decided to offer you a home loan up to a certain amount. Pre-approval is a smart step to take before making an offer on a home, because it will give you a clear idea of how much money you can borrow to pay for a house. Pre-approval is also a great way for you to stand out from other buyers in a competitive marketplace, since it proves to sellers that you can follow through on your offer and close the deal.
Mortgage pre-approval should not be confused with mortgage pre-qualification, where you tell a lender about your income and debts but don’t provide documentation to verify your claims. Pre-qualification is a way lenders can give you a ballpark idea of what amount you could borrow, but it’s no guarantee you’ll get the loan until you go through the more thorough process of pre-approval.
If you’ve crunched the numbers on a house you hope to buy but feel the monthly mortgage payments are higher than you’re comfortable with, don’t worry—there are ways to lower your mortgage payments. Here are some ideas.
- Shop around for a lower interest rate.Different lenders offer varying interest rates. A lower rate equals a lower monthly mortgage payment.
- Lengthen the term of your loan.Choose a longer time period to pay off your mortgage, like 30 years rather than 15. This will lower your monthly mortgage payments, although you will pay more in interest over the life of the loan.
- Buy points.Discount points, also known as prepaid points, help lower your interest rate, thus reducing your monthly mortgage bill. The downside is that you’ll need to pay for these points upfront, but they may be worth it.
- Increase your down payment.A higher down payment may be harder to scrounge together upfront, but this will lower your monthly mortgage payments over the life of your loan.
- Don’t pay PMI.If your down payment is less than 20% of the home’s price, most lenders will require that you pay private mortgage insurance. To avoid this extra fee, you can always try to reach that 20% threshold.
- Buy a less expensive house.Even if you are able to afford a more expensive home or neighborhood, the simplest way to lower your mortgage is to buy a home well below your means that you can comfortably pay off each month.
If you’re hoping to buy a home, weeks or months could pass before you find a house and negotiate your way to an accepted offer. But mortgage pre-approval does not last indefinitely, since your financial circumstances could change by the time you close your real estate deal. As such, you’ll want to know how long pre-approval lasts before it expires.
Although there is no set time frame, the custom within the real estate industry is that mortgage pre-approval is valid for between 90 to 180 days. Make sure to ask your lender how long your pre-approval lasts, or look for this expiration date on your pre-approval letter.
If your mortgage pre-approval is set to expire before you’ve completed the home-buying process, this does not mean you have to start the pre-approval application process from square one. In most cases, you can extend your pre-approval by providing updated financial statements to your lender to show there have been no drastic changes to your circumstances that might affect your ability to afford a loan.
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The L.A. Real Estate Agency, Inc.
The L.A. Real Estate Agency, Inc.
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