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MORTGAGE
Your Top Refinancing Questions Answered
What you'll learn: From qualifying for a loan to interest rates and payments, discover the answers to homebuyers most pressing mortgage questions.
EXPECTED READ TIME: 4 MINUTES
August 25, 2022
No two homebuying experiences are the same, but most buyers start in the same place: with questions. From qualifying for a loan to interest rates and payments, discover the answers to homebuyers’ most pressing mortgage questions.
1. How do I know if I qualify for a mortgage?
The best way to start a homebuying journey is to meet with a lender and get prequalified for a mortgage. Prequalification is not an official stamp of approval, but it will set the parameters of how much home you can likely afford. Once you find a property, you’ll provide additional paperwork to become preapproved.
Here is the typical mortgage application process:
- Prequalification
- Preapproval
- Approval
Keep in mind, nothing is guaranteed until your loan application is approved. Set yourself up for success by avoiding common mistakes when applying for a mortgage.
2. Is there a difference between prequalification and preapproval?
Though the terms sound similar, there are distinct differences between being prequalified and preapproved for a mortgage loan.
Prequalification gets you started
Your first step in buying a home is getting prequalified. This is a way to establish a relationship with your potential lender and find out how much you may be approved for. The process varies, but usually involves you sharing some preliminary income details. The lender then completes a soft credit check, which doesn’t affect your credit score, to make that initial estimate. Learn more about prequalification.
Preapproval moves you closer to mortgage approval
To get preapproved, your lender will need additional financial information such as bank statements, pay stubs, and a full credit report. This is also not a guarantee you’ll get a loan, but a preapproval shows real estate agents and the seller that you are serious about buying a home. It also shows an estimated approval amount to guide your home search. Learn more about preapproval.
3. What credit score do I need?
Your credit score affects your mortgage approval and interest rate. A higher score indicates to a lender you’ll be able to make payments on the loan. A lower score indicates a higher risk, but it doesn’t mean you won’t be approved.
Although the guidelines can differ, 620 is a common minimum baseline for most mortgage types including VA loans and FHA loans. If you have a low score, you may want to take steps to increase your credit score before meeting with a lender. A higher score will increase your chances of getting approval and receiving a better interest rate.
4. Do I need a 20 percent down payment?
The short answer is no. But larger down payments can help you secure a lower interest rate and avoid paying mortgage insurance.
Fortunately, options are available for aspiring homeowners with little, or even no, money down. The following chart shows the down payment requirements for different mortgage types. Remember, each option has its own set of requirements and qualifications.
| Mortgage Type | Minimum Down Payment | Mortgage Insurance |
|---|---|---|
| Conventional - Low Income | 3% | Yes - PMI |
| Conventional | 5% | Yes - PMI |
| Conventional | 20% | No |
| FHA | 3.5% | Yes - MIP |
| VA | 0% | No |
5. How much home can I afford?
Start with an affordability calculator to determine how much of a mortgage you may be able to obtain. The calculator is just an estimate and does not account for total homeownership costs like mortgage insurance, closing costs, water and electricity, maintenance, and HOA fees. You’ll have an even better idea of your budget once you get prequalified and preapproved for your mortgage.
6. Which mortgage type is right for me?
Mortgages come in many shapes and sizes. The type that’s right for you will depend on several factors including your credit score, income level, assets, down payment, and the purpose of the property you’re looking to buy.
Here are the most common mortgage types:
- Conventional Loans - Available in several different terms with varying down payment requirements; most common type of mortgage today
- Jumbo Loans - Non-conforming loan option for high-value properties requiring higher down payments
- Government-Insured Loans - Special loans backed by government entities such as the Federal Housing Administration (FHA) and Veterans Affairs (VA); unique benefits and qualifications apply
- Adjustable Rate Mortgages (ARMs) - Home loans with two distinct periods: a fixed-rate period and adjustable-rate period
7. How do I lock in a rate?
Mortgage rates fluctuate along with changes in the economy and market. Your quoted rate is based on your lender’s current mortgage rates plus individual factors like your down payment, credit history, and loan term. It’s recommended to lock in when you feel comfortable with your quoted interest rate and monthly payments to avoid the risk of rising rates before closing.
8. How do interest rates and fees affect my payments?
Shopping for a mortgage should include much more than a comparison of interest rates. To tell the whole story, you’ll want to consider all mortgage costs including the property purchase price, down payment (and possibility of mortgage insurance), interest rate, loan term, closing costs, and points. Taken together, you’ll have a full picture of your mortgage – from monthly payments to how much you can expect to pay over the life of the loan – and can compare lenders apples-to-apples.
9. What are points and why would I want to pay them?
Sometimes lenders offer borrowers the option to buy down their mortgage with points. Mortgage discount points, or buy-down points, are a one-time fee you can pay for a lower interest rate.
One point equals one percent of the loan amount (such as $2,500 on a $250,000 loan). Depending on your finances, the type of loan, and the market, one point can typically buy a rate down by an eighth to a quarter percent. That can lower your monthly payments and lead to significant savings over time – as long as you can afford the upfront cost and stay in the house long enough to make it worth it.
For example, consider a $250,000 loan with a 30 year fixed-rate term:
| Option 1: No Buy-Down | Option 2: One Point Buy-Down | |
|---|---|---|
| Interest Rate | 4.25% | 4.00% |
| Monthly Payment | 5% | Yes - PMI |
| Conventional | $1,107 | $1,074 |
| Buy-Down Cost | N/A | $2,500 |
| Total Monthly Payments After 30 Years | $398,520 | $386,640 |
A savings of over $11,000 over the life of the loan may sound great, but you want to first make sure you’ll come out ahead if you sell before the full term. To calculate the breakeven point, divide the up-front cost ($2,500) by the monthly savings ($33), and divide by 12. In this case, it would take over six years to start reaping the savings of the lower interest rate. If you plan to sell before that, it would not be worth it.
Buying down may be favorable if you want the lowest rate possible, can afford the up-front cost to buy it, and plan to stay in the home long enough to make it worth it. Be sure to run the numbers to make sure it makes sense for you.
10. What is included in my monthly mortgage payment?
Your mortgage payment comprises the price of your home, down payment, loan term, interest rate, and how your mortgage fees were structured. It may include the following:
● Principal - pays down your outstanding loan amount
● Interest - based on your interest rate and current loan balance
● Insurance - dependent on your situation; can include homeowners insurance, PMI, or MIP
● Taxes - if you chose to have a portion collected and saved in an escrow account
As you get further into the life of the loan, you may be able to drop mortgage insurance and will see more of your payments go toward the loan principal. This is a promising sign your home equity is increasing.
