We know the home loan process can be overwhelming, especially if you aren’t familiar with the lingo. To make sure you’re informed before beginning your home-buying or refinance journey, here are some helpful pointers. Being in the know will help you make the best decisions for your financial situation.
Annual Percentage Rate (APR) – Consider the Whole Picture
You may have heard that rates are at historic lows, but what does that mean for you? When it comes to mortgages, a low rate doesn’t always equal a low monthly payment.
The annual percentage rate (APR) is expressed as a percentage, such as 3.9% APR, and it’s the interest rate you’ll pay for your home loan on a yearly basis, plus any additional fees including bank fees, closing costs, discount points, and loan origination fees. The rate you qualify for, largely based on your credit score, affects your monthly payment amount.
You may have heard people talk about mortgage points. They’re a way for buyers to get a lower interest rate by paying points. The amount by which points reduce the rate is set by the lender. But if rates go down later and you’d like to refinance, there’s a chance the points you purchased may not pay off. We keep our rates as competitive as possible from the start so you can plan ahead for your payments and budget effectively.
When shopping for the best mortgage options, remember to consider the whole picture and calculate payments using the listed APR. To get the complete picture of your mortgage payment, look at principal, interest, taxes, and insurance (PITI).
Principal is the actual balance of your loan.
Interest is a percentage of the money borrowed, which is what you pay the lender for access to the funds.
Property taxes on your home are due once or twice a year, but they may be included as part of your monthly payment and held in an escrow account. (A portion of each payment gets deposited in your escrow account each month to cover property taxes and is paid out on your behalf when the payment is due.)
Insurance is required for homeowners, and it protects your investment in case of disaster. As your property value increases over time, it’s a good idea to regularly review your current policy and make sure it matches your home value. Similar to property taxes, your insurance costs can also be included as part of your monthly payment.
What You Pay Before Closing
When you find a house you want to purchase, you make an earnest money payment to show you’re committed to the purchase. This amount is usually a small percentage of the total price you’re offering to pay and secures the home for you while the mortgage process and home inspections get underway. If the sale goes through, this money will be applied toward your down payment or closing costs, which we’ll discuss next. If you don’t complete the home purchase, the money will be returned to you. Keep in mind, some criteria must be met to receive this refund, and some circumstances can impact it.
What You Pay at Closing
When home buyers close on their loan, they usually pay one-time fees called closing costs. These can include title fees, the appraisal fee, recording fees, and more. The buyer also makes a down payment, which is the money paid up front. For example, if you’re purchasing a $300,000 home, a 20% down payment is $60,000. You would pay this amount at closing, and your home loan principal amount would be $240,000. (Note: RCU offers mortgage options with no closing
costs and low down payments.)
To help cut back on upfront costs, a home buyer may opt for a no-closing-cost mortgage. With this type of mortgage, the lender commits to paying the initial closing costs and making that money up by charging a higher interest rate on the loan itself. You won’t pay as many fees at first, but what you pay over time will be comparable to a traditional mortgage.
It’s important to also factor recurring fees into your cost equation. These are charges that you’ll pay again and again. Recurring fees include impound costs, fire insurance premiums, mutual or private mortgage insurance premiums, flood insurance (if required), and prepaid interest.
During the home buying process, you’ll probably hear the term “escrow” used a few times. A third party temporarily holds a sum of money in an escrow account until a particular condition has been met. When it comes to purchasing a home, escrow can be used for two reasons: 1) to ensure the buyer’s good faith deposit goes to the right place (based on conditions of the sale), and 2) to hold a home owner’s funds for taxes and insurance. In the first example, the escrow account would be used while the home is being purchased. In the second, the escrow account would be utilized during the life of the mortgage.
When You Make Your Final Payment
Reaching your home loan’s maturity date can be cause for celebration. That’s when you make the final payment and become mortgage free!
When you choose to finance your home with Redwood Credit Union, you can count on having a trusted, local lender by your side throughout the process. Our mortgages are straightforward, and we offer a variety of options for your unique needs. To learn more, visit redwoodcu.org/homeloans.