The decision to rent or buy a home differs for everyone, as there are benefits to both. Buying a home could be a better deal for you depending on how long you plan to live in your home and the loan you choose. Try our Rent vs. Buy Calculator to help you decide which option is best for you.
A home purchase gives you personal benefits such as a sense of investing in your community and pride for achieving the dream of homeownership. There are some strong financial benefits as well, especially the tax savings you may enjoy. Interest payments on a mortgage are typically tax deductible (consult your tax advisor for more information). As you continue to make mortgage payments, you'll build home equity instead of paying rent to someone else.
Everyone's financial situation differs; it is important to recognize what you can comfortably afford to borrow. In general, the loan amount you can afford depends on four factors:
- Your debt-to-income ratio, which is your total monthly payments as a percentage of your gross monthly income
- The amount of cash you have available for a down payment and closing costs
- Your credit history
- The value of the property you are purchasing
Your down payment requirements will depend on your lender, the type of home loan you choose and the type of property you are buying. Your required down payment can range anywhere from 0-30% of the home's purchase price. Lenders offer a variety of different loan programs, including low down payment options. Each loan program has different rules regarding the down payment required. Down payments can also vary by the amount you want to borrow, as well as factors like credit history.
On a fixed-rate loan, the interest rate doesn't change over the life of the loan. An adjustable-rate mortgage (ARM) has an interest rate that is fixed for a set number of years and then afterwards will go up or down based on a market index such as the LIBOR. Consider factors such as the length of time you plan to stay in your home. If you plan to stay in your home for a long period of time, a fixed-rate mortgage may be better for you. Otherwise, an adjustable-rate might be better if you plan to sell your home before the rate becomes variable, since initial ARM rates are typically lower than fixed-rate mortgages.
Your interest rate is the direct charge for borrowing money.
The APR, however, reflects the cost of your mortgage as a yearly rate and includes the interest rate, origination charge, discount points and other costs such as lender fees, processing costs, documentation fees, prepaid mortgage interest, and upfront and monthly mortgage insurance premium. When comparing loans across different lenders, it is best to use quoted APRs for the same type and term of loan.
In short, the pre-approval process is more rigorous than the pre-qualification process.
To get prequalified, you will need to provide your lender with some financial information such as your income and the amount of savings and investments you have. The lender will use this information to estimate how much money they may be able to lend you, which determines the price range of homes you can start looking at. To get prequalified, the lender will request a formal credit check. The estimate of the loan amount provided to you does not guarantee you will ultimately be approved for that amount.
To get pre-approved, however, you will need to provide the lender with financial documents including W-2 statements, paycheck stubs and bank account statements. The lender will use these documents to verify your financial status and request a formal credit check. A pre-approval is helpful because it can give sellers more confidence that you will be able to successfully obtain a loan to purchase their house.
Interest-only loans are not for everyone. There are risks associated with this loan type, and borrowers should carefully consider the pros and cons of an interest-only loan. With an interest-only loan, borrowers make monthly payments on interest only for a set number of years before they begin to make principal payments. During this period, the borrower won't build any additional equity in their home unless it appreciates in value. When the interest-only period ends, the mortgage payment will increase, often substantially, to ensure the outstanding principal balance is repaid before the loan term ends.
If you are comfortable with managing the risks, an interest-only loan does provide some flexibility in managing month-to-month cash flow. The interest-only feature is not offered on all loan products and is only available to those who are well qualified. Contact one of our Sr. Mortgage Specialists to see if this option is right for you.
There are numerous reasons customers refinance the loans they already have. Some of these are:
- To lower the monthly payment
- To lower the interest rate
- To switch from an adjustable rate to a fixed rate, or vice versa
- To refinance for a higher amount in order to pay off other debts or get cash
- To change the remaining term of the loan
Whatever your needs, we can help you determine whether to refinance and which loan is best for you.
If you’re refinancing a first mortgage and have less than 20% equity in your home, mortgage insurance, such as private mortgage insurance or PMI, is usually required. The mortgage insurance premium is typically included in your monthly mortgage payment.
As a local lender, Directors Mortgage offers a number of advantages over national online lenders. First, Directors Mortgage offers the same online mortgage application convenience as a national online lender. If you want to do everything from home and don’t want to come into the office or apply over the phone, we can help you with that.
Second, as a local business, the money you spend on your mortgage stays local and gets invested back into the community through our DMCares philanthropic initiatives. Third, the fact that we’re local means you can have a personal interaction with your Mortgage Specialist rather than waiting weeks for an email response from an online lender or sitting on hold with a national lender. Call, email or come into the office and have a face-to-face chat—we’re here to help and easy to reach.
Finally, our connection to our communities means that we can help put you in touch with the right people to help your home buying journey go smoothly. Our Mortgage Specialists have connections with local realtors, appraisers, escrow and title professionals that help us provide expedited service and quick problem solving for our clients.
Step 1: Apply
The first step in the process is up to you: the application. You can apply with Directors Mortgage online. If you know the name of a Mortgage Specialist you’d like to work with, you can enter their name and get started. If you don’t have anyone in mind yet, fill out the contact form and we’ll be in touch to match you with the right person.
Your Mortgage Specialist will then get in touch with you to help determine your needs so your application can get going in the right direction. Once you submit your application, we’ll check your credit report so we can determine what you’re qualified for and start customizing the right loan solution. With your Mortgage Specialist coaching you along the way, you’ll put together paperwork including including W-2s, pay stubs, tax returns and bank statements. Our in-house underwriters will review all this information.
Step 2: Approve
After we’ve reviewed your documents, we’ll talk with you and your realtor to explain your qualified loan amount, required down payment and options to offset it. You can then sit back and relax while your Mortgage Specialist orders your appraisal to determine the value of your home and coordinates your deposits to make sure they’re properly credited for an on-time closing. If any further documentation is required, our team will communicate with you about it during this step.
Step 3: Close
After we’ve prepared your loan documents, we’ll help you schedule your signing and make sure all details are in order. Because we’re focused on you, our goal is to ensure that escrow agents have all applicable loan documents at least 8 days before closing. This allows plenty of time for you to review and get all of your questions answered before sitting down at the closing table.
Glossary of Mortgage Terms
A mortgage loan in which the interest rate adjusts periodically based on the changes of a specified index such as the one-year Treasury Bill or the LIBOR. If a borrower opts for an adjustable-rate mortgage, they can expect their monthly payment to change when the interest rate adjusts. The terms of the mortgage determine the frequency with which the monthly payment will change.
The calculation of the regular installment payment amount required to pay off a mortgage by the end of its term. In other words, amortization is the process by which a monthly mortgage installment payment is calculated. Factors such as interest and the principal are included; if the borrower pays according to their amortization schedule, they will have paid their loan in full at the end of that schedule.
Annual Percentage Rate (APR)
Generally, APR is a percentage that expresses the yearly rate of interest a borrower is charged by their lender. In the context of home loans, though, APR includes not just the mortgage interest rate but also other charges. This means that an APR may include points, fees and other charges in addition to the mortgage interest rate.
An official report that estimates the market value of a property. This helps ensure that the sale price of the home is accurate, which protects the lender in case of default by helping to ensure that the loan amount can be recouped in a foreclosure sale. Appraisals must be performed by a licensed professional.
The value a tax authority (e.g., a county or city government’s assessor office) places on real property for the purpose of assessing yearly property taxes. A property’s assessed value may fluctuate over time, meaning property tax payments may change as well.
A mortgage that is amortized over a stated period but provides for a lump-sum payment due at an earlier period. One example of balloon mortgage terms is a 30-year due in 15 loan, wherein the payments are based on 30-year repayment but the loan is due to be paid in full within 15 years. Under these terms, monthly payments would be based on the 30-year repayment term, but the borrower would be expected to pay the entire remaining mortgage balance in one lump sum after 15 years of these smaller monthly payments. Though once common, this is now a relatively uncommon loan type, but it can be a suitable option for borrowers in certain circumstances.
A limit that defines how much the interest rate on an adjustable-rate mortgage (ARM) can increase or decrease. This helps make monthly payments more predictable for borrowers with ARMs.
Cash to Close
The total amount of liquid assets a buyer must have on hand to pay fees associated with a mortgage transaction. These fees include closing costs and mortgage origination fees among other potential charges. Borrowers should be aware of their total cash to close amount before their closing date.
An asset that a borrower pledges as security for their loan. This property can be seized if the borrower defaults on their loan. The home itself is collateral for a mortgage; if a borrower defaults on their home loan, the lender can foreclose on and sell the property in order to recoup losses associated with the loan.
A mortgage not obtained through or insured by an entity of the U.S. federal government. If a borrower secures financing through a government agency such as the U.S. Department of Veterans Affairs (VA), U.S. Department of Agriculture (USDA) or Federal Housing Authority (FHA), they do not have a conventional mortgage.
A legal document that conveys title to a property. This document, which must be recorded in an official government office (e.g., a county recorder’s office), is the official record of property ownership transfer from the seller (grantor) to the buyer (grantee).
Deed of Trust
The legal document that pledges the property for the security of a mortgage loan.
Failure to comply with the terms of a legal agreement. In the context of mortgages, failure to make timely payments is one of the primary forms of default, but there are other failures that can lead to default. Depending on the terms of the loan agreement, failure to pay property taxes or selling without the lender’s permission could also cause default.
Earnest Money Agreement (Sales Contract)
Also known as a purchase contract or sales contract, an earnest money agreement is a legally binding document specifying the terms of a property sale between buyer and seller. This agreement sets forth details such as purchase price, closing date, agreed-upon repairs and other conditions that must be met to complete the purchase transaction.
A right of way given to persons other than the owner for access to or use of their property. There are a number of different kinds of easements granted for a variety of reasons, including things like giving neighbors rights to a roadway that runs through a property or granting utilities the right to install their equipment on a property. In some cases, homeowners can be granted a negative easement that controls what a neighbor can do on their own property; for example, neighbor A may be granted a negative easement that says neighbor B may not construct a home addition that would obstruct neighbor A’s ocean view.
The portion of a property’s value that the homeowner has paid off from the amount owed against it. Equity is a calculation of the property’s market value minus mortgage debt. The more of a home loan the borrower pays off, the greater their equity, or true ownership stake.
A disinterested third party that handles legal documents and funds on behalf of the seller and buyer in a property transaction. The use of escrow provides reassurance for both buyer and seller that payment and property will transfer smoothly and in fulfillment of specified purchase conditions.
The first mortgage associated with a specific borrower and a specific property. When a buyer initially purchases a house using a mortgage, that loan is considered the first mortgage. If that same buyer purchases an additional house, the initial mortgage used to buy that property is also considered a first mortgage. The first mortgage takes precedence of any subsequent loans on a specific property, such as a second mortgage, in the event of foreclosure. Any proceeds from the sale of the house will go to pay the first mortgage before any other mortgages associated with the property.
Fixed Interest Rate
An interest rate that does not change during the term of the loan. With a fixed interest rate, borrowers can expect their monthly payments to remain the same.
A legal procedure in which a lender takes possession of a property from a borrower. Foreclosure happens only when the mortgage loan is in default, typically due to nonpayment. When the lender repossesses a property as part of foreclosure, they will sell the home in order to pay off the remaining balance on the mortgage. Foreclosure can have a serious negative impact on a borrower’s credit history.
A written letter that outlines the terms of a gift used to buy property. The letter must be signed by the giver and must specify that the recipient is under no obligation to repay the sum of money being given. Mortgage applicants who use gifted money to pay for a down payment or other costs associated with a mortgage are typically required to provide a gift letter to establish that a significant deposit is not a loan that must be repaid. Gift letters may need to include several different pieces of specific information, including the gift giver’s relationship to the recipient, in order to be considered official.
Gross Monthly Income
Total monthly income earned before taxes or other official deductions. Gross income is not the dollar amount that gets deposited into a bank account as part of a paycheck but rather the amount listed on a pay stub that reflects total pre-tax income.
Insurance that provides coverage for physical damage to a property from fire, wind, floods, tornadoes and other hazards or natural disasters. Hazard insurance is typically separate from homeowners insurance, and the exact hazards or disasters covered by hazard insurance may vary by policy or company. This type of insurance typically only covers costs associated with damage to the structure of the home and may not cover personal belongings, even if those belongings are damaged as a result of a covered disaster. Homeowners should carefully inspect the terms of a policy to make sure it covers likely hazards for their area.
Home Equity Line of Credit (HELOC)
A line of credit that is leveraged against the equity a homeowner has built in their home. Home equity lines of credit (HELOC) typically use the house itself as collateral. Homeowners must have equity built up in their homes in order to open a HELOC. Once a homeowner opens a HELOC, they may draw up to the maximum credit limit from their line of credit, and typically must make monthly minimum payments on the balance. A HELOC is like a credit card in this way, but ultimately differs because most HELOC terms have a finite time period in which borrowing is permissible. After this borrowing period, a repayment period typically begins. Different banks and lenders typically have different terms for this product.
A standard form of insurance coverage that homeowners typically purchase in order to cover various possible damages and losses to their home and property. Depending on the policy, homeowner’s insurance may cover damage caused by vandalism and common natural disasters (e.g., wind, lightning strikes). Many policies cover not only damage to the building itself but also to personal effects inside the building. Some homeowners insurance policies also cover things like theft and medical bills for people who are injured on the property.
A published number or percentage used to compute the interest rate for an adjustable-rate mortgage. Indexes are used as a benchmark to determine how the interest rates for an ARM should change. Lenders typically use specific indices such as such as the yield on the One-Year Treasury Bill for this purpose. This way, borrowers can verify rate change accuracy.
Also called non-conforming loans, jumbos exceed the annual conforming loan limit. Limits may vary based on housing prices in a given area, so what qualifies as a jumbo loan may be different across different cities or regions.
A description that specifies exactly where a property is located in addition to details such as precise property boundaries and the exact location and scope of any existing easements on the property. Legal descriptions are official definitions that must be registered or with a government office such as a tax assessor’s bureau.
A legal claim or attachment against property as security for a loan. When a borrower purchases a home with a mortgage, the lender has a lien on the property until the borrower pays the loan in full. This means that the borrower’s ownership is conditional—if the borrower defaults on the loan, the lender can repossess the property.
A calculation that divides a home loan amount by the property’s value. Lenders use LTV ratios to determine the riskiness of a given mortgage. The higher the LTV ratio, the riskier the mortgage is for the lender. This may result in the loan being assigned a higher interest rate than it might have with a lower LTV. Additionally, LTV ratios can be a factor in determining whether a borrower requires private mortgage insurance (PMI).
The total amount a borrower must pay to their mortgage lender on a monthly basis. Failure to pay the full amount on time may result in penalties and, eventually, default. The monthly payment usually consists of small percentages of principal, interest, taxes and insurance.
A loan of funds for a real property purchase given from a lender to a borrower in exchange for an interest in that property as collateral for repayment. The mortgage treats the property as security for the loan, meaning that the lender can take possession of the property and sell it for repayment if the borrower is in default.
A fee paid to the lender for processing a loan application. The origination fee is stated in the form of points. One point equals one percent of the mortgage amount.
A cash amount a borrower must have left over after making a down payment and paying the closing costs for the purchase of a home. This amount must cover the borrower’s monthly principal, interest, taxes and insurance (PITI) payment for a specified number of months. This shows the lender that the borrower can actually afford the house and isn’t overextending to the point that they’ll immediately be unable to make monthly payments.
Private Mortgage Insurance (PMI)
Insurance written by a private company that protects a lender against loss resulting from mortgage nonpayment or default. Not every mortgage includes PMI—only those with a down payment that fails to meet a minimum percentage of value (usually 20% of the selling price). The cost of PMI is typically built into the borrower’s monthly mortgage payment, though some borrowers may be able to pay a one-time premium at closing, while others pay through a combination of the two methods.
Calculations that are used in determining whether a borrower can qualify for a mortgage. The two calculations are the housing expense ratio or front-end ratio, also known as the mortgage-to-income ratio (estimated monthly mortgage payment amount divided by monthly gross income), and the debt-to-income ratio (the borrower’s total monthly debt payments, including credit cards and other forms of debt, divided by monthly gross income). Lenders use these basic calculations to determine whether a borrower will be able to afford to pay for their home loan.
A commitment issued by a lender to a borrower guaranteeing a specific interest rate for a specific period of time. If rates go up during the period covered by the lock, the original, locked-in rate still applies.
Provides insurance that public records have been examined to ensure that there are no liens, claims, estate issues or other defects against a property being sold. There are different forms of title insurance, the most common of which protects the lender against financial loss if title issues are discovered.
Truth in Lending Act
A federal law that requires lenders to fully disclose the terms and conditions of a mortgage, including the Annual Percentage Rate (APR) and other charges. This is a consumer protection law designed to ensure that borrowers understand the exact terms of any loan or line of credit they obtain, meaning it applies to forms of lending in addition to mortgages.
The process of evaluating a loan application to determine credit worthiness and risk involved for the lender. This is a more in-depth and detailed process than that of pre-qualification, meaning that the decision that results from the underwriting process is not always guaranteed. Most of the risks and terms that underwriters consider fall under the three C’s of underwriting: credit, capacity and collateral.
A loan that is guaranteed by the U.S. Department of Veterans Affairs, also known as a government loan. VA loans are typically only available to those who have completed a specific amount of active service in the U.S. armed forces, National Guard or Reserves. Some spouses of service members lost or disabled in the line of duty may also be eligible.