It’s pretty simple: A mortgage is a loan, with your house and land used as security; if you don’t pay back the loan, the lender forecloses on your home. The loan is secured by a lien (the “mortgage”) against the property (your house and land). The lender doesn’t own the house, you do. They just have the lien with your house as their collateral (i.e., the security).

When you are looking for a first mortgage, there are two things to think about: what you can actually afford, and what you can borrow. Why are they different? Because the lender is not going to look at how much you spend in a month on gourmet wine or movies, or how comfortable you’ll be with a big payment. They may be willing to loan you much more than you think you can spend on your mortgage. Only you know how much flexibility or not that your lifestyle has, which determines how much you can afford in a home.

A lender looks at your income (and income potential) vs. your debt, as well as your savings and credit history. Then they determine how big a risk you’d be for the lender to take on. They’re also going to look at the value of the house you want to buy, and the interest rate of the loan you’ll be getting. And then they arrive at a loan amount their firm can live with. In a perfect world it will match (or exceed) what you need to bridge the gap between your down payment and the price of the house you want.

When it comes to looking at mortgage types, ask yourself one giant question: What is your goal? Will you be in this new home when the grandkids come to play, or is this a starter home that you’ll trade up in the next five years? The answer to that question will help narrow your mortgage choices.

It is a true measure of what you are paying per year against your loan. A loan has a life — whether it’s 15, 30, or even 50 years. You pay in installments, and the principal decreases until the loan is paid off by the end of the term. The payments are evenly spread over the life of the loan, with the interest payments making up the majority of the payment at the beginning, and then principal paid off toward the end of the term. Pay attention to the amortization schedule, which shows the payments for the life of the loan including interest.

Tip: Pay half your house payment every two weeks instead of one monthly payment. This results in 26 payments per year, one more payment annually than if you just paid monthly. The re-amortized loan will eventually result in more of the payment paid on principal and less on interest. The extra payments go to pay down the principal on the loan.

If you are making a down payment on a home of less than 20 percent, you will most likely have to get Private Mortgage Insurance (or PMI). It ensures that the lender is guaranteed, by the mortgage insurer, 80 percent of the loan if you default. The insurance premium amount varies by the loan to value of the house and type of loan.

Government loan programs, such as FHA or VA loans, are backed by the government rather than PMI. There is no monthly mortgage insurance on VA loans, however you will have monthly mortgage insurance on a new FHA loan.

The Veteran’s Administration (VA) loan program is sponsored by the U.S. Government’s Department of Veteran’s Affairs. VA loans are available to credit-worthy individuals who are or were:

• an honorably discharged veteran
• an active duty service member
• an un-remarried surviving spouse of a military service member
• a Reservist, or
• a National Guardsperson

Quick Facts:

• 0% down payment required
• Gift funds may be used to pay for closing costs
• Maximum loan amount: $417,000 or the geographic VA maximum mortgage limit

Prepayment penalties. Think it’s a good thing to pay off a loan? Well, it might be, but certain lenders charge a penalty if you do. Penalties apply for a specific period of time, usually 1, 2, or 3 years after the loan is originated. How much is the penalty? Could be six months of interest or 2 percent of the principal remaining on the loan, but it varies.

You might think that it’s stupid to get a loan with a prepayment penalty, but some lenders offer very low (and therefore tempting) interest rates in exchange. Also, some borrowers agree to loans with penalties if they have bad credit and it’s the only way they can get the loan. Mostly, a prepayment penalty is a financial decision. There are situations where accepting a prepayment penalty on a loan can save you thousands of dollars in interest.

If you are interested in getting rates or requesting a quote, we can get you in touch with one of our preferred lending partners through Citywide and/or Celtic Bank. We have partnered with them to provide extremely competitive rates to our customers. Click here to learn more ›