As of this writing, the average credit score in America has reached an all-time high…
For people around the country and across the globe, moving to LA seems to be the best option to chase their dreams. Seeing that Los Angeles is the epicenter of a multi-billion dollar entertainment industry, it makes sense that aspiring actors, screenwriters, directors try to make their way to LA.
Whether or not you’re looking for a home in LA, it’s good to educate yourself on commonly-used mortgage terminologies and processes. These include learning about the different mortgage loans available, the factors affecting a mortgage, and how to save on your mortgage payments.
Mortgage Interest Rates
The interest rate is the amount charged on top of your principal by the lender. Depending on your type of mortgage loan, the interest rate may either stay the same or change during the loan period.
Annual Percentage Rate (APR)
An annual percentage rate (APR) is the amount of interest on your total mortgage loan amount that borrowers have to pay annually. The APR is averaged over the full terms of the loan. A lower APR can translate to lower monthly mortgage payments.
In today’s mortgage rates, you can see the APR aside from the interest rate. This helps home-buyers compare mortgage offers. Depending on the lender and borrower, the better option is to choose a mortgage loan with the lowest APR. In other cases, you may want to use that money towards your down payment or on other things to furnish and maintain your home. Again, choosing a mortgage loan with the lowest APR would depend on your priorities as a borrower.
Interest Rate vs. APR
The interest rate reflects the current borrowing cost expressed as a percentage rate; however, it does not reflect other charges you may need to pay for the loan. The APR provides these and gives a complete picture of how much a buyer will pay for a home, including lender fees and closing costs. This is done by taking the interest as a starting point and accounting for the other charges required to finance the mortgage loan.
Types of Mortgage Loans
Finding the best mortgage loan would depend on your needs and financial capabilities as a borrower. There are different mortgage loans available in today’s market. Besides the varying home loan options involving interest rates, your mortgage may be backed by private lenders or the U.S. government.
#1 Fixed-Rate Mortgage
In a fixed-rate mortgage (known as “traditional” loans), you will be paying the same amount (principal and interest) monthly during the entire term of your mortgage or for the whole life of the loan. This type of mortgage works best for borrowers who wish to budget their finances since the monthly payments will be consistent. A disadvantage of this type of mortgage is if you purchase a home with high interest. Since the rate is fixed, you will potentially miss out on savings. Fixed-rate mortgages are popularly paid within a 15 or 30-year time frame. Another type of fixed-rate mortgage is a jumbo loan.
#2 Adjustable-Rate Mortgage (ARM)
Adjustable-rate mortgages (ARM) mean that there will be changes in the buyer’s monthly payment after some time. Whether your monthly payment increases or decreases would depend on whether the index rate increases or not, this type of loan would be preferred by borrowers who do not plan on staying at home for an extended period and for those who believe that interest rates will decrease over time, one example of this type of loan is a 5/1 ARM in which the interest rate may change after an initial period of 7 years.
#3 Conventional Loans
Conventional loans are home loans that private lenders back, and the buyer pays off their insurance. This type of loan is expected because of its flexible requirements; however, it is a lot riskier than government backed-loans. There are two types of conventional loans.
Conforming Conventional Loan
Conforming Conventional Loans follow the standards set by Fannie Mae (short for Federal National Mortgage Association) and Freddie Mac (short for Federal Home Loan Mortgage Corporation). Fannie Mae and Freddie Mac are government-sponsored enterprises that purchase mortgages from lenders. In conforming to conventional loans, there are loan limits set as a baseline for how much you can borrow annually (considering adjustments).
Non-conforming Conventional Loan
Non-conforming conventional loans are not purchased by Fannie Mae and Freddie Mac and scope private backers and other lending institutions. These loans do not follow the loan limits and may exceed them.
#4 FHA Loans
The Federal Housing Administration backs FHA loans. Compared to conventional loans, where you must pay a 20% down payment, FHA loans allow borrowers to pay with as little as 3.5% down payment. This is possible mainly because the loans are government-backed. FHA loans are the best option for first-time home-buyers, people who haven’t purchased a house within 3 years, and borrowers with low credit scores. FHA loans have flexible requirements not only regarding down payment but also with lower FICO scores.
#5 USDA Loans
USDA loans are government-backed and insured by the United States Department of Agriculture. This type of loan is best for people who wish to purchase a home in a rural area. There are specific homes in the rural area in USDA loans that the government finances fully, meaning that USDA loans don’t require any down payment. This loan’s main requirements are that your debt-to-income (DTI) ratio be at 41% or better, and you purchase mortgage insurance. A USDA loan is the best option for individuals and families who wish to buy a home, even if they may be financially challenged.
#6 VA Loans
VA loans are insured by Veteran Affairs and are available for service members, veterans, and surviving spouses for purchasing a home. If you qualify for a VA loan, you won’t have to worry about your down payment and mortgage insurance requirements. VA loans follow strict requirements, namely that the home be your “primary” residence and that it follows “minimum property requirements.”
Factors Affecting a Mortgage
Mortgages are greatly affected based on the supply and demand of the market. Government-backed mortgage loans are less risky as compared to mortgage loans backed by private lenders.
Before getting a mortgage, one thing to consider is that the cost of housing would depend on your location. In LA, for example, there is a high demand to live in LA. Because of that increased demand, the cost of living (gas, rent, food, utilities) is a lot more expensive than other locations. This also translates to the cost of housing. However, since LA is a vast city, housing prices may vary depending on its location since other areas are more popular than others.
The mortgage process depends on the type of home loan you wish to apply for. Although the requirements and, in turn, the method may differ (depending on the lender), the mortgage process usually follows this sequence.
- Get pre-approval from your lender – During pre-approval, you can already see if you qualify for a particular loan. Here, you can get ahead with your home-buying process since the lender will already look into your credit report and financial profile. Should there be any lacking documents or things to fix, you can attend to them before you proceed with buying a home.
- Make an offer – After getting pre-approval from your lender, you can start looking for houses and make an offer with your real estate agent’s help. The request will include how much down payment you’ll make and, essentially, how you plan to finance your home.
- Apply for your loan – The lender will review your application and, most importantly, your financial profile. This includes your credit scores, proof of employment, payment history, and other details. Since you got pre-approval, this process will be quicker since the information has already been reviewed.
- Closing your loan – After everything has been verified and you’ve settled on the terms of financing your home, you can start closing your loan. During the “closing,” you will sign contracts, give your down payment, and the seller formally gives you the home.
Saving on Your Mortgage Payments
You can save on your mortgage payments by having a good credit score. If you have a high rating FICO score, lenders will deem you less of financial risk and are more likely to approve your loan application. If you have a higher credit score, you’ll have more mortgage options, and you can evaluate these to see which deal is the best. A lower mortgage score may lessen your chances, and you may potentially miss out on a great mortgage deal.
Another way to save on your mortgage payment is through the size of your down payment. If you’re able, you can reduce your monthly payments by paying a larger down payment. Although it depends, borrowers typically want to pay for their mortgage as soon as they could so that they may own the home faster.
Today’s Mortgage Rates
For any home-buyer, it is essential to look out for the mortgage rates because these are subject to change without prior notice. Currently, these are the mortgage rates in Los Angeles, California.
For a 30-year fixed-rate loan type, the mortgage rate is 3.25%. For a 15 year fixed rate loan type, the mortgage rate is 2.59%. For a 5/1 ARM loan type, the mortgage rate is 2.96%
Mortgage Rate Predictions
According to Bankrate’s recent poll, 38% of mortgage rates will fall due to the runup in stocks and the bond market. 23% of mortgage rates will rise, and 38% assume that rates will stay unchanged because experts believe that the market has settled down.
Again, it’s essential to look out for the current mortgage rates since these not only differ over time, but mortgage loans differ from lender to lender. As a borrower, it is your responsibility to research to look for the best mortgage loan for you. To make the home-buying experience a lot less stressful, you can seek professional help. With Home Lending Pal, you’re able to see the best mortgage options for you. Not only can you get your credit reviewed, but you will also be able to quickly contact lenders should you wish to proceed with the home-buying process. Sign up today at https://login.homelendingpal.com/signup.