Home Loan Basics: Mortgages, Home Equity, and Other Specialty Home Loans
A home loan can mean a lot of things. The first thing that comes to mind is a mortgage loan for the purpose of buying a new home. There are a multitude of home loan options from those with zero to no down payment, to fixed or variable interest rates to name a few. But there are also other loans that fall under the home loan umbrella. You can borrow off of the equity of your existing home with a fixed or variable rate home improvement loan, which allows you to reinvest in your home’s value. There are also state-backed programs designed to help you improve the energy efficiency of your home. We know that any loan process can be intimidating, so to help you along we are going to discuss the many types of home loans available as well as the steps you’ll need to take before you start applying.
Before You Apply for a Mortgage
You’re ready to buy a house. You’ve been saving for a down payment and preparing for this moment but have you done everything you need to do before you start applying for a mortgage? In this section we are going to break down some key actions to take to ensure a better experience.
Know Your Credit Score
It is important to know the buying power that you have. Your credit score determines your creditworthiness to a financial institution. In other words, it represents how suitable you are to receive a loan. Your credit score tells them how long your credit history is and if you have a clean history of making on-time payments or a history of late payments. Credit scores range from very poor (around 300) to excellent (800+). Learn more by checking out our blog post Know Your Credit Score.
Make a House Budget
Buying a house could mean a lot of new home expenses or at least different ones depending if you owned a home prior. If you have owned a house before, some of these expenses may not be relevant but worth a read through in case costs in your new home have gone up or maybe you are switching from oil heating to gas.
- Maintenance – Every house needs to be taken care of all year long. Whether it’s a new roof, or siding, the outside elements will deteriorate the structure. Make sure to set aside funds so that you can keep up with the up keep. If things are allowed to go for too long without proper care then you can expect an even higher cost when things completely fall apart. Spend a little each year on making sure your home is structurally sound and can withstand the test of time.
- Heating – Have you ever had to pay for oil before? Or gas? Check pricing when you are looking for a new home. Find out the capacity of the oil tank and ask how old the heating system is in the home. It might be time for an upgrade. Ask the current owners what their average heating payment is to determine the efficiency. You can also research the current heating system by googling and calling around to local oil and gas providers. This will help you when budget for heating during the cold winter months. Keep in mind, the more square footage you have, the more energy (and money) it will take to heat.
- Electricity – Survey the area on pricing and the local utility company. Is there only one supplier? Check online reviews. You can even ask the current homeowner if they are willing to share their average monthly cost for electricity. This will help determine the reliability and any potential issues you may have with pricing.
- Furniture – Sure, the idea of an entire living room filled with bean bags and inflatable couches sounds like a great idea for your first apartment but it’s not going to cut it in your new house. You’ll want to welcome family and friends into a space where they will actually want to stay for a while. A new home is a perfect opportunity to upgrade your seating arrangements. This also includes a kitchen table, bed(s) for a larger space, dressers, and coffee tables. You know, all of those “adult” items.
- Appliances – Not all new homes will come with everything you need. And if they do, you might not want them. This is your new house so why not “make it yours.” Budget for a matching washer and dryer. Put in a dishwasher. Even small items like a toaster or microwave may be a necessity. Make a list of what you have to have. This is also something that you’ll want to make sure you ask the seller, which of the appliances are being sold with the house so that you are fully prepared.
- Tool shed – If this is your first house you may not have things like a lawn mower, snow blower, a tool box, etc. These are tools you will need throughout each season for basic home maintenance that you can do yourself. If you plan on hiring a landscape company or plow driver then you will still need to budget for those services as well.
After You Apply for a Mortgage
Once you have applied for a mortgage loan make sure to know who you will be working with and what their function is during the process. Since you will be dealing with multiple people and a lot of paperwork, you’ll want to keep contact information like phone numbers and email addresses in an easily accessible place to avoid confusion. Keep multiple copies of EVERYTHING that you provide. Multiple parties may need copies of the same documentation.
Keep multiple copies of EVERYTHING that you provide.
Multiple parties may need copies of the same documentation.
Let’s take a quick run through of the key players you will be dealing with.
Mortgage Loan Originator – One of the first contacts in regards to applying for a mortgage loan at the credit union will be a Mortgage Loan Originator (MLO). They are the person that walks you through the application process, guides you to the best product that will fit your needs and handles any front-end questions. All MLOs have to be registered with the Nationwide Mortgage Licensing System and Registry (NMLS). They will have a unique identifier number that you can look up in the nationwide registry. If they do not have this then it is not advised to work with them or that institution.
Mortgage Processor – Once your application has been submitted you now need to provide documentation for review. A mortgage processor collects all of these stipulations. They are responsible for making sure everything is organized and complete before sending to a loan underwriter. The mortgage processor will be your main contact during this period for any questions regarding the documentation needed. It is important to stay in touch and meet the deadlines they lay out for you in order to close in an appropriate time frame.
Loan Underwriter – Once all of your documentation has been collected the processor will send it for review by the loan underwriter. Their job is to review the application with corresponding documentation to assess if the risk to lend you the money is acceptable. They will evaluate your credit, assets, the property and its value, the amount of the sale, etc. It is important that all documentation is available to them and clear. If something doesn’t add up the entire process is halted. Surprises at this point could cause major delays so be completely upfront with your mortgage originator from the start. Any credit concerns, possible issues with the property, etc. will be found out at some point by the underwriter, so it’s best to be clear and transparent during all appointments and communications prior to this step.
6 Types of Mortgage Loans for Homebuyers Explained
Buying a house isn’t a cookie cutter process. From the review process, to finding your dream home, to the home closing, everything is tailored to your particular situation. There are products to fit all sorts of needs for a borrower. Every mortgage loan will be different. This is a good thing! We know this may look like a long, overwhelming list, but that’s what your Mortgage Loan Originator is for! They will make sure you are picking the right product and terms for you.
- Fixed Rate Mortgage Loan – A fixed rate mortgage refers to the term and interest rate of the mortgage loan. The interest rate and term don’t change for the duration of the loan.
- Variable Rate Mortgage Loan – A variable rate or Adjustable Rate Mortgage (ARM) is designed with a low introductory rate and term. The rate can then change based on the prime rate published in the Wall Street Journal. Prime is the interest rate that commercial banks charge their most credit worthy customers which largely consist of corporations. This is determined by the federal funds rate that banks use to lend to each other. Why does this matter? It is the rate that banks and credit unions base their rates off of. For variable rate loans or lines of credit it will be expressed as the prime rate plus a set percentage. If the prime rate goes up then your variable rate will go up and vice versa. The rate will be fixed for a predetermined amount of time denoted in the loan note. For example 5/1 ARM means that during the first 5 years the mortgage will have a fixed rate and then every year after that will be variable for the remainder of your loan term.
- First Time Homebuyer Program – the first time is always the hardest. Should you decide to get a mortgage through Workers Credit Union, the guidance you’ll receive from our experienced team will be your most powerful tool while navigating the mortgage loan process. There will also be perks like reduced closing cost options and free home appraisal credits to assist you along the way.
- Government Backed Mortgage Loans – Not everyone can meet the requirements of a standard loan. Government backed mortgage loans offer applicants options when it comes to apply for a mortgage with little to no down payments, lower interest rates and some more flexibility.
- US Department of Veteran Affairs (VA) Mortgage Loan is offered to members of the military, veterans, reservists, and National Guard members. Spouses of military members who died while on active duty or as a result of service-connected disability are also eligible. Other qualifications may apply.
- Federal Housing Administration (FHA) Mortgage Loan is another government backed mortgage program with lower down payment requirements and lower credit score expectations to allow people that have experienced a hardship to still be able to purchase a home.
- United States Department of Agriculture (USDA) Loan is a 100% financing mortgage for moderate-to-low income homebuyers in eligible rural and suburban areas. The loan is issued through the USDA Rural Development Guaranteed Housing loan program. To be eligible income must meet certain guidelines and the home must be located in an eligible rural area defined by the USDA.
- Jumbo Mortgage Loan – A jumbo mortgage loan is a home loan greater than $484,350. That’s it. There’s no mystery to hide. They are available for the same terms and interest rates, they are just for a larger requested amount. The loan amount is considered above the conventional loan limits and will be reviewed with a bit more scrutiny in regards to risk for the lender. Therefore a larger income must be verified, a higher credit score, and greater reserves in order to be considered.
- Refinance – Why would you refinance your mortgage? It all depends on what your current mortgage loan terms and interest rate are. It also depends on your current situation financially and personally. Are you planning to move any time soon? Do you need in influx of cash? How long have you been paying on your current mortgage? These are some questions you should ask yourself before you pursue a mortgage refinance. Will it cost more up front to refinance than it will save you in the long run? A refinance means a new appraisal, attorney fees, credit pull, loan origination fees, etc. and could outweigh whether or not it is worth it to move forward.
Here are some of the possible reasons to refinance. Keep in mind that every situation is unique so not all of the reasons below will necessarily be applicable to you
- Interest rate. Research what the current interest rates are for mortgages. If they are significantly lower than your current rate you may be an ideal candidate to refinance your loan. Keep in mind how long you have had your current loan. It is not suggested to refinance within the first year of your mortgage.
- Rewrite terms. If you have a variable rate mortgage you may be coming to the end of your fixed interest rate period. Now is the time to refinance into a fixed rate mortgage if your variable interest rate is going to be higher. The fixed rate may be higher than your initial rate but will be lower than the variable rate when it switches over.
- Shorter term. One way to pay off your mortgage loan sooner is to refinance into a shorter term. Depending on how much you owe and the remaining term of your loan you may even save money monthly. Though a shorter term may mean your monthly payment goes up, you will save in the long run by paying less in interest over the life of the loan. Plus, who doesn’t want to pay off a debt sooner than later.
- Cash flow. Depending on how long you have been paying on your mortgage loan and the value of your home, a refinance may lower your payment and provide some cash in your pocket. This is a case-by-case scenario and depends on a lot of factors like interest rate, term, amount, etc.
- Construction loan – Construction loans are for owner-occupied residence properties and must be paid off in a maximum of 30 years after the construction period has been completed. You will have nine months to complete the construction of your home. You are allowed to pick the contractor to build the house to your exact specifications. Options allow you to get a fixed rate or an adjustable rate mortgage.
Home Equity Loans - Find out How Your Equity Works
The equity in your home is the difference between your current mortgage balance and the market value of your home. With a home equity loan or home equity line of credit you are able to borrow off of the available equity in your home.
The equity in your home is the difference between your current mortgage balance and the market value of your home.
- Home Equity Loan – A home equity loan is a fixed rate loan for a fixed amount and term. That means you will be given a lump sum and a fixed amount of time to repay it. Since you will be using the home as collateral the interest rate will most likely be lower than a personal loan. This is ideal for one time projects like a pool or consolidating debt like credit cards or student loans.
- Home Equity Line of Credit – A home equity line of credit (HELOC) is a line of credit based off of the available equity in your home’s value. You are able to use the funds like a credit card and pay back only what you use. There is a fixed draw period in which you make interest only payments. After the draw period is over the funds are no longer accessible and you begin making principal and interest payments. The interest rate is still variable and is an ideal time to refinance into a home equity loan with a fixed rate and term to save from any fluctuations in payment amounts. This is ideal for ongoing home renovation projects that the amount needed may fluctuate.
- Lienholder Position – When you sign on a mortgage loan for a home you may hear the term First mortgage. This is not referring to you personally if this is the first home you have purchased. This is in reference to lienholder position on the home. The lienholder is the financial institution that has given you the funds to purchase the home and have a lien or right to the property until a debt is paid off on the property. You may be living there and paying the mortgage but the financial institution owns it until you have paid them off. If you decide to utilize the equity in your home and take out a home equity, whether it is a home equity loan or line of credit, there will be a second lien on the home. That is considered a second mortgage or equity product. You don’t have to use the same mortgage company to obtain a second mortgage or equity product. Therefore there are positions that a lienholder can be placed. In laymen terms, if you default on your home loan, it’s who gets paid first and then in order after that. Most financial institutions will not go beyond second lien since there is more risk that they will not be paid. In some case a Subordination Agreement, which specifies which mortgage takes precedence over the other, may be needed.
- Solar loans –Solar loans offers a means to buy and install solar panels on owner-occupied primary residencies in Massachusetts only. A solar loan is an unsecured loan which means you are not using your home or its equity as collateral for the loan. The rate and term are fixed. Since this is considered a specialty loan it may be withdrawn at any time.
- Heat loan – Working in conjunction with Mass Save, a state run program, Workers can offer a 0% loan to update your home’s energy efficiency. This includes a new heating system, new windows, insulation, domestic hot water systems, etc. A heat loan is an unsecured loan which means you are not using your home or its equity as collateral for the loan.
- Home improvement loan – For smaller home repairs and renovations a home improvement loan is the perfect fit. A home improvement loan will have a quicker turn-around time then a home equity loan or home equity line of credit getting you the money faster so that you can get the work done sooner. It is also a good alternative since home equities will typically have a minimum amount that you have to take out. A home improvement loan is great for smaller projects like painting the inside or outside of your home or any do it yourself type of projects that won’t meet a high minimum loan amount. A home improvement loan is an unsecured loan which means you are not using your home or its equity as collateral for the loan.
We have covered everything from the simple to the complicated; the application process and what to expect after you have applied, who you will be in contact with and what their function is in each stage, fixed rate mortgages, adjustable rate mortgages, lienholder positions, finally understanding what a HELOC is, and all of the in between special products that will help once you have purchased and moved in to your new home. Now that was a run-on sentence. As you can see, home loans aren’t a walk through the park. Workers Credit Union has the experienced mortgage team that can help you navigate the bumpy terrain. They can walk you through the whole process if you a first time homebuyer or help nudge you in the right direction even if this isn’t your first rodeo. Workers can accommodate all types of applicants with all kinds of unique needs. Let us help you get the right product that fits your needs. Call or apply online today.