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Basics of Home Loans

Three fundamental pieces of knowledge for obtaining and maintaining a home loan are the application, rates, and repayment habits. Let’s discuss them.

  • Filling Out the Application. Filling out home loan applications can be time consuming and overly detailed. Before beginning, get yourself organized by finding all of the paperwork you will need. With all your info in front of you, filling out the application goes much easier.
  • Rate Changes. Keep an eye on home loan rates for major changes, particularly changes downward. Low rates can be your signal to buy a home or refinance your existing mortgage. Refinancing is inexpensive compared to the money you save leaving behind a higher-rate loan, or perhaps an unpredictable, adjustable-rate mortgage (ARM), and moving to a loan fixed at a lower rate.
  • On-Time Payments. Nothing hurts or helps your credit rating more than your payment habits on debts. Make all your payments on time and you’re golden. On the other hand, show a habit of missing payments and your credit score will take a hit that’s hard to recover from.

Benefits of Shopping for Mortgages Online

Why should you shop for home mortgages online? Because you can obtain mortgage quotes from a reputable lender and your information is secure. The old way meant visiting or calling each lender, giving your same data to a new stranger each time, and waiting for a reply. To stay safe online, don't check with every no-name mortgage company that comes up in search results. Stick with names you can trust, or use a lender-matching service like Lendgo.

Mortgage companies who operate online aren't bound by the same home loan processes as large local banks, and can process applications faster. And with so many lenders for you to choose from, mortgage brokers and home loan specialists are motivated to offer you the best deal they can to secure your business.

4 Points of Comparison in Home Loans

You can't compare apples to oranges, right? Well, there are so many loan products and different rates and terms surrounding home loans that the whole thing can seem like a fruit salad. An adjustable rate is most definitely not a fixed rate; a 15-year term means much bigger savings than people guess when compared to 30 years; interest rate and annual percentage rate (APR) are two different things. Let’s run down the basics.

  • Loan Term. The term of a loan is the length of time you have to repay it. The most common home loan term in America is 30 years, but 20, 15, and 10 are also available. Spreading out the balance you owe over more time means lower monthly payments, but inside each payment will be a bigger chunk going to interest instead of to your home.
  • Fixed vs. Adjustable Rates. An adjustable interest rate can and will change during the life of the loan, whereas a fixed rate is fixed. Fixed rates are the most popular type of mortgages, and with interest rates so low today, why wouldn’t you want to lock it in? In times of higher interest rates, people roll the dice on adjustable-rate mortgages (ARM) with the expectation that in a few years rates will drop and their loan will adjust downward rather than upward.
  • Interest Rate vs. APR. Compare loans by their annual percentage rate rather than interest rate. APR includes closing costs, fees, any loan insurance, and other costs, so it’s closer to the truth of how much the home loan will cost you. APR is not the whole truth, however. Different lenders can include or exclude costs from the APR they quote customers. It’s still the best comparison you can make of rates, but it means making notes of what each lender’s APR includes and doesn’t include so you can compare apples to apples. APRs are set by each lender, so you have room to negotiate, whereas interest rates are set by the banks.
  • Closing Costs. Many things are factored into closing costs, such as the services of lenders, closing agents, and attorneys. Some of these costs will seem reasonable to you; others won’t. They are negotiable. Choose a lender with the fewest junk fees or a lender that pays for your closing costs out of their revenues.

Home Mortgage Prepayment

A 30-year mortgage probably seems like forever to most borrowers, yet it’s the most popular mortgage term. Having 30 years to pay back the loan is not the same as taking 30 years to do it. Just one or two extra payments when your finances allow can make a surprising difference on your amortization schedule, which is a big-picture look at how much of your money is going to the home versus interest over time. Extra payments go toward the loan principal (the home) and not toward interest. Sometimes as little as $20 extra on each payment can reduce the term of your loan a year or more! Many people never take advantage of paying one additional payment per year in order to shorten their 30-year mortgage term by up to 10 years because they have not educated themselves on prepayment.

Taking Advantage of Low Rates to Improve Your Home

If you're looking to make improvements to your home and you have some equity in the home, you should take out a home improvement loan. These loans are typically easy to obtain because the money is adding value to the home. Home improvement lenders are easily found both locally and online.

Hurricane damage might not be covered by home insurance. A home improvement loan is the next best option to fix the damage and increase the overall value of your home. To start, you'll want to get quotes from contractors for the cost of the repairs. With quotes in hand, go to lenders who specialize in home improvement loans. Each lender will evaluate the risks of the home improvement loan in comparison to the benefits of improving the home’s value. Most often, you will be able to obtain a loan to repair hurricane damage.

What Happens If I Miss a Payment?

It's extremely important to make your home loan payments on time, yet sometimes circumstances are beyond your control and you can't. What should you do? First, contact your lender immediately. Tell them about your situation and when you will be able to send the payment. Keep your word. Send your payment as soon as possible, and include any late fees associated with missing the payment—don’t let fees pile up.

Sometimes the lender will cut you some slack and not report the late payment to credit bureaus. If your lender is going to report the late payment, get ahead of the story and call the credit reporting agencies yourself. While you probably won't get the late payment removed for your profile, you can make sure that they note that the loan is in good standing and that the payment was made, just slightly after the due date.

Most importantly, don't let it happen again. Try to keep enough money in your bank account to cover yourself when money is tight.

Consolidating Home Loans to Save Money

If you have a refinance loan and your original home loan, you may want to consolidate them. This sounds complicated but should be painless for you. Find all of your current home loan information, such as account numbers, bank names, initial loan amounts, dates of the loan, and any other documents you've obtained through the loan processes. Find out how much equity you have in your home to determine whether consolidation makes sense. Finally, go to your mortgage specialist to get a more accurate portrait of the options available to you.

Home Mortgage Tax Benefits

The tax benefits of home ownership are outstanding. All of the mortgage interest you have paid is tax deductible.