In 2018, the Home Mortgage Disclosure Act revealed that 39.1% of loan applications were rejected mainly due to a high debt-to-income ratio, followed by poor credit history, inadequate collateral, and incomplete credit application.
Applying for mortgage is not an overnight process, and if you want to make sure you don’t waste time and be part of the rejected pile, it would be best to prepare and familiarize what a mortgage loan consists of. Likewise, before filling up that mortgage application form, it would be best to know already what amortization strategy you’d be willing to commit to.
In this article, we dissect the most critical components of a mortgage for you to better prepare as you go looking for your Georgia house.
Dissecting the Mortgage Payment Structure
For people who don’t have any background in real estate, mortgage loans can seem confusing and complex. However, it’s not entirely like that. From a buyer’s perspective, the most important things to be familiar with are your principal payment, interest, taxes, insurance, and amortization schedule. These tell you how much you’re going to pay and when you will be paying it.
The standard downpayment for large loans is 20% of the total loan amount. However, there are mortgage programs that accept lower downpayments and even zero downpayments as long as you qualify. This means that your home is located in their approved area, your income qualifies you as a beneficiary, and your credit stats fall within their acceptable standards. Most originators with friendlier mortgage acceptance indicators include government-backed loans like FHA, VA, USDA, Fannie Mae, and Freddie Mac.
Principal and Interest Payments
The principal amount is the total amount you borrow from the lender, while interest is the amount that the lender charges you for their service. Your monthly principal and interest payment partially comprise your total monthly amortization. This is because your total monthly amortization also consists of taxes, insurance, and other fees that you might have to deposit in escrow.
Once you start paying your mortgage, this means that the home’s ownership has already been transferred to you. Furthermore, this means that you’re already required to pay property taxes regardless of whether you’re occupying the property or not.
One benefit of having a monthly mortgage is that your property taxes are already calculated in the total monthly amortization. This means that you won’t have to go to your county treasurer to pay your taxes voluntarily because your lender will do this on your behalf. Every time you pay your monthly amortization, a portion of it (allocated for tax) is deposited in escrow where your lender will withdraw from once the taxes are due.
The most common insurance included in your amortization is your homeowner’s insurance. A homeowner’s insurance secures both you and your lender in case of damages while your home is still under mortgage. You can still legally own a home even without insurance; however, most mortgage lenders will charge for it (although not all), especially if the house is old. If you’re not ready to pay for homeowner’s insurance, you can find other lenders, or talk to your lender about alternatives.
The loan amortization schedule is a document that clearly outlines how much you will pay monthly and for how long. For example, if you choose a 30-year loan, your loan amortization schedule will show you a monthly breakdown of your total mortgage payment for the entire duration of your loan (360 months for a 30-year loan). If your total loan amount is, say $350,000 and is payable in 30 years, you should be able to see at least $972/month + charges in your amortization schedule.
Mortgage Amortization Strategies
As reported by Time, about 90% of mortgages follow a 30-year term. But this doesn’t necessarily mean a 30-year term is the best. It still depends on your financial situation and capabilities. Let’s run through each of the different mortgage amortization strategies below:
The 30-year amortization period is the longest mortgage amortization period. This means you’ll be repaying your loan within the course of 30 years. If you get a fixed-rate, 30-year loan, the interest rate for the entire 30 years will be the same, regardless of market fluctuations. However, if you get a 30-year, adjustable-rate mortgage, the interest rate within the 30 years may periodically change depending on the market.
Long-term amortization is friendlier upfront because your monthly payments will be lesser. If you need more flexibility in your finances or are still building savings for other accounts (like for an emergency), a long-term loan would be advisable.
The downside to this, however, is that your interest payments will accrue overtime. This is usually why your total loan payable is higher than getting a short-term loan.
Short-term amortization covers loans that are payable within 15 years or less. Your monthly mortgage will be higher, but your total interest amount will be lesser at the end of the term. If you’re looking to have higher savings, and you can allocate for higher mortgage premiums (or you have more cash), then a short-term loan is advisable.
Accelerated amortization allows a borrower to give more principal payments / monthly payments whenever they can. For example, if your 30-year loan amortization schedule states that you’re going to have to pay $900/month for the next 30 years, and you’re able to add $500 to it whenever you have extra cash; then you’ll be able to repay your entire loan sooner than 30 years.
Not all lenders welcome this kind of strategy because it would mean that you’ll stop paying interest sooner, and interest payments are their bread and butter.
If you’re projecting to sell your home in the next few years, or you want to score lower interest rates even for the first few years of your amortization period, an adjustable-rate mortgage (ARM) may be a good strategy to explore. In this mortgage, the interest rate varies depending on a benchmark (e.g. LIBOR and the Federal Funds Rate). There are different types of adjustable-rate mortgages, and for some people, they can get really complicated or expensive in the long run.
The chart below demonstrates how a 5/1 ARM fluctuates together with LIBOR.
Source: The Balance
If you’re interested in getting an adjustable-rate mortgage, it would be best to discuss it with a lender specializing in ARMs.
Likewise, if you want a second opinion, you can consult with us at HomeSold GA. We find you the house you want, help you navigate the buying process, take care of the documents, and give you ideas on suitable mortgages. You can contact us at 770-668-4888 or connect with us by filling in the form below!