If you're thinking about buying a home, especially if it's your first home, you might be thinking about your potential mortgage. In short, a mortgage is a loan for the amount of money you're buying your home for. However, there are a number of different types of mortgages to choose from.
Which mortgage is right for you depends on your financial situation. Your annual income, credit score, and financial history all come into play here. Additionally, you'll have to factor in your potential future income, as well as any current assets, liabilities, or debts.
Use this page as your guide to understanding mortgages before purchasing your home on the Main Line. If you ever have any questions about mortgages, home-buying, or the Main Line area of Pennsylvania, please give me a call at (610) 520-2500.
What's in a Mortgage, Anyway?
A mortgage is a loan for the amount of money your home is worth. Your mortgage payment depends on the type of mortgage you end up getting. There are many different kinds of mortgages out there, from conventional fixed-rate to adjustable-rate and VA loans. One important question to ask yourself before deciding on a mortgage is whether or not you're comfortable choosing a loan with an adjustable-rate. This means that your payments may vary over time, beginning low in the first few years of homeownership and increasing steadily over the years.
Here's an overview of the most common loans out there:
- Oldest and most popular
- Rate is constant over the life of the loan
- Can be taken out in 10, 15, 20, or 30-year lengths
Adjustable-Rate Mortgage (ARM)
- Interest rate fluctuates
- Are tied to one-year Treasury bills or another specific index
- Initial rate is low, but grows each year
- Usually a cap of two points; lifetime ceiling caps of around six points
- Rate can drop
- Pre-set spending limits
- Amounts are set by the median prices of different cities within a particular area
- Only 5% down is required (sometimes 3%)
- Steep mortgage insurance premium and other upfront costs are required
- Designed to help military vets buy homes with no down payment
- Not allowed to pay points; responsible for some fees
- Seller usually has to pay the extra money
- Usually called 5/25s and 7/23's
- Convertible converts the loan to a fixed loan for the remaining 25 or 23 years
- Nonconvertible - converts the loan to an ARM
- Both are 30-year loans
- Fixed interest rates for the first 5 or 7 years; then change to convertible or nonconvertible loans
- Both can be amortized over 30 years
- Riskier than fixed rates, but less risky than ARMs
- You pay half the amount of a monthly payment
- Paid 26X a year (not 12X monthly)
- Cuts down on the amount of interest over the life of the loan
- Paying so often can be a drawback
How Much Can I Afford?
Again, this depends entirely on your financial situation. One great way to determine how much you can afford in a home is by meeting with a lender to become pre-approved for a mortgage.
During the pre-approval process, you'll sit down with a lender to thoroughly go over your financial history. This includes your annual income, credit score, and any debts or liabilities you may currently have. Getting pre-approved for a mortgage is an excellent idea because:
- It lets you know exactly how much financing the bank is willing to loan you
- You'll know what your potential maximum mortgage payment will be
- You'll know how much your down payment will be
- It makes you a more competitive buyer to sellers
If you need a lender in the Main Line area, please give me a call at (610) 520-2500 and I'd be happy to recommend one. In the meantime, feel free to play around with this mortgage calculator, to get a feel for how much you might be spending per month on a mortgage.
Any Other Questions?
I have answers. If you're thinking of buying a home in Main Line, PA, we should chat. I would love to connect you with home-buying resources or sit down to discuss your future plans.