Understanding Mortgage Loans
Purchasing your first home can be both exciting and overwhelming at the same time. Once you have selected a home, the next step is to acquire a mortgage loan, which is a detailed, multi-step process. At Bank of Old Monroe, it’s our goal to ensure the process is efficient while keeping you well-informed. In order to be as prepared as possible, it’s important to understand the two types of conventional mortgage loans we offer: fixed rate and adjustable rate (ARM).
Fixed rate mortgages are those whose interest rate is set at the beginning of the loan’s term and will not change over time. Therefore, you can expect your monthly payments to remain the same. Conversely, adjustable rate mortgages are more likely to fluctuate. Also called variable rate loans, adjustable rate mortgages can start at a lower interest rate when compared to fixed, but once the introductory period is over, your rate will change with the market.
Tips for Buying Your First Home
With decades of experience in the mortgage lending industry, Bank of Old Monroe strives to educate and assist all customers with their home purchase. Below are some top tips for buying your first home:
Compile a List of Needs and Wants Before Searching
Once you have decided the type of home that’s right for you, whether it be a condo, duplex, ranch, or two-story, you can begin to prioritize the features you need and desire. For example, if you or your partner work from home, it might be necessary to ensure there is an extra bedroom that could be an office. Additionally, a large fenced-in yard may be needed for those with pets.
On the other hand, features such as a walk-in closet, hardwood floors, and a finished basement could be considered a “want” rather than a “need,” depending on your goals. Overall, creating a list of your needs, non-negotiables, and nice-to-haves gives you an idea of what you’re looking for and allows you to compare homes with less stress.
Work with an Experienced Real Estate Agent
Real estate agents are experts in both the home buying process and your local market. The right buyer’s agent will be knowledgeable, motivated, and highly skilled. They will assist you in the following ways:
- Showing area properties that fit your budget and needs
- Visiting showings and open houses with you to answer questions and guide you through
- Assisting you in determining how much to offer for a home
- Submitting an official offer letter on your behalf
- Negotiating with the seller or seller’s agent after your offer is submitted
- Attending the closing to ensure everything is squared away
It’s important to ensure that the individual you choose as your real estate agent specializes in assisting buyers rather than sellers. A buyer’s agent will possess experience guiding first-time home buyers through the process, whereas a seller’s agent may not have your best interest in mind.
Strongly Consider Securing Pre-Qualification
In the home buying process, it’s crucial to stand out among the crowd. The goal is to be the most attractive buyer, and one way to boost your ranking is through securing a pre-qualification letter. Based on an informal evaluation of your income capacity, debts, and other information, a pre-qualification is an estimate of how much you are able to borrow for a mortgage loan.
Although a pre-qualification letter does not mean you are approved for a specific amount, it certainly makes you a more attractive buyer and can give you an edge over others who haven’t taken the step.
Do Not Take Out a New Line of Credit
When you apply for a pre-qualification letter, our mortgage lenders will pull your credit report. It’s important to avoid any actions that could affect your credit rating during the home buying process. The goal is to prove that your financial behavior patterns are consistent, so you can be relied upon when making mortgage payments. Therefore, you risk your final loan approval if your credit balance has increased or you make late payments during the specific time period.
Ensure You Have the Funds for a Down Payment
A down payment is the percentage of your home’s price that you pay up front before you close on the mortgage loan. Keep in mind if you are already a homeowner, you can use equity in your home for a down payment if you choose to purchase a residential lot, farm or vacation home. At Bank of Old Monroe, we require a minimum down payment between 5% and 20% depending on the type of mortgage loan you choose. It’s critical to ensure you have the funds available for the investment, or you risk losing the loan and consequently the property.
This example assumes a home purchase price of $200,000.00. The information contained in this table is for illustration purposes only. Actual closing costs depend on the loan amount, property location, Title Company, etc.
|Fixed Rate Mortgage Example||Adjustable Rate Mortgage Example|
|Down Payment||$10,000.00 (minimum of 5%)||$40,000.00 (Minimum of 20%)|
|Terms of Repayment||360 monthly payments||240 monthly payments|
|Interest Rate||Fixed for term of loan||Variable 3 years based on current internal index|
|Annual Percentage Rate||3.395%||6.242% (Rate may increase after consummation.)|
|Example is using an interest rate in effect on 12/17/2021.|
Factor in Closing Costs
Another set of costs that should not be overlooked is those in relation to the closing itself. You can generally expect to pay anywhere between 2% and 5% of the total loan amount for the closing services provided and arranged by your lender. Refer to the table above for an example. Fees can include:
- Loan fee
- Flood determination
- Appraisal fees
- Inspection fees
- Escrow fees
- Title insurance expenses
- Homeowners insurance policies
- And others, depending on your situation
Know the Difference Between an Appraisal and an Inspection
Both an appraisal and potentially an inspection must occur before you purchase a property. They are not the same thing, however, so it’s wise to know the difference. An appraiser will provide you and your lender with a rough estimate of the home’s worth compared to similar properties in the area (also known as comps). An inspector will inform you of potential issues within the property so you can learn more about the home. The inspection also helps you determine what concessions to request from the seller.
One of the most important tips for first-time home buyers is to stay within your budget. Begin your search by looking at properties that are priced lower than your pre-qualified amount. Although you can technically afford the amount stated in the pre-qualification letter, it is your maximum, and does not allow wiggle room. It also does not take into consideration the monthly expenses that are associated with owning a home or any issues that may arise. Plus, it’s smart to budget enough money for repairs or renovations.
Purchase Adequate Homeowners Insurance
When you finance your new home with Bank of Old Monroe, it is required that you possess homeowners insurance at closing. The dollar amount is factored into your total closing costs. Do your research and look closely at each policy to ensure your necessities are covered.
Prior to closing on your mortgage loan, certain pieces of information are required. Verifying your income proves that you are able to repay the loan, so it’s important to provide all requested documentation in a timely manner. Have the following information prepared:
- W2s: A W2 is a federal income tax form completed by employers that reports wages earned by employees, as well as the taxes withheld. Locate your W2s from the past two years.
- Tax returns: A tax return is a form submitted to the government that details the taxes you owe as well as the taxes your employer paid from your wages. It is helpful to locate the past two years’ tax returns.
- Pay stubs: A pay stub outlines in detail the money each employee earns in a given pay period. It will list your hourly rate, hours worked, and taxes deducted. The more recent your pay stubs are the better.
- Bank statements: Either presented in a paper or an online format, bank statements are summaries of account activity and financial transactions during a certain period of time. It’s important to show that your wages are deposited into your account as well as prove you have the money to pay your mortgage each month.
Roadmap to Refi’s and Purchases
1. Contact Bank of Old Monroe
If you’re wishing to refinance your existing mortgage loan or purchase a new home, the first step on your journey is to contact the experts at Bank of Old Monroe. Our mortgage lenders have the knowledge and experience necessary to recommend the best loan option for you. With numerous loan types available, we’ll work with you each step of the way.
2. Title Search and Appraisal are Ordered
Once your offer is accepted, we will first order a title search. During the search, the property’s title records are examined to confirm the rightful legal owner. Additionally, it can also reveal if there are any liens or claims against the property that could affect your purchase. If the title search concludes that the seller is the rightful owner, then the property is appraised to determine its approximate value.
3. Avoid Taking on New Debt
During the mortgage loan process, it’s crucial that you do not acquire significant debt, such as purchasing a new vehicle or applying for another loan. Doing so greatly affects your credit score, which is taken into account both when you apply for the mortgage and right before closing. Therefore, if your credit score changes drastically during the course of your loan process, you may be deemed untrustworthy to afford monthly mortgage payments.
4. Closing Date is Set
When you are approved for a mortgage loan, your lender will set a closing date, which is approximately 45 days after your offer is accepted. During this time, you will provide all necessary documentation needed to close. The lending team will review your information and ask any appropriate questions for clarity purposes.
5. Loan is Closed
Once everything is squared away with your loan, you’re set to close on the property. Prior to the closing, you will need to secure a cashier’s check that contains the funds for both your down payment and all closing costs.
During the closing, which typically takes place at a title company, you will verify and sign all mortgage documents. The seller will execute the deed to the property and the closing agent will record what is necessary to ensure you receive legal ownership. The process can take up to an hour to complete but may vary depending on the complexity of your transaction.
Contact a Bank of Old Monroe Mortgage Lender Today
Purchasing your first home doesn’t have to be stressful and overwhelming. When you finance your purchase with Bank of Old Monroe, you will receive top-of-the-line support and the tools needed to navigate the mortgage process. As a community bank with five locations in Old Monroe, Moscow Mills, Wentzville, Troy, and O’Fallon, we are dedicated to the success of every customer we serve. Don’t hesitate to contact us with any questions and to get started!