Mortgages are available through mortgage brokers, banks, credit unions and savings banks. Mortgage brokers originate close to half of all mortgage loans in the United States. Whether you elect to work directly with a lender or through a mortgage broker, it is a good idea to get "pre-qualified." This will help you definitively ascertain how much you can afford and will give you a competitive advantage with sellers (because you can present them with a document demonstrating that you will be able to pay the amount they are asking).
A conventional mortgage is not insured or guaranteed by the government. Conventional loans with a down payment of less than 20% typically require private mortgage insurance (PMI), which protects the lender if the homeowner defaults on the loan.
With an adjustable-rate mortgage (ARM), the interest rate changes periodically. They are typically characterized by the amount of time that must pass before the rate can be changed (1, 3, 5, 7 or 10 years, for example). Rates are generally lower than fixed-rate mortgages, but ARMs carry the risk that an increase in interest rates will lead to higher monthly payments.
The Federal Housing Administration (FHA) offers several low down payment mortgage products for eligible participants. FHA-insured loans are available from most of the same lenders who offer conventional loans. For more information about these loans and eligibility requirements, please contact your lender or visit the Housing and Urban Development website at: hud.gov/fha/loans.cfm.
If you are a veteran of military service, reservist, or on active military duty, you may qualify for a loan guarantee from the Department of Veterans Affairs. These loans typically require minimal down payment.
Lenders may or may not require that you have your prospective home inspected by a professional before they approve your mortgage, but it's a good idea, even if they don't. Home inspections, which typically cost between $300 and $600, can reveal structural problems that may impact the selling price and your interest in the home. Home inspectors are licensed by the state.
Under Wisconsin law, building inspectors are liable for damages that arise from an act or omission relating to their inspection. In addition, they are prohibited from performing any repairs, maintenance or improvements on the inspected property for at least two years after the inspection has occurred. For more information about the state's home inspection regulations or to check the status of an inspector's license, please call (877) 617-1565 or visit drl.wi.gov.
Common Financial Terms
Following are financial terms frequently used when buying or selling a home:
- APR (Annual Percentage Rate): Because it includes points, expenses and other costs charged by the lender, this is the actual interest rate you will be paying. Since all lenders must calculate this figure the same way, the APR provides an excellent method for comparing mortgage proposals.
- Appraisal: An estimate of the property's market value based on the condition of the structure, the value of the land and the characteristics of the neighborhood. Appraisals are usually needed whenever a home is bought, sold or refinanced.
- Assumable Loan: A mortgage that can be taken over by the buyer for a fee. These mortgages avoid closing costs and loan fees.
- Closing Costs: Payments made on closing day to cover attorney fees, appraisals, credit reports, escrow fees, prepaid insurance premiums and other fees
- Common Area Assessments: Also known as homeowner association fees, these are charges paid by unit owners to maintain the property.
- Down Payment: The amount of cash paid by the homeowner at the time of closing. Any down payment that is less than 20 percent of the purchase price usually requires mortgage insurance, which increases the buyer's monthly payments.
- Escalator Clause: A contract clause that allows the lender to change the interest rates or principal amount of a loan if market conditions change
- Fixed-Rate Mortgage: A loan with a fixed interest rate. The initial rate is typically higher than a variable-rate mortgage, but the monthly payments remain constant over the life of the loan.
- Home Warranty: Insurance purchased by the seller that covers the cost of repairing major appliances, such as the furnace and water heater, if they fail within a year of the purchase date
- Interest-Only Mortgage: A loan in which the mortgage holder makes payment only on the loan’s interest
- Joint Tenancy: A type of ownership that allows two or more parties to own a single piece of property together. In the event of one joint tenant's death, ownership of the property automatically passes to the surviving joint tenant(s).
- Loan-to-Value Ratio: The percentage of a property's value that can be lent to a borrower. Typically, financial institutions will not lend more than 80 percent.
- Mechanics Lien: A lien against the title of a property for work done on a house. Courts impose liens for non-payment of home-related services and must be satisfied at the time a home is sold.
- PITI: An acronym that stands for "principal, interest, taxes and insurance." This is the total monthly payment owed to the lender. It includes payment on the principal and interest, as well as money escrowed for insurance and taxes.
- Points: Interest that is paid in advance of the loan. A point is equal to one percent of the loan value. Three points on a $100,000 mortgage is equal to $3,000. Paying points lowers the monthly payments.
- Private Mortgage Insurance (PMI): Insurance that protects the lender in the event the homeowner defaults on the mortgage. It is typically required when the down payment is less than 20 percent of the home's cost but can vary according to the lender.
- Title: A document that indicates a buyer has clear ownership of a property. In order to protect themselves, lenders typically will not issue loans without this document.
- Title Insurance: Insurance that protects the homeowner and lender in the event there is an ownership dispute
- Variable-Rate Mortgage: A mortgage in which the interest rate is adjusted to reflect market conditions Variable-rate mortgages feature interest rates lower than fixed-rate mortgages, but the rate can change quickly. They typically have caps that prevent the rate from exceeding a fixed amount