How To Ensure Your Mortgage Is The Right Length
(Even If You’ve Had It For Years)
Owning a home has always been the American dream, and for most of us, that house comes with a lawn, a garage and a mortgage payment. Smart homeowners consider their mortgage loan carefully, since it will likely be part of their monthly budget for a really long time.
One of the most important things to look at when purchasing a home is the length of the loan. How much are you comfortable paying each month? What are your future plans? Retirement may be closer than you think, especially if you are considering a mortgage payment that will be with you for the next 30 years. These are all factors to consider as you choose the right mortgage loan for your lifestyle.
Fortunately, a home loan is seldom a one-size-fits-all proposition. Instead, a good mortgage lender will work with you to put together a loan that best fits your current budget, your future plans and your individual approach toward debt. At First United Bank, for example, lenders get to know each homeowner personally so that they can tailor a mortgage to their unique needs.
Here are a few things to consider about the length of your mortgage as you start putting one together.
(1) Choose The Right Length
The most common home loan length in the United States is 30 years, and that’s mainly because young homeowners decide that they can’t afford the higher monthly payments that come with a 15-year mortgage (the second most popular length). In general, personal finance experts suggest that you look at a 15-year term first. If you can make the payments, you will save a lot of money on interest as you buy your home. However, if you decide that a 15-year loan is simply not in your budget, then a 30-year term is a great option. However, did you know that technically you can customize the term of your mortgage loan to almost any length? If a 20-year loan makes more sense for your situation, then explore it with your lender. Is it possible to pay off your house in 10 years? Then why take a longer loan? It’s your mortgage, and a good lender will build it to maximize your resources.
(2) Make Bi-weekly Payments
Sometimes reducing the length of your loan is as simple as adjusting how you pay on it. Just because you have a 30-year loan doesn’t mean that you need to take 30 years to pay it off. A recent trend has borrowers making bi-weekly payments rather than monthly ones. This schedule comes with two advantages. First, it’s easy to get the hang of smaller, more manageable payments, and second, you pay your loan off faster. How? Let’s look at a bi-weekly schedule. Rather than making a full payment each month (which would be the equivalent of 24 half payments), you will make 26 half-payments a year. Those two extra half-payments essentially mean that you are making 13 monthly payments a year rather than 12, and because that extra money almost always goes against your principal (the money you owe before interest), it can take years off of the term of your loan.
(3) Make Extra Payments
If you can’t swing bi-weekly payments, you can always just save up during the year and make one extra payment at the end. Of course this plan comes with the temptation to spend that money rather than saving it, but some people thrive with this more flexible system. For example, let’s say that your employer gives you a substantial bonus at the end of the year. That makes it the perfect time to put some extra money toward your mortgage. Each time you do so, you reduce the length of your loan (sometimes significantly), and that’s a bonus in and of itself.
Don’t settle for a mortgage that’s longer or shorter than you need. Choose an innovative lender like First United Bank and collaborate with them on a loan that’s just the right length for you and your budget.
Understanding The ABCs Of Home Loan Acronyms
Buying a house is an exciting proposition. You look for the right neighborhood, you think about the best layout for your family and you envision how you will put your own touch on your new home’s style. There’s a special joy to be found in planning for a new house, whether you are a first-time homebuyer, an experienced homeowner or even an intrepid soul looking to build your dream home. Every move feels like a fresh start, filled with promise and potential.
Of course, there may be challenges to overcome as well. One of the advantages of working with a bank that puts your needs first is that you can relax and stay focused on the more engaging parts of the home-buying process, while your lender concentrates on putting together the very best mortgage for your budget. Choosing your new home is much more enjoyable when a trustworthy banker has your back.
However, it’s still important to understand the basics of the mortgage process to ensure that there are no surprises when it comes to your home loan. Not only are there quite a few documents to sign when you close, the entire mortgage process has evolved to include its own set of shorthand – home lending-specific acronyms that might sound like a foreign language if you don’t hear them very often. With the right bank, you don’t have to worry about all of the details, but it’s still nice to know what everybody is talking about! Here are five of the most common mortgage-related acronyms and their meanings:
This stands for Adjustable Rate Mortgage. In general, this indicates a loan that has you pay a fixed interest rate for a certain amount of time, then “adjusts” based on several economic factors. That means the interest you pay may go up, and it may go down. These mortgages will normally be adjusted once or twice a year from then on, and depending on the terms of your loan, there can be limits on just how much your interest rate can rise or fall. The alternative to an ARM is an FRM, or Fixed Rate Mortgage.
Sometimes pronounced like the word “pity,” this is an acronym for Principal, Interest, Taxes and Insurance. It’s a way of saying “everything you will owe to own your home” rather than simply considering the mortgage payment. This can help you to more accurately determine what you will pay out each month, and as you make decisions about your budget, it can be a very important number to consider. When comparing financing options, make sure to compare apples to apples. Do both options include all of the PITI elements? Working with an experienced lender like those at First United Bank can make this easier. They can simplify and clarify your options.
A Debt-To-Income ratio is an important factor that banks use to determine how much you can borrow and how much you can afford to pay each month. In most cases, it is calculated by taking all of your monthly debt payments together and dividing that by your gross monthly income (income before taxes and other deductions). Nobody wants to commit to a mortgage that they can’t afford, and this formula helps lenders and borrowers to find a loan that fits.
These three letters stand for Private Mortgage Insurance. This policy is paid for by the borrower if they make a down payment of less than 20 percent on a home purchase (or if a homeowner doesn’t have 20 percent in equity for a refinance). It protects the lender in the event of a default, and its cost is often built into the mortgage’s monthly payment. Because PMI is based on a percentage of the loan amount, the larger the loan value, the more PMI will cost. Lenders like those at First United Bank understand all about PMI, and they make the process very easy to understand.
(5) LE / CD
LE stands for Loan Estimate. It is a three-page form that you get once you apply for a loan. It breaks down some of the important details of the proposed mortgage, including monthly payments and closing costs, as well as information about taxes and insurance. Near the end of the process you will receive a CD, or Closing Disclosure. This five-page document includes the loan terms, projected monthly payments, and information about fees and other costs. Comparing your CD with your LE is a fairly simple way to see if anything has changed during the process of preparing your mortgage.
If any of this sounds confusing, don’t worry. The most important part of a good mortgage isn’t learning about all of the jargon, it’s choosing the right bank. When you work with First United Bank, for example, your lender will work hard to make everything simple, freeing you up to think less about your mortgage and more about your new home. If you’d like to learn more, stop into your local First United Bank today and find out just how easy it can be to purchase the right home for you.