Mortgage 201 FAQs
You’ve got a good grasp on the fundamentals and are ready to dive a little deeper into the world of home mortgage loans.
Welcome to the club!
What to expect as a 2nd time homebuyer?
The process of buying a home is the same whether it's your first, second, or tenth time. The biggest difference is you as a homebuyer.
You have some experience with the process. You’ve been there before so you know how exciting it will feel at the end of the journey.
There is the potential aspect of selling while buying and we’re well equipped to support you through it all. We work with many partners to ensure we can get you the best possible solution to your situation.
We’ve seen it all, but your situation is unique, so understanding your plans and goals can impact the solutions we recommend!
I’m interested in investment properties…
When it comes to buying an investment property, there are two big pieces to keep in mind: #1 - the number of units - residential loans are eligible for up to 4 units, and #2 - how title will be held.
There are many advantages and disadvantages to holding property in a corporation, while there are also many of the same for keeping those properties in your individual name. Understanding your goals and intentions with the property will help you and your loan officer find the best path forward.
One option that many first-time investors think about is the opportunity to live in one unit while renting out the other 1-3 units in the same dwelling. This is certainly possible and allows you to take advantage of primary home rates as well!
Investment properties built with the intent of keeping them as investment properties do typically come with more down payment required as well as slightly higher rates than primary and secondary homes.
What’s a rate lock?
During the process, your rate will be locked in at some point. Sometimes it makes sense to lock your rate from the start. At other times, it might make sense to lock your loan at the very end.
There are different lock periods (duration of lock agreement between you and the lender) and they are all priced uniquely as well.
The shorter your lock agreement, the less cost to the lender and potentially the better the rate will be.
Every situation is unique and each investor handles this differently, but locking your loan means you are locking in the interest rate for the life of your loan (be it a 30-year fixed mortgage or a 2-1 Buy-down program).
Is there a difference between a mortgage broker and a mortgage lender?
Some people use the titles interchangeably, but there is technically a slight difference.
One of the key differences between a mortgage broker and mortgage banker or lender is that a mortgage broker typically works with the buyer/borrower through the initial application before passing the application off to another person to process the loan.
Processing includes ordering title, appraisal, and submitting the loan to the underwriter.
On the flip side, a mortgage banker or mortgage lender, like Team Chedester, is an individual who works with the buyer/borrower through loan closing, before the loan is then sold to the investor that will be the new servicer.
A mortgage banker or lender is more invested as they are doing much more direct to consumer activity from initial discussion all the way through closing, making the process from the consumer's side much smoother, with only one person to contact throughout.
How does a mortgage lender get paid?
This is a very common question and sometimes has people concerned that it will be an added cost after closing.
Your mortgage lender can be paid in one of two ways. In some states, the mortgage lender is paid directly by the buyer/borrower. When the buyer/borrower writes their cashier’s check at closing on their mortgage, a portion of those funds are directed straight to the loan officer that makes the loan.
That said, in Iowa and with Team Chedester, the investor pays us for making the loan with their company. We work with many different investors who pay us based on the rates they are offering, to get your loan.
We shop around for the best interest rate for you, knowing that the investor that gives the best rate for your situation is going to give you the lowest monthly payment.
After your loan closes and funds, the investor pays us for sending them the loan.
What are points/discount points?
Discount points are a term used when buying down your interest rate. It is a permanent rate buy-down that will last the duration of your loan term.
The common misconception however is that 1% buy-down equals 1% in rate reduction.
The 1% buy-down is 1% of your loan paid toward the rate, however this typically results in 1/8% reduction to ½% reduction, depending on what the current rates offered by the lender are at that time.
Lenders set their own rates, and the discount points paid can make varying impacts depending on the lender.
Contact your lender to find out if this is a good option for you.
What does it mean to buy down points?
There are two types of buy-downs.
#1 - There is a permanent rate buy-down (with points) which is a way to obtain a lower interest rate by paying a one-time fee at closing. You’re essentially paying to have a lower rate for the length of your mortgage.
#2 - On the other hand, some lenders offer a temporary buy-down product that allows you to have a lower monthly payment for the first year or two, and it gradually increases to the fully amortized rate by the 2nd or 3rd year.
The difference in payment for those first 1-2 years is offset by the lender or the seller, depending on the situation. It’s important to weigh all the pros and cons to consider if it’s a good financial choice for your situation..
Talk to me about alternatives to dorm living for my college student.
Ready to get you or your child out of their college dorm and into something they can call their own?
One option is to buy a home instead of paying a college or university for room and board.
By taking advantage of cosigning for your son or daughter, as long as they are on the loan, we can help you and them buy something that they can call their own.
This allows you to get primary occupancy interest rates for classes and allows them a place to live.
Plus, if they enjoy roommates, they can rent out rooms to their friends to help pay the mortgage payment!
It’s a win / win.
How is my mortgage a tool to build generation wealth?
Thanks to rising values in the United States, the sooner you buy a house, the sooner you’re able to begin building equity.
This is because the house will continue to rise in value, no matter how long you hold it.
Sure it won't always rise dramatically and potentially could even lose value once in a while, however in the long run, homes have continued to increase in price due to supply and demand.
The world is not making more land, so that leaves a finite amount of space for homes to be built.
Mortgages then taken out to purchase those homes become a tool to create more wealth as they allow you to set a budget for paying them off while also setting money aside for investments and savings.
Think of it this way - if every penny you made was to pay your mortgage, sure you could have your house paid off faster, but you certainly wouldn't be diversified.
All of your eggs would truly be in one basket.
While values are constantly increasing on homes, that does not mean that the house is putting money in your pocket.
It is future money that you will only see if A) you take another loan out, of which you will have to pay back, or B) you sell the house.
Using the mortgage loan to allow you to diversify your assets ensures you can build your wealth in multiple ways.
Additionally, owning a home enables your kids and grandkids to inherit something of value that will provide funds for them in their future. Owning a home that can then be passed on to the next generation provides an opportunity to leave a lasting imprint on the people you care most about.
What happens if the world shuts down again?
First, we hope that never happens again!
But, in the event that it does, mortgages were still being made and people were still buying homes the first time around.
In fact, that is when we saw the lowest mortgage interest rates in history.
While we don’t expect that to ever happen again, as rates that low are not sustainable from an economical standpoint, when the supply of money is back in consumers pockets, rates will fall to entice more to buy.
How does the national/global economy impact my mortgage?
While there is no perfect correlation between the economy and mortgages, there are a few indirect ties.
For starters, when the national economy is not doing well, it historically has decreased interest rates. This is due to a strain on the economy making it harder for buyers to afford new homes, and to allow for people to continue to purchase, keeping mortgage lenders, bankers and investors employed, mortgages must continue to be made.
On the flip side, if the economy is doing well, rates may rise, as consumers have more buying power, so they can afford more interest.
However, there is no true direct tie between the economy and the mortgage rates.
If you are curious if there is an implication to your existing loan, there likely is not.
This is because the majority of the mortgages made prior to 2022 were fixed rate loans as fixed rate loans had better interest rates than adjustable rate mortgages (ARMs).
Most people were not enticed by ARMs since they had higher rates and an adjustable rate and payment, making them obsolete for many years.
In 2022, the resurgence of ARMs came, with fixed rate mortgages decreasing in popularity due to their increasing interest rates.
If you have an ARM loan, your rate is directly tied to an index. As that index changes its rate, it likely has a periodic impact on your mortgage rate & payment.