Home Buying: All About Mortgages
As part of our home buying series, I recently had the pleasure to talk with Adam Shelton of Sierra Pacific Mortgage. He gave some great, easy to understand information on mortgages, what they are, and how they work. Here’s the latest from our Q & A session:
1. What is a mortgage and how does it work?
A mortgage is a legal contract (i.e. a loan) between you (the “buyer”) and your lender (me!) that allows you to buy a home at a specified cost (i.e. interest rate) over a specified period of time (typically 30 years). The house acts as the collateral (guarantee) for the loan you receive. So, much like any loan, while you technically “own” the property, your lender retains a “security interest” in the property which allows them to foreclose in the unfortunate event payments are not met.
Many, perhaps most, people believe that you need to have a 20% down payment in order to buy a house, but that couldn’t be further from the truth. There are many varying loan types today that allow for 5%, 3.5%, or even 0% money down!
2. What should one look for in a mortgage lender?
Today’s mortgage market is very unlike the mortgage market of even 5 or 10 years ago. After the 2006-2008 “mortgage meltdown” the Federal Government mandated many positive changes relating to consumer protection. One of the primary outcomes of those changes was that in today’s market most lenders are dealing with, relatively speaking, the exact same loan products. As such, and I know it sounds cliché, but the most important thing you can look for is someone who really listens to your needs and someone in whom you trust to have your family’s best interest at heart. The “math” part of a mortgage loan is relatively simple; the hard part is ensuring that the type of loan you’re doing makes sense both now and in the future.
3. What advice would you give to first time home owners?
Take your time. Buying a home is, in most cases, a highly emotional experience. Most first time home buyers fall in love really quickly only to have their hearts broken when “the perfect house” is already under contract, fails inspection, or is too expensive. One thing I’ve learned after nearly two decades in the finance industry is: there is ALWAYS another house and it’s almost always better than the other house you “couldn’t live without.” Another key thing to remember is to retain the power in negotiations. It’s not always true in all markets at all times, but in most circumstances the buyer has the advantage. The seller NEEDS to sell a lot more than you NEED to buy and as my father always told me, “If you’re not willing to walk away, you’ve already lost.”
4. Is there anything first time home owners should avoid when buying a home, choosing a lender, etc.?
Learn how interest rates work AND don’t plan on living there “forever”… because you won’t! Most buyers have been led to believe two fundamental truths about interest rates: First, that there is one interest rate for every product each day and, second, that “the lowest interest rate always equals the cheapest loan.” Yet, nothing could be further from the truth. The fact of the matter is that you can get nearly any interest rate you want on a loan…it’s just a question of how much you’re willing to pay for it. For every product available (Conventional, FHA, VA, USDA, etc.) there is a “rate card” that shows a variety of interest rates available at a variety of different prices. In most cases, you want to know what the “par” rate is, i.e. the lowest interest rate that doesn’t charge you fees or “points.” However, there may be times where it makes sense to take a lower or a higher rate.
“Wait!…How could it ever benefit me to take a higher rate?!?” In many cases you will have the opportunity to take a higher rate and receive a “lender credit” that you can use to pay closing costs and/or other fees associated with your transaction (but, NOT your down payment). If for example, you have limited funds, this could be an ideal structure to help preserve cash. Alternatively, if you know you’re not likely to live in the house more than 7 years (the average length of ownership in the US is around 7 years) there is typically a mathematical advantage in taking a higher rate and receiving credits.
5. Please give any other pertinent information you think important.
There are a lot of good, honest and, trustworthy people in my business and no particular reason you should choose us over any of them. With that said, my team and I strive to do our best every day and would be absolutely honored to have an opportunity to earn your business and/or answer any questions you might have.
For all of you buying a home, we hope this helps clarify this aspect of the process. You can reach Adam Shelton at 865-385-4242 or at adam.shelton@spm1.com for more information. If you missed it, enjoy our former blog post by realtor Rebecca Fritschie on Tips for First Time Home Buyers. Happy house hunting!