A Brief Insight on Mortgage Rates and Lending

The mortgage industry in the US functions quite differently compared to other countries around the globe. In the US, a mortgage is treated as a commercial paper and allows lenders to convey and assign them easily. This allows financial institutions to free up money and lend out in the form of mortgages that people can invest in the way of securities. The country has government-sponsored enterprises such as Freddie Mac and Fannie Mae that especially undertake and process mortgages. Unlike other countries, the mortgage rates in the US are fixed.

How to apply for a mortgage loan?

If a person wants to apply for a mortgage loan, then he/she will have to deal with an underwriter. If you want to avoid underwriters who usually work for banks, then you could choose to work with a brokerage. Most mortgage brokers tend to have a network with lenders who give loans, since brokers do not directly provide loans.

When you deal with an underwriter, you will have to do the following:

  • Submit a credit check.
  • Provide proof of employment and income.
  • List your various addresses of residence for the past two years.
  • Provide documents of your savings and other financial accounts related information.
  • Provide a copy of purchase and sale agreement.

If providing all of the aforementioned information and documents is a big hassle for you, then there are loan options known as low doc or no doc since they do not require the applicant to prove any of the statements that need to be made to an underwriter. Since these loans are hassle-free, they are expensive. You can also obtain a pre-authorization before you make an offer on a house that you would like to buy. This can help expedite the process while also letting the seller know that you actually intend on buying the house.

Another factor that is unique to mortgage loans in the country is that they require a significant downpayment. While traditional mortgages call for a 20% downpayment, a larger percentage is usually required for low doc or no doc mortgages. It is also possible to obtain 100% finance on such loans if you qualify for it.

A very competitive mortgage lending market

Even though the overall interest rates in the country are similar to the rates found in many European countries, the competition between banks and the brokers is very stiff. So, if you want to be a smart purchaser and land yourself a good real estate purchase, then you need to shop around and visit multiple lenders before you find the list of the best mortgage companies and settle on one.

If you are looking for an easy way out, then the simplest way is to work with your existing bank for obtaining a mortgage loan. If you hold an account in a bank in the US, then the application process is relatively easy. The only downfall, in this case, could be that your bank cannot provide you with the best possible deal in the current scenario. So it pays off to consult various underwriters from different financial institutions while also enquiring about their origination fees, closing fees, and other associated fees.

Fixed vs. variable mortgage rates

As mentioned above, mortgage loans in the US are given on a fixed rate. This means that you shall have to pay your mortgage at the same rate for the entire duration of your loan. In such a case, you shall have to refinance to be at an advantage, if interest rates drop during this period. While variable rate mortgage loans are available, it usually gets a little complicated; hence it is advised to understand all the terms before you sign an agreement.

Variable rate mortgages are also known as adjustable rate mortgages in the country. They are often available at lower interest rates than fixed rate mortgages. However, do keep in mind that the variable rates fluctuate and can increase quite a bit. So, you need to assume the potential risk and use a mortgage calculator to determine the potential increase or decrease in rates and its associated financial implications from time to time.

Building equity

Once you begin to pay off your mortgage payments, a portion of it shall go to the principal. This shall decrease the amount you owe to the lender. Moreover, you can build equity upon the value of your house, if the value is to increase. This equity is also known as the second mortgage since you can use your equity as collateral and pay a portion of your first mortgage, if you can obtain a home equity term loan.

Getting an insight into the mortgaging industry in the country is a good place to start gathering right information, and you can explore more to enhance your understanding and make informed decisions.

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