How to Buy A home - Home Financing Questions - Part 1

What is a Fixed Rate Mortgage vs. an Adjustable Rate? or maybe “What will my rate be?” Or “What am I paying when I pay my mortgage payment?” or how about “What’s PMI and will my monthly payments change during the loan term?

Hi, I am Jeff Chubb with the Chubb Realty Group and today I am answering those questions!

-        So “What is the difference between a Fixed Rate and an Adjustable Rate?

For a fixed rate mortgage, the interest will stay the same throughout the life of the loan. The most common fixed rate mortgages are 15 and 30 year notes. An adjustable Rate Mortgage, otherwise known as an ARM means that the interest rate can change periodically. This means that the monthly payments can go up or down. Generally the initial interest rate is lower than of a comparable fixed-rate mortgage which is called the teaser rate. After that period ends, interest rates-and your monthly payments can go higher or lower.

Your expected utilization of a property will ultimately help drive this decision. I will however note that interest rates are at historical lows and the only real place for them to go… Is well UP.

-        So “What is my interest rate going to be?”

That is a tough question to answer depending how far out you are from the actual buying process. The farther out you are, the bigger the guess! When you are getting pre-approved, you do not want to worry about a bank’s interest rates. Banks rates vary daily and a bank may be competitive one day and less competitive the other.

When you have found a home and gone under agreement on that home, then that is when you would want to go rate shopping and compare one bank to another. But don’t forget… Rate isn’t everything. You will also want to looking into closing costs as one bank may be charging a lot more in closing costs, but be offering a marginally better rate.

-        When you make a mortgage payment, what are you most likely paying?

I have to say “most likely” because there will be some variances based off of different mortgage products. Some mortgage companies may have you pay the property taxes or homeowners insurance companies directly. But for the most part, a mortgage payment will include the Principal, Interest on the loan, property taxes and insurance to carry the property. For people who put down less than 20%, it also may cover PMI – Private Mortgage Insurance.

-        At this point of the conversation, this is generally when someone will ask “What is PMI?”

Private Mortgage Insurance, known as PMI is a type of mortgage insurance that a borrower might be required to pay for if they have a conventional loan. PMI protects the lender - not the borrower – should the borrower stop making payments on the loan.

PMI is usually required when a borrower has a conventional loan and makes a down payment of less than 20 percent of the home’s purchase price.

As I mentioned, a borrower can pay this with a monthly premium, but sometimes they can pay for PMI with a one-time up-front premium that is paid at closing.

-        Another great question is: “Will my monthly payments change during the loan term?

A homeowners monthly Interest payment will only change if you have an adjustable rate mortgage. If you have a fixed mortgage, then as a homeowner you do not have to worry about the exposure to increasing interest rates.

A homeowner however will see some adjustment year to year with the amount they are paying into their escrow account. Remember that the bank is also generally going to collect a 1/12 of the total bill each month for taxes and insurance. If taxes and insurance go up, then you will see increases in the monthly payment that you are sending to the bank.

At the Chubb Realty Group our philosophy is to ‘Make Moving Easier’. We understand that the mortgage process can be a confusing maze to navigate which is why we work with some of the best industry professionals. They will speak with you with no obligation and all conversations are held with the strictest confidentiality. If you are looking to buy a home, see what we have on the market, with listings being updated daily.

Give us a call at 617-480-2600 or shoot me an email at [email protected] with specific questions or if you would like me to make an introduction to a mortgage banker that can answer all of your questions.  It would be my pleasure.