Consumer Guide: Mortgages and Financing
Consumer Guide: Mortgages and Financingpdf (117.74 KB)
Buying a home is one of the largest personal and financial decisions you can make. For many buyers, the process includes finding a loan that will help you pay for your new home over time. An agent who is a REALTOR® can help you learn about your options. Here’s what else you need to know:
What is a mortgage, and how do I get one?
A mortgage is a loan offered by a bank or lender that lets you borrow money to purchase a home and repay over time with interest. Mortgages can take many forms, but one of the most popular options is a 30-year fixed rate mortgage. Many factors can affect the mortgage options available to you, including your down payment, personal finances (e.g., credit score, income, existing debt, employment history), and other factors like government policies, current interest rates, and what lender you are working with. Certain buyers, like first-time homebuyers and veterans, might be eligible for special financial assistance programs.
What types of loans are there?
Factors like where you are searching for a home and how long you plan to stay in your new home will help determine which loan type best suits you. Some options include:
Fixed-rate mortgage: Sets an interest rate and monthly payment for the life of the loan, which is typically 15 or 30 years.
Adjustable-rate mortgage (ARM): ARMs may offer interest rates that are lower than you could get with a fixed-rate mortgage for a chunk of the life of the loan, such as five or 10 years. However, after that point your interest rates are subject to change approximately once per year based on market conditions.
What is a down payment, and how much will it be?
Some lenders require buyers to pay a percentage of the home’s purchase price up front, which is known as a “down payment.” Your down payment can vary substantially depending on your mortgage agreement. Typically, if you pay more money up front, your monthly mortgage payment will be lower. Many local governments and non-profit organizations offer down payment assistance grants and loans if you meet certain requirements. Ask your agent or reach out to your local REALTOR® association for recommendations and guidance on what’s available.
What is the difference between conventional and federal home loans?
Conventional loans are financed by private lenders, such as banks, credit unions, and mortgage companies. They require stronger credit and higher down payments but may offer better rates. Federal loans are government- backed, meaning lenders carry less risk and can pass savings onto eligible borrowers who may not have pristine credit. Some federal loans include:
Federal Housing Administration (FHA) Loan:FHA loans cater to first-time buyers and have flexible requirements and down payment options as low as 3.5%, depending on your credit score or debt-to-income ratio.
Department of Veterans Affairs (VA) Loan: If you served in the U.S. military, you are eligible for a VA loan with no down payment and no mortgage insurance requirements.
U.S. Department of Agriculture (USDA) Loan: The USDA Rural Development loan is designed for families purchasing a home in rural areas, requires zero down payment, and offers discounted mortgage interest rates.
Are there other ways I can lower my out-of-pocket costs?
Some sellers may offer to pay certain costs associated with purchasing a home for you, which are called concessions. Certain limits apply to concessions—please consult our guide to seller concessions for more information. You can also ask the seller to pay for your agent’s compensation, which does not count towards concession limits, as part of your purchase offer. Both are options that may reduce out-of-pocket and upfront expenses, helping you stretch your budget. However, keep in mind that the current banking system does not allow for agent compensation to be financed through a mortgage. Talk to your agent about building a home purchase plan that works with your budget.
Practices may vary based on state and local law. Consult your real estate professional and / or an attorney for details about state law where you are purchasing a home. Please visit facts.realtor for more information and resources.
Understanding homeowners insurance is essential for anyone looking to purchase a home. Start looking at policies early—an agent who is a REALTOR® can help. Here’s what you need to know:
What is homeowners insurance?
Homeowners insurance covers you for unexpected losses at your home or property. It can include provisions to repair or rebuild the property, replace assets within the home, cover accidents that happen to you or someone else on the property, or even pay for living expenses if a covered incident forces you to live elsewhere temporarily.
Is homeowners insurance required?
If you are taking out a mortgage on your new home, your lender may require you to have a homeowners insurance policy for the duration of your mortgage. If your mortgage is paid off, or if you’ve paid for the home in cash, no laws require you to maintain insurance. However, having insurance is generally a good idea to ensure your assets are protected.
How much does homeowners insurance cost, and how do I pay it?
The cost of homeowners insurance depends on several factors, including your credit history (in some states), the house’s age, square footage, condition of the property, and location. You may have the option to pay your premium on a monthly, quarterly, or annual basis. Some lenders collect the insurance premium as part of your monthly mortgage payment, place it in an escrow account, and pay the insurer on your behalf.
What does my insurance cover?
There are two types of coverage provided by a homeowners policy:
"Named Peril” coverage pays only if the damage is caused by a specifically named peril. The most popular policy, HO-3, covers the home structure and personal belongings for disasters including fire, hail, lightning, freezing, theft, and vandalism.
"Open Peril” coverage pays in all instances except for when the damage is caused by an incident that is specifically excluded. HO-5 insurance policies may offer more extensive, open-peril coverage, but they often have higher premiums and more eligibility requirements.
How much will my insurer pay me?
In the event of a loss, there are three types of reimbursement:
Actual cash value: The insurer pays out the cost to fix the home and replace your personal belongings, minus any depreciation. For example, if you bought a new table 5 years ago for $1,500, but due to normal wear and tear, it’s only worth $750 at the time of the covered incident, then your insurer will only pay out up to $750.
Replacement cost value: The insurer will reimburse the money needed to make repairs and/or purchase a comparable new model at today’s prices without taking depreciation into account. In this case, even if you only paid $1,500 for the table 5 years ago, if a comparable model is $2,500 today, then you may be paid $2,500 to replace the damaged furniture.
Guaranteed or extended replacement cost: A guaranteed replacement policy means the insurer will pay the actual cost to replace a home at the time of loss, regardless of the policy limit. An extended replacement policy gives extra coverage above the policy limit up to a set percentage. For example, a home insured for $500,000 that takes $750,000 to rebuild would be completely covered with a guaranteed replacement policy. But an extended coverage policy at 20% would mean the insurer pays 120% ($600,000), or $100,000 above the limit.
Are homeowners insurance premiums tax deductible?
If the property in question is your main home, then your home insurance is generally not deductible. However, people who run a business from their home or those intending to rent out their property may be able to claim a deduction. Additionally, if you suffered a loss to your property caused by a presidentially declared disaster, you may be able to claim a casualty loss deduction. Discuss your unique needs with a tax professional.
Practices may vary based on state and local law. Consult your real estate professional and/or an attorney for details about state law where you are purchasing a home. Please visit facts.realtor for more information and resources.
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