If you are familiar with real estate markets, you know that winter isn’t exactly known for being the time to buy or sell homes. However, here in Middle Tennessee, it seems that we don’t really care what market standards are supposed to be, our market is hoppin’ all year round!
Over the past several weeks I’ve had multiple clients come in who are buying their first home, and they have had some great questions for me. This made me think: What are things that first-time home owners aren’t told? What part of the process do we sometimes forget to mention? Keep reading to find out the answers to questions that will help you as a new homeowner!
1) Your mortgage payment can change.
You may think that sentence sounds tricky, and I’ll give you that. But let’s dive into the details of it to see why. When you go to a bank or online lender to get a mortgage, they may offer several different “mortgage products” to you. “Mortgage Products” are basically different types of loans that banks or the government offers. For example, you can have a fixed-rate mortgage or an adjustable-rate mortgage. The “rate” that is being referred to is your interest rate. Basically, you can either have the exact same interest rate until your mortgage is paid off, or your interest rate will change periodically based on what the market is doing at that time.
The most straight forward reason that your mortgage payment can change lies here: the adjustable-rate mortgage. If you sign up for an adjustable rate mortgage, you should go into this loan knowing that a changing payment is part of the package.
However, sometimes our monthly payment changes when we thought we were signing up for a fixed-rate mortgage. (And if you’re me, you have a minor coronary and you call your mom to find out what treachery this is.) Don’t worry. This isn’t treachery, it’s your escrow. Escrow is basically a savings account that’s linked to your mortgage. When you buy a home, you are required to pay property taxes. And unless you pay cash for your home, you are also required to pay homeowner’s insurance. Often times, both of these additional expenses will be added on to your regular principal and interest payment and your mortgage company is responsible for dividing those up and paying them once a year.
From year to year, your property taxes can increase or decrease, as well as your homeowner’s insurance premium. This means that even if you have a fixed-rate mortgage, your payment can still go up and down a little. But this is due strictly to changes in taxes and homeowners insurance and doesn’t have anything to do with your interest rate. Don’t worry though, normally this doesn’t change your payment drastically.
2) Mortgage insurance doesn’t always go away.
If you put less than a 20% down payment on a property, most lenders require something called Private Mortgage Insurance (PMI). This is insurance that the lender gets in case you stop making payments and the property goes to foreclosure. However, most loans will drop the PMI payment once you have paid up to about 20-22% of the home’s value. (Ex. Property is listed for $150,000, reaching 20% would be $30,000 equity or your mortgage balance being $120,000.)
However, if you decide to go with a government-backed loan, specifically FHA loans, some of these products require a Federal Mortgage Insurance Premium (MIP). Unlike conventional loans, this mortgage insurance may not be removed after you make payments for a few years. This occurs on FHA loans where individuals put down less than 10%. No matter how long the loan, if you pay less than 10% down, mortgage insurance is here to stay.
3) Your loan may be sold.
About 3 weeks after moving into our family’s first home, I got a letter from the local bank I worked with letting me know they had sold my loan to a much larger national lender. (Per most of the mail that I received as a new home owner, I promptly called my mom again.) Often times, banks will buy and sell mortgages from each other. It may seem alarming, but it is rather common and is rarely something to worry about. This doesn’t change anything about your loan except who you send your payments to each month.
In summary, none of these are the end of the world. But if you’re new to being a homeowner, it can definitely make you nervous. Now, take a deep breath and move forward in your new found knowledge.
Whether you’re thinking about buying a home, having trouble making your payments, or just have some questions, don’t hesitate to reach out to Apprisen. No matter where you are in your homeownership journey, we’re happy to lend a hand. Feel free to reach us at 1-800-355-2227.