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Mortgage Basics
BancMac - Your Community Bank Mortgage Partner
Mortgage Basics

More Americans are translating the dream of homeownership into reality. BancMac has been largely responsible for making this happen. How can homeownership happen for you? BancMac has assembled the most important information in an easy-to-follow format. We will walk you through the entire process, so breathe easy, and you'll be in your dream house before too long.

What exactly is a mortgage? What type of mortgage is right for me? How do I get a mortgage?

These are questions that most everyone has or will need to answer at some point. Hereís some information that will guide you in the right direction.

A mortgage is a loan used to finance the purchase of your home. It is one of the largest and most important investments that youíll ever make.

This is how it works. Your home serves as the collateral for the loan that you agree to pay up to 30 years with interest. Monthly payments typically include the principal (the sum financed by your community bank), interest (the interest charged to you for borrowing money) and taxes (usually community taxes based on a percentage of the value of your home, and home hazard insurance). When you put down less than 20% on the purchase of your home, most lenders charge private mortgage insurance (MI) premiums. This coverage is designed to protect the bank against you not paying your mortgage.

What Type Of Mortgage Is Right For You?

Our Lenders offer several types of mortgages to suit your various needs. As a general rule, you should take these factors into consideration when selecting a mortgage program.
  1. Your current financial picture
  2. How you expect your finances to change
  3. How long you intend to keep your house
  4. How comfortable are you with a mortgage payment that may change
Types of Mortgages

The most common type of home financing falls under the category of fixed-rate mortgages. With these mortgages, the interest rate remains the same for the entire term of the loan, and there are a number of repayment terms.

Conventional mortgages feature down payment requirements as low as 5 percent. Guaranteed Rural Housing loan will even allow for 100 percent financing!

Here is a breakdown of the most common mortgages.

    Fixed rate mortgage
    A mortgage in which the interest rate does not change during the entire term of the loan.

    Refinance transaction
    The process of paying off one loan with the proceeds from a new loan using the same property as security.
How Much of a Mortgage Can You Afford?

There are two basic formulas commonly used to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments relative to your income and other expenses.

The following ratios may vary and each application is handled on an individual basis, and so the guidelines are, in fact, just guidelines. There are many affordability programs, both government and conventional, which have lenient requirements for low- and moderate-income families.

As a general rule of thumb, to qualify for conventional loans, housing expenses should not exceed 28% of your gross monthly income. Monthly housing costs include the mortgage principal, interest, taxes and insurance. If your annual income is $36,000, your gross monthly income is $3,000, times 28% = $840. So you would probably qualify for a conventional home loan that requires monthly payments of $840.

Any expenses that extend 11 months or more into the future are called long-term debt, such as a car loan. Total monthly costs, including long-term debt, should not exceed 36% of your gross monthly income for conventional loans.

One method of determining just how much to spend for housing is to compare your monthly income with monthly long-term obligations and expenses. Be sure to only include income you can definitely count on.

When budgeting to buy a home, it is important to allow enough money for additional expenses, such as maintenance and insurance costs. If you are purchasing an existing home, gather information on cost averages and maintenance costs from previous owners to help you better prepare for homeownership.

Homeowner's insurance or property insurance is another cost you will have to consider. The lending institution holding the mortgage will require insurance in an amount sufficient to cover the loan. However, to protect the full value of your investment, you might want to consider purchasing insurance that provides the full replacement cost if the home is destroyed. Some insurance only provides a fixed dollar amount that may be insufficient to rebuild a badly damaged house.

How to Get a Mortgage

Getting a mortgage loan is not nearly as difficult of a process as many typically believe.
  1. The first steps in the loan process are getting pre-approved and selecting a lender. If you havenít already, this is the perfect time to begin our pre-approval process. Review our description of the most commonloan products
  2. The next step in the loan process is the loan interview with your local banker. Be prepared to provide your financial records, including pay stubs for the last 30 days and three months of bank statements. Be prepared also to talk about your capacity to repay the debt of the loan, your credit history and your financial ability to make a down payment and meet closing costs.
  3. You may also wish to discuss interest rates with your lender. If rates are low, you may consider asking your lender to lock-in, or commit to that rate, that day. Make certain that the timeframe agreed upon covers your closing date.
  4. Within 3 days of your loan application, you will receive a Good Faith Estimate and a Truth in Lending Disclosure from your lender. These documents outline the costs associated with getting your mortgage. Review these documents carefully before your closing meeting.
You are now ready to close on your loan!