Rates for 30-year mortgages have decreased by almost a whole percentage point since the 20-year high of 7% in November, says The Wall Street Journal. This is still well above the 3% range seen in early 2022, but potential buyers have accepted that higher mortgage payments will eat up much of their monthly costs. Mortgage applications have increased by 25% since the end of 2022, according to the Journal.
“I purchased my first home in 2022,” says Danielle Martinez of the UBS Rising Generation Client Segment. “It was important to clearly understand my options before continuing with the underwriting process and having a resource like the EVERFI AchieveTM mortgage guide would have made it less overwhelming.”
If you’re planning to submit one, you may want to explore the EVERFI AchieveTM financial guide to mortgages first. EVERFI by Blackbaud is a leading EdTech firm that UBS has partnered with to help you learn how to find a mortgage that fits your needs and budget. Read on for highlights from their guide.
What is included in a mortgage payment?
- Principal. This refers to the lump sum of money you borrowed to buy your home.
- Interest. This refers to the money charged by the lender to you, the borrower, for taking out a mortgage. Interest is expressed as a percentage rate and is calculated by the lender using factors such as your credit score, the location and price of your home, the type and terms of the loan, and current market value.
- Taxes. This refers to fees required by the government and includes property taxes, which help fund things like schools, road construction, and other services in your community. Your property tax bill may change from year to year.
- Insurance. This refers to the portion of your monthly payment for homeowners insurance, Private Mortgage Insurance (PMI), and/or flood insurance that may be required on your loan. You typically pay Private Mortgage Insurance (PMI) until you have 20% equity in the home or, in some special cases, for the life of the loan. PMI protects the lender if you stop making payments on your mortgage.
Where do I apply for a mortgage?
There are many options to choose from when you’re looking to obtain a mortgage. No matter which lender you ultimately choose, it’s a good idea to speak to multiple lenders because they will each offer different loan terms. You may also speak to a loan officer at your bank or credit union.
- Banks. Financial institutions where you may deposit money and take out loans.
- Credit unions. Member-owned financial cooperatives where you may deposit money and take out loans.
- Savings and loan associations. Also called thrift institutions, these are financial institutions that specialize in helping customers get residential mortgages.
- Mortgage broker. A company that arranges transactions between lenders and borrowers. They’re usually paid a fee for their services.
What are the different types of mortgages?
The two main types of mortgages are fixed-rate and adjustable-rate:
- Fixed-rate mortgage. This type of mortgage locks in the same interest rate for the loans' entirety. A fluctuation in your mortgage payment may still occur, such as if your property taxes or insurance premiums increase or decrease. Fixed-rate mortgages allow buyers to lock in a set interest rate for the entire loan, which makes it easier to anticipate and budget for monthly payment amounts.
- Adjustable-rate mortgage. ARMs typically start with a fixed-rate for a set number of months or years. After the initial period, the interest rate may increase or decrease, and your mortgage payment may increase or decrease as well. ARMs typically offer lower initial interest rates, but uncertainty may kick in once the rate is due to change. Buyers sometimes choose ARMs if they plan to sell the house or refinance their mortgage before the rate changes.
5 steps to apply for a mortgage
Once you’re ready to begin seriously shopping for a new home, it’s time to start the mortgage application process.
- Assemble all the paperwork you need. Common examples of documents you will need are a form of government ID, such as a driver's license and social security number, and proof of income, such as pay stubs for the last 30 days and W-2 forms for the last two years. Expect to prove the source of your down payment, using a document like an investment or savings account statement to show at least two months’ history of account ownership.
- Make a list of potential lenders. It is recommended that you make a list of at least three lenders to speak with in order to compare their offers. A great option to consider is speaking with the bank or credit union you already have a relationship with. You may also get recommendations from people you trust and find out why they liked working with those lenders or mortgage brokers.
- Get a pre-approved letters. Pre-approval or pre-qualification letters aren’t guaranteed loan offers, but they let home sellers know you’ll be able to secure a loan. Many sellers require it before accepting your offer on their house. Pre-approval letters generally expire within 30 to 60 days, so get your pre-approval when you’ll be seriously considering homes in the next month or two. Not all lenders offer these letters.
- Get loan estimates. If you get a pre-approval letter and find the home you’d like to buy, you may begin the mortgage application process. You’ll start by discussing the type of mortgage you are interested in and requesting a loan estimate, which spells out the loan’s costs, interest rate, and features. Loan estimates aren’t binding and you can get them from multiple lenders.
- Select a loan. To accept a loan estimate, notify the lender of your intent to proceed within 10 business days of receipt. If you don’t, they’ll assume you aren’t interested. Once you’ve selected a lender, you’ll provide additional proof of your income and assets and pay an application fee. Once the lender processes the loan, they will also charge you a loan origination fee, which is usually a set percentage of the loan amount.
The homebuying process can be daunting, but tools, like EVERFI AchieveTM 5-minute guide to mortgages, and a conversation with a financial advisor can help you take the first steps.
UBS has partnered with EVERFI by Blackbaud, a leading education technology firm, to launch the financial education site ubs.com/thecode. The site features over 30 interactive modules on topics that are relevant to investors like budgeting, buying a home, and building credit.
Main contributor: Kerry Breen
Review code: S2301188
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