First-time and current homeowners need help with the confusing and even overwhelming mortgage financing process. This guide will help you learn about the ins and outs of mortgages in Maryland. You’ll learn how the right mortgage financing strategy can help you benefit from your investment and manage your family’s future.
Important Mortgage Terms for First-Time Homebuyers
First-time homebuyers should know these basic terms before seeking mortgage financing in Maryland.
- Principal: The pre-interest amount you borrow to pay for your home
- Interest: The amount you must pay in addition to the principal, calculated as a percentage rate based on the amount you still owe
- Equity: The value of the home on the current market minus the current balance of the mortgage loan and any other monetary restrictions on the property
- Annual Percentage Rate (APR): A percentage you pay per year on top of the principal, covering additional fees such as interest, points, broker fees, and closing costs
- Loan amortization: The process of paying off a loan over time in regular installments, often calculated monthly
- Points: A fee paid to a mortgage lender to reduce the interest on a loan either upfront (discount points) or after processing the loan (origination points), where one point equals 1% of the loan amount
- Private mortgage insurance (PMI): Insurance that protects the lender in case buyers default on their loan payments, usually indicated when the buyer’s down payment is less than 20% of the value of the loan
- Loan estimate: A form that shows your estimated monthly payment, interest rate, closing costs, and taxes for a loan
These terms are essential, but they represent merely the beginning of learning the ins and outs of mortgage financing.
Step-By-Step Guide to Mortgages in Maryland
To obtain the most advantageous mortgage loan for your situation, follow these four steps:
1. Refine Your Credit Score
The first step to mortgage financing is to acquire your FICO score through a credit report. Credit scores range from 300 to 850 and will determine which loan you can qualify for.
The FHA (Federal Housing Administration) mandates that mortgage loans with a 3.5% down payment require a credit score of 580+. Between 500 and 579, the required down payment increases to 10%. Below 500, you will not qualify.
Note that other lenders are typically more particular about credit scores. Fannie Mae, for example, doesn’t accept credit scores below 620.
So how can first-time home buyers improve their credit scores? The best way is to maintain a large amount of available credit while chipping away at high-interest debt. Don’t close active cards, as credit utilization will improve your score over time. Pay bills on time, prioritizing loans with the highest interest.
2. Shop Around
Assuming you qualify, you should shop around for a lender. Most lenders charge fees for processing and underwriting. Still, they are usually negotiable by as much as 50% for those with good credit scores.
Try to avoid paying points, which lower your interest rates but increase your down payment. If a lender tries to force you to pay points, consider shopping around some more.
Additionally, real estate attorneys can help you determine which costs are typical for mortgage loans and which should be avoided. For example, the Maryland Mortgage Program is a useful network of lenders, but it can be challenging to use without guidance.
3. Calculate PMI
Private mortgage insurance, or PMI, is an extra fee that first-time homebuyers should try to avoid. If you can achieve a 20% equity percentage, you can cancel the PMI and significantly reduce your lifetime loan payments. If you pay $200 per month for a PMI policy, in 30 years, you will have paid $72,000 on the insurance alone.
So how can homebuyers eliminate their PMI? Let’s say you want to buy a home valued at $300,000. In most cases, you will need a downpayment of 20% of the principal, or $60,000, to avoid a PMI policy. Most new homeowners aren’t going to be able to pay that.
However, you could piggyback the loan between two lenders, opening a first and second mortgage simultaneously. You can leverage the second loan (or home equity loan) against the home’s value to cover the full downpayment and avoid paying the PMI on the primary mortgage.
If you use this method, prioritize paying off this loan first since secondary mortgages often have much higher variable interest rates.
4. Choose a Loan Type
Commonly, mortgage loans are 30-year fixed-rate loans. However, a 15-year fixed loan reduces the interest you’ll have to pay in addition to having a lower starting interest rate since the lender is at lower risk.
Alternatively, adjustable-rate mortgages (ARMs) offer low interest initially and then change the rate based on a set schedule. For example, suppose your ARM is a 7-1 loan. In that case, the interest will be recalculated after seven years based on the new market conditions.
Contact Your Community Bank to Learn More About Mortgage Financing
At Woodsboro Bank, we know that maneuvering through the mortgage financing process is stressful for first-time Maryland homeowners. Contact us today—our team of experts can help guide you through checking your credit, searching for a lender, and finding the right loan for your needs.