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Loan term

A 30-year fixed-rate mortgage gives you much lower monthly payments, but you'll pay a lot more interest over the long run and will be making mortgage payments for a much longer time.

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A 15-year fixed-rate mortgage lets you pay off the loan in half the time and pay significantly less interest in the long run, but also requires higher monthly mortgage payments.

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Interest rate type

Fixed-rate financing means the interest rate on your loan does not change over the life of your loan. With a fixed rate, you can see your payment for each month and the total you will pay over the life of a loan.

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Variable-rate financing is where the interest rate on your loan can change, based on the prime rate or another rate called an index. With a variable-rate loan, the interest rate on the loan changes as the index rate changes, meaning that it could go up or down.

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Loan type

“Conventional” just means that the loan is not part of a specific government program. Conventional loans typically cost less than FHA loans but can be more difficult to get.

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FHA loans are loans from private lenders that are regulated and insured by the Federal Housing Administration (FHA), a government agency. The FHA doesn’t lend the money directly–private lenders do.

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For people who qualify, special loan programs can be more affordable than a conventional or FHA loan, so make sure to check to see if you are eligible.

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Understanding mortgages

Buying a home is exciting. It’s also one of the most important financial decisions you’ll make. Choosing a mortgage to pay for your new home is just as important as choosing the right home.

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The credit check is reported to the credit reporting agencies as an inquiry. Inquiries tell other creditors that you are thinking of taking on new debt. An inquiry typically has a small, but negative, impact on your credit score. Inquiries are a necessary part of applying for a mortgage, so you can’t avoid them altogether.

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Your credit reports and your credit scores are two different things. A credit report is a statement that has information about your credit activity and current credit situation such as loan paying history and the status of your credit accounts. Your credit scores are calculated based on the information in your credit report.

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A FICO® score is a particular brand of credit score. A credit score is a number that is used to predict how likely you are to pay back a loan on time. Credit scores are used by companies to make decisions such as whether to offer you a mortgage or a credit card. They are also used to determine the interest rate you receive on a loan or credit card, and the credit limit.

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Your credit score, as well as the information on your credit report, are key ingredients in determining whether you’ll be able to get a mortgage, and the rate you’ll pay.

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For most mortgages, lenders calculate your principal and interest payment using a standard mathematical formula and the terms and requirements for your loan.

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The difference between your principal and interest payment and your total monthly payment is that your total monthly payment usually includes additional costs like homeowners insurance, taxes, and possibly mortgage insurance.

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Usually not. Condo/co-op fees or homeowners’ association dues are usually paid directly to the homeowners’ association (HOA) and are not included in the payment you make to your mortgage servicer.

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Prequalification and preapproval both refer to a letter from a lender that specifies how much the lender is willing to lend to you, up to a certain amount and based on certain assumptions. These letters provide useful information, but are not guaranteed loan offers.

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Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.

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With a home equity loan, you receive the money you are borrowing in a lump sum payment and you usually have a fixed interest rate. With a home equity line of credit (HELOC), you have the ability to borrow or draw money multiple times from an available maximum amount. Unlike a home equity loan, HELOCs usually have adjustable interest rates.

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Applying for a mortgage

Adjustable-rate mortgages (ARMs) typically include several kinds of caps that control how your interest rate can adjust.

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For an adjustable-rate mortgage, the index is a benchmark interest rate that reflects general market conditions and the margin is a number set by your lender when you apply for your loan. The index and margin are added together to become your interest rate when your initial rate expires.

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If you are considering an ARM, make sure to read the terms carefully and ask lots of questions until you understand exactly how each of these features of the mortgage works.

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Yes. There's a limit on how much the lender can make you pay into escrow. An escrow account is not required for every loan. But it can be an important protection for you, because it helps make sure that money is there when you need it to pay taxes and insurance. Failing to pay taxes and insurance can be expensive and can cause lots of hassles.

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Yes, some lenders or mortgage brokers may offer you a loan that is advertised as having no lender fees or no closing costs.

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The form provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan. The Loan Estimate also gives you information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future.

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A Closing Disclosure is a five-page form that provides final details about the mortgage loan you have selected. It includes the loan terms, your projected monthly payments, and how much you will pay in fees and other costs to get your mortgage (closing costs).

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Use this tool to double-check that all the details about your loan are correct on your Closing Disclosure. Lenders are required to provide your Closing Disclosure three business days before your scheduled closing. Use these days wisely—now is the time to resolve problems. If something looks different from what you expected, ask why.

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Some mortgage costs can increase at closing, but others can't. It is illegal for lenders to deliberately underestimate the costs on your Loan Estimate. However, lenders are allowed to change some costs under certain circumstances.

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An appraisal is a written document that shows an opinion of how much a property is worth. The appraisal gives you useful information about the property. It describes what makes it valuable and may show how it compares to other properties in the neighborhood. An appraisal helps assure you and your lender that the value of the property is based on facts, not just the seller’s opinion.

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It is very risky to purchase a home for more than the appraised value.

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A survey is a drawing of your property showing the location of the lot, the house and any other structures, as well as any improvements on the property.

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Owner’s title insurance provides protection to the homeowner if someone sues and says they have a claim against the home from before the homeowner purchased it.

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Lender’s title insurance protects your lender against problems with the title to your property-such as someone with a legal claim against the home. Lender’s title insurance only protects the lender against problems with the title. To protect yourself, you may want to purchase owner’s title insurance.

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Homeowner’s insurance pays for losses and damage to your property if something unexpected happens, like a fire or burglary. Standard homeowner’s insurance doesn’t cover damage from earthquakes or floods, but it may be possible to add this coverage. Homeowner's insurance is also sometimes referred to as "hazard insurance."

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No. You may shop for property or flood insurance. But if you do not get homeowner’s insurance, or let your policy lapse, your lender may insure your property and charge you for it. This is called force-placed or collateral protection insurance. It is usually much more expensive than a regular policy. A lender may also buy force-placed flood insurance for homeowners in flood zones who do not have adequate flood insurance to meet the legal minimum required to protect the property.

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A lock-in or rate lock on a mortgage loan means that your interest rate won’t change between the offer and closing, as long as you close within the specified time frame and there are no changes to your application.

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An escrow account, sometimes called an impound account depending on where you live, is set up by your mortgage lender to pay certain property-related expenses.

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Generally, points and lender credits let you make tradeoffs in how you pay for your mortgage and closing costs. Points, also known as discount points, lower your interest rate in exchange paying for an upfront fee. Lender credits lower your closing costs in exchange for accepting a higher interest rate.

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An annual percentage rate (APR) reflects the mortgage interest rate plus other charges.

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Private mortgage insurance, also called PMI, is a type of mortgage insurance you might be required to pay for if you have a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender—not you—if you stop making payments on your loan.

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Mortgage insurance lowers the risk to the lender of making a loan to you, so you can qualify for a loan that you might not otherwise be able to get.

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Federal law provides rights to remove PMI for many mortgages under certain circumstances. Some lenders and servicers may also allow for earlier removal of PMI under their own standards.

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Closing on a mortgage

Make sure you’re prepared for each step of the closing. Follow the steps below, and download closing checklist.

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Before closing on a mortgage, you can expect to receive documents required by state and federal law and contractual documents.

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It depends. Depending on your state’s laws, you may not be required to have an attorney at the closing.

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If you’re buying a home, you should expect to see the following people at closing:

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The closing is the last step in buying and financing a home. The "closing, also called settlement, is when you and all the other parties in a mortgage loan transaction sign the necessary documents.

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Maintaining a mortgage

Your mortgage lender is the financial institution that loaned you the money. Your mortgage servicer is the company that sends you your mortgage statements. Your servicer also handles the day-to-day tasks for managing your loan.

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If your loan is sold, then your lender must provide you with a loan ownership transfer notice. Just because your loan is sold does not mean that your servicing right is sold and that you will get a new servicer.

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You can send a written request to your servicer asking for information about the identity of the mortgage loan note holder. The servicer is obligated to provide you, to the best of its knowledge, with the name, address, and telephone number of the owner of your loan. In addition, whenever the owner of your loan transfers it to a new owner, the new owner is required to send you a notice telling you its name, address, and telephone number, along with other information.

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Yes. One reason may be that you have an adjustable rate loan. In this type of loan, the payments can go up or down, based on the terms of the agreement that you signed. Even if you have a fixed rate loan, your payments may change if you are paying your taxes and insurance through an escrow account maintained by your servicer.

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If you’re having problems with your escrow or impound account, contact your mortgage servicer right away. You may need to send an information request or notice of error.

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The amount you borrow with your mortgage is known as the principal. Each month, part of your monthly payment will go toward paying off that principal, or mortgage balance, and part will go toward interest on the loan. Interest is what the lender charges you for lending you money.

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Most mortgage contracts include a grace period, after which time the loan servicer charges a late fee.

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If you think your mortgage servicer has made an error or you need information about your mortgage loan, you can call or write a letter to your servicer. You may get more protections if you write a letter.

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The legal foreclosure process generally can’t start during the first 120 days after you’re behind on your mortgage. After that, once your servicer begins the legal process, the amount of time you have until an actual foreclosure sale varies by state.

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Generally, if you have an adjustable-rate mortgage (ARM), your mortgage servicer is required to send you an estimate of your new payment.

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You should send a notice of error, which is a letter to your servicer disputing the error and explaining the issue.

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Make sure you have your own homeowner’s insurance and send proof to your mortgage servicer.

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Send a notice of error to your servicer and contact your tax authority and insurance carrier as soon as possible.

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Your payoff amount is how much you will actually have to pay to satisfy the terms of your mortgage loan and completely pay off your debt. Your payoff amount is different from your current balance.

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State property records will show whether your lien is released. You can find information on property records by contacting your local Secretary of State or county recorder of deeds.

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