Mortgages 101 (Home Buying 2/6)

Meet Emily. Emily has been renting an apartment
with her wife Olivia for the past seven years. Recently, Olivia has made it clear to Emily
that she wants to move to the suburbs where there are better schools for their twin girls. Emily agrees with Olivia, and has just watched
our video “Rent or Buy a Home?”, and understands that buying a home is the right choice for
her. There’s just one problem: Emily can’t
afford to buy a house on her own. What should she do? Well, luckily for Emily, there exists a ready-made
solution to this problem: mortgages. Mortgages are just loans, and like most loans,
they offer Emily a fixed amount of money at a certain interest rate for a set period of
time. However, unlike most loans, mortgages come
in three distinct flavors: Fixed-rate, which have fixed interest rates.
ARM, which have adjustable interest rates. And hybrid ARM, which have fixed rates in
the beginning of the loan, and then adjustable rates by the end. Mortgages are also unique in the fact that
they’re always collateralized by a house, which the bank can take if Emily doesn’t
repay her loan. Finally, mortgages also come with three rather
unique expenses. The first is closing costs: a group of fees
charged by the lender when creating the loan. These fees generally range between 2 to 5%
of a home’s purchase price, but can be even more if you chose lower your loan’s interest
rate by buying what are called discount points, each of which are worth 1% of the loan balance. The second expense is property tax, which
is a tax based on a percentage of your home’s market value. For example, if your local property
taxes are 3%, and your home is worth about $100,000, you’d pay $3,000. The last expense is insurance, and it comes
in two forms. The first is homeowner’s insurance. This
insurance is required to get a mortgage, and will protect Emily in the event that her home
is damaged, or someone is injured on her property. For more details on this, be sure to check
out our video “Homeowner’s Insurance 101”. The second form of insurance is private mortgage
insurance, or PMI. This is a monthly fee lenders charge to offset the risk of the borrower
not repaying the loan. While that can get expensive, PMI is not a universal requirement;
as only those with less than a 20% down payment are forced to get it. But wait, hold up. What is a down payment? Well, generally when purchasing a home, lenders
will require people to use a combination of both their own money, called down payment,
and debt. For example, if Emily wanted to buy a house worth $100,000, and was asked
to put 20% down, she’d pay $20,000 and the lender would cover the rest. While this certainly sounds expensive: a 20%
down payment remains the gold standard in the industry for three good reasons:
One: You’re far more likely to be approved for a mortgage.
Two: You can avoid the monthly PMI fee. And three: Lenders will offer you a lower
interest rate. However, if Emily can’t afford a large down
payment, she can still apply for a FHA loan. These are loans issued by private lenders
but insured by the government, which translates into much lower credit score and down-payment
requirements, as little as 3.5%. Hopefully you and Emily now have a better
understanding of how mortgages work. Be sure to check out our next video, where you learn
how to actually get a house and a mortgage, and be sure to check out our website, where
you can find great real estate agents, mortgages, and more educational content.

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