Mortgage Options

Some lenders require 20% of the home’s purchase price as a down payment. However, many lenders now offer loans that require less than 20% down — sometimes as little as 5% on conventional loans. If your down payment is less than 20%, lenders usually require the homebuyer to purchase private mortgage insurance (PMI) to protect the lender in case the homebuyer fails to pay.

When government-assisted programs like FHA(opens new window) (Federal Housing Administration), VA(opens new window) (Veterans Administration), or Rural Development Services(opens new window) are available, the down payment requirements may be substantially smaller. Ask about the lender’s requirements for a down payment, including what you need to do to verify that funds for your down payment are available. Ask your lender about special programs it may offer.

If PMI is required for your loan

• Ask what the total cost of the insurance will be.
• Ask how much your monthly payment will be when the PMI premium is included.

When buying a home, remember to shop around, to compare costs and terms, and to negotiate for the best deal. Mortgages can have many different features, including:

• fixed interest rates or adjustable interest rates;
• payment adjustments that can cause your payment to increase;
• interest payments only which are set for an specific period and will not reduce the principal of the loan during such term;
• penalties for paying the loan off early (federal credit unions are prohibited from charging prepayment penalties); and
• a large payment due at the end of the loan (a balloon payment).

The mortgage shopping worksheet(opens new window) could also help you compare between loan programs to ease your decision and what mortgage fits your needs best. Take it with you when you speak to each lender or broker and use it to take notes on the loan information.  Let the lenders know you are shopping for the best deal so they know they are competing for your business. Lenders will provide you with various disclosures, some of which may be given to you at the time you are discussing their various loan products and costs. 

Consider asking for an initial amortization schedule for the life of the loan based on the features of any loan product you might be interested in. Once you are ready to buy a home, consult your credit union about competitive interest rates and to find out about your mortgage options, including the term of the loan and the conditions.

The Federal Trade Commission provides the following glossary to help consumers make informed lending decisions.

Adjustable-rate mortgage (ARM) — A mortgage that does not have a fixed interest rate. The rate changes during the life of the loan based on movements in an index rate, such as the rate for Treasury securities or the Cost of Funds Index. ARMs usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates increase, generally your loan payments increase; when interest rates decrease, your monthly payments may decrease. For more information on ARMs, see the Consumer Handbook on Adjustable Rate Mortgages.

Annual percentage rate (APR) — The cost of credit expressed as a yearly rate. For closed-end credit, such as car loans or mortgages, the APR includes the interest rate, points, broker fees, and certain other credit charges that the borrower is required to pay. An APR, or an equivalent rate, is not used in leasing agreements.

Conventional loans — Mortgage loans other than those insured or guaranteed by a government agency such as the FHA (Federal Housing Administration), the VA (Veterans Administration), or the Rural Development Services (formerly known as the Farmers Home Administration or FmHA).

Escrow — The holding of money or documents by a neutral third party before closing on a property. It can also be an account held by the lender (or servicer) into which a homeowner pays money for taxes and insurance.

Fixed-rate loans — Loans that generally have repayment terms of 15, 20, or 30 years. Both the interest rate and the monthly payments (for principal and interest) stay the same during the life of the loan.

Interest rate — The price paid for borrowing money, usually stated in percentages and as an annual rate.

Loan origination fees — Fees charged by the lender for processing a loan; often expressed as a percentage of the loan amount.

Lock-in — A written agreement guaranteeing a homebuyer a specific interest rate on a home loan provided that the loan is closed within a certain period, such as 60 or 90 days. Often the agreement also specifies the number of points to be paid at closing.

Mortgage — A contract, signed by a borrower when a home loan is made, that gives the lender the right to take possession of the property if the borrower fails to pay off, or defaults on, the loan.

Overages — The difference between the lowest available price and any higher price that the homebuyer agrees to pay for a loan. Loan officers and brokers are often allowed to keep some or all of this difference as extra compensation.

Points (also called discount points) — One point is equal to 1 percent of the principal amount of a mortgage loan. For example, if a mortgage is $200,000, one point equals $2,000. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages to cover loan origination costs or to provide additional compensation to the lender or broker. Points are paid usually on the loan closing date and may be paid by the borrower or the home seller, or split between the two parties. In some cases, the money needed to pay points can be borrowed, but increases the loan amount and the total costs. Discount points (sometimes called discount fees) are points that the borrower voluntarily chooses to pay in return for a lower interest rate.

Private mortgage insurance (PMI) — Protects the lender against a loss if a borrower defaults on the loan. It is a payment usually required of a borrower for loans in which a down payment is less than 20 percent of the sales price or, in a refinancing, when the amount financed is greater than 80 percent of the appraised value. When you acquire 20 percent equity in your home, PMI is cancelled. Depending on the size of your mortgage and down payment, these premiums can add $100 to $200 per month or more to your payments.

Settlement (or Closing) costs — Fees paid at a loan closing. May include application fees; title examination, abstract of title, title insurance, and property survey fees; fees for preparing deeds, mortgages, and settlement documents; attorneys’ fees; recording fees; estimated costs of taxes and insurance; and notary, appraisal, and credit report fees. Under the Real Estate Settlement Procedures Act, the borrower receives a “good faith” estimate of closing costs within three days of application. The good faith estimate lists each expected cost either as an amount or a range.

Thrift institution — A term generally describing savings banks and savings and loan associations.

Buying a home is the largest investment most Americans will make. A mortgage loan is also one of the most complex, most expensive financial commitments you may ever make, and it's okay to ask for help. Talk with a trusted housing counselor or a real estate attorney that you hire to review your documents before you sign them. You can find a list of counseling resources at NeighborWorks(opens new window) and on the U.S. Department of Housing and Urban Development's (HUD)(opens new window) website or by calling (800) 569-4287.

The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant’s income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act.

The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin. Under these laws, a consumer may not be refused a loan based on these characteristics nor be charged more for a loan or offered less-favorable terms based on such characteristics.