Are you interested in obtaining a mortgage on a house you currently own? It is possible to get a mortgage on your home. We’re here to help answer your questions.
What We'll Cover
- How to Get a Mortgage on a House You Already Own
- Get Your Home Appraisal
- File your Mortgage Application
- What are the Different Types of Mortgages?
- What is a Home Equity Line of Credit?
- Is an Adjustable Rate Mortgage Different than an Interest Only Mortgage?
- What About Reverse Mortgages, or HECM? What Are They?
- Reverse Mortgages Cost More
- What is a Second Mortgage?
- Thinking of Refinancing a Mortgage
- Things Take into Consideration
Knowing you can use your house as collateral for a loan is one thing. But what do you need to do to get the loan? This article will help you through the process of obtaining a mortgage and more.
How to Get a Mortgage on a House You Already Own
Getting a mortgage can be a timely process. But you might be able to have it go faster if you know exactly what you need when you apply for your loan. Homeowners who already own their home and do not owe money on it are more likely to get the loan they apply for.
This is especially true when you also have a verifiable income, and your credit is in good standing.
Interview Mortgage Lenders
You will need to find a lender. There are many resources available. Here are a few places you should check:
- Visiting your bank
- Check other Banks and Credit Unions
- Sometimes you can find mortgage lenders online
Interview prospective lenders to make sure they are the right resource for you. Be prepared when you speak with them, by bringing a printed list of questions. Things you should ask are
- What types of mortgages are offered?
- What do they believe is the best mortgage for you?
- Ask for an estimate of what they can lend you?
- What interest rate do they charge?
- What is the Annual percentage rate?
- What is included in the monthly payment?
- Can they break down the different fees so you can clearly see what is being paid off?
- Is there a penalty for early payoff?
Think of any other questions you may have, or research common questions online. Do not hesitate to ask the prospective lenders questions if you do not understand something, or if something doesn’t look right. Write down their answers to help you remember and to help you make an informed choice.
Gather the Necessary Documents
You will need to collect your documents to share with your proposed lender. These will include:
- Tax returns
- Proof of all income, including pay stubs and W2 forms
- Rental history
- Photo Identification
- Statements from you banks
- Assets including
- Physical assets such as property, vehicles, boats, expensive jewelry, art collections
- Non-physical assets include bonds, stocks, 401k
- Liquid assets
- If you receive a fixed income be sure to bring proof of this
- Gift letters from persons who have given you money to help you purchase your home. Have the person write a letter documenting the monetary gift.
- Credit report
- Home Appraisal
Credit Scores are Important when Applying for a Mortgage
Your credit score tells the lender how you deal with the responsibility of money and paying back a debt. If you have good to excellent credit, you should be able to get a mortgage up to 80% of your home's retail value. Some smaller banks may even determine the amount of the loan to be equal to the value of your house.
To obtain a free credit score, you can
- Ask your bank if they offer a free credit report. “Some banks offer benefits designed to help you understand and improve your credit score,” claims Investopedia.
- Visit Annual Credit. According to the Federal Trade Commission's consumer report, Annual Credit allows consumers to access their credit reports for free weekly through April of 2021.
The better your credit and employment history, the more likely you will be to obtain a mortgage. This doesn’t mean you won’t be able to get a loan if you have a lower rating or with no credit history, but your interest rates will most likely be higher with a lower score, and your loan amount will most likely be less.
Get Your Home Appraisal
For your lender to give you a home mortgage, they need to know the value of your home to make an informed decision on the amount of your loan.
If the lender loans more than your house is worth, they risk losing money. So, you will always be required to have a home appraisal. This appraisal is an unbiased estimate by a professional appraiser familiar with the neighborhood and current housing market of the area.
Find your appraiser by
- Asking banks for their list or if they would recommend a property appraiser. Most banks will have a list of reputable property appraisers.
- You could also ask friends and neighbors in the area for recommendations.
- Do a quick online search for local house and property appraisers. Make certain the appraiser you choose is licensed. You can check their credibility by searching the Better Business Bureau
Home Appraisals Cost Money
It costs money to have your home appraised. According to Bank Rate, a home appraisal could cost $300 to more than $800, depending on the property's type and size.
File your Mortgage Application
Once you have found your lender, you can fill out your mortgage application. It can take several months for your mortgage to be approved. However if you have every detail ironed out the process could be much quicker.
Most lenders use the same mortgage application form called the 1003 residential mortgage application. Fanny Mae has links to the 1003 forms.
Your lender will give you a pre qualification letter expressing a rough estimate of how much they plan to loan you. This could take a few days to a couple of months. Your final approval letter should show up a couple of weeks later.
What are the Different Types of Mortgages?
There are at least 8 types of home mortgages. Of these three are the most likely choices for a currently owned home. Each type of mortgage represents a different intended agreement between the lender and the consumer.
- HELOC: Home Equity Line of Credit
- Home Equity Loan
- IOM: Interest Only Mortgage
- ARM: Adjustable Rate Mortgage
- HECM: Home Equity Conversion Mortgage
What is a Home Equity Line of Credit?
A home equity line of credit is for a homeowner who wishes to use their home as a line of credit. It is similar to how a credit card works. You are approved for a certain amount of your home's value. Then your lender will either
- Link your bank account to your equity credit
- Cut cheques as you need/ request them
- Link your equity credit to a credit card
You are able to use this line of credit for various needs. However, you do not need to use the entire amount you are approved for. As a line of credit, you are able to withdraw multiple amounts at different times.This draw period is usually 10 years, followed by the repayment period of 10 years, according to the US Bank. If you do not use all of the money, you were approved for; you only repay what you actually used plus interest.
When repaying the line of credit, you use you have the option to pay back all of what you used or make minimum monthly payments. These payments include the interest rate, which can fluctuate with a HELOC.
If you are looking into a HELOC, you will need a credit score above 620. You will also need to have less debt than the value of your house (your equity), and have verification of sufficient income.
Do use caution as a home equity line of credit can be frozen by your lender should they decide the value of your home has decreased or feel your finances have been compromised, and you would not be able to repay.
Using a home equity line of credit calculator can help you find out how much you may be able to borrow, as well as how much your monthly payments may be.
HELOCs are available for homeowners who own their home outright, as well as for homeowners who have an existing mortgage that is not greater than the value of the house.
Home Equity Loans are Different than HELOC’s
A home equity loan is different from a Home equity line of credit. It is an amortization loan, this means that you will have fixed monthly payments that are divided into paying your loan and the percentage rate of the loan. The percentage rate is what your lender gets paid for loaning you money.
With a Home Equity loan, you will receive a lump sum of cash based on the equity of your property. The interest rate is a set rate and should not change over time.
Though the home equity loan can be used for most anything, most people use their loan to:
- Make repairs on their home
- Remodel the house
- Build a new structure
- Need a large sum of money for something else.
If you do not need a large amount of money, or you are looking for a loan to help make ends meet, you should reconsider. If you are not able to repay your loan, the lender can foreclose on you and take your home.
The Interest Rate Only Mortgage is not for Everyone
An interest rate mortgage is often applied for by homeowners who have plenty of money and assets. Therefore they are not concerned about the inability to repay the loan. Lenders will require a high credit score of more than 700 before they will give an interest only loan.
With an interest only loan, you are given a lump sum and then make payments on only the interest of your loan, not the loan amount itself. It is a short term loan of 5 to 10 years, and after paying the lower interest rates you will have to make much higher payments to pay off the money you borrowed.
Is an Adjustable Rate Mortgage Different than an Interest Only Mortgage?
Interest only mortgages are the same as adjustable rate mortgages in the sense that the loan will have a fluctuating interest rate after a block time where the interest rate remains the same. The difference is the length of time of the loan.
With an adjustable rate loan, you could choose a long term loan beyond 10 years, whereas an interest only loan is for short term loans of usually 5 to 10 years.
Investopedia gives this example, “ a 2/28 ARM features a fixed rate for 2 years followed by a floating rate for 28 years.” A fluctuating interest rate could be a gamble. Some years it might be lower, others higher. For this reason, an ARM could be good for those who will pay off the loan during the fixed rate period, or those that a fluctuating interest rate will not affect.
What About Reverse Mortgages, or HECM? What Are They?
You see the ads on the television for American Advisory Group, or AAG, all the time. These ads target those who are 65 years or older. The idea sounds fascinating. Using the equity of your home to stabilize your retirement plan and ensure you have the money to do what you enjoy doing?
Home equity conversion mortgage is a reverse mortgage. The home equity conversion mortgage is the only mortgage insured by the federal government. It is still a loan and only available through the Federal Housing Administration.
It is much like a home equity line of credit or a home equity loan and is designed for individuals of retirement age. Reverse mortgages can offer you a direct line of credit or a lump sum of money.
The amount you are able to obtain depends on the free equity you have in your home. If you have a mortgage you are still paying on the amount you are able to borrow will be based on what percentage you no longer owe.
If you own your home outright and do not owe any money on it the amount of your loan could be much more. The draw to a reverse mortgage is that you do not have to repay your loan so long as you reside in your house.
Reverse Mortgages Cost More
However, these home equity conversion mortgages are expensive. AARP notes that
- Interest rates are higher. The more money you withdraw plus the longer you wait to repay, the more interest you will owe.
- You will be required to have mortgage insurance.
- Other fees include origination fees and closing costs, which the government has placed a cap on the amount these fees, and lenders can not charge more than $6000.
- You will also be required to pay service fees on your loan
- You will also be required to take reverse mortgage counseling
Other Types of Reverse Mortgages
There are three types of reverse mortgages. The SPRM or single purpose reverse mortgage is good for people in the medium to low income bracket. This type of reverse mortgage is
Only available for a single purpose such as home repairs. These are available in a few state and local government agencies. They are not as expensive as
Proprietary reverse mortgages, also known as jumbo reverse mortgages, are another type of reverse mortgage. These are offered through private lenders. The proprietary loan is not federally insured and usually a little easier to get because of this.
However, there is not a large market for proprietary mortgages as many lenders will steer clear of them since the 2008 housing crisis when too many home loans and little government regulations caused the boom and collapse of the housing market. Thus, we now have the new regulations for the HECM loans.
- Proprietary mortgages can offer a higher loan amount than HECM loans, because they do not have the same caps on the amount they can lend.
- These mortgages do not require the borrower to have mortgage insurance, or to attend counseling to get the loan
What is a Second Mortgage?
A second mortgage, also known as a junior lien, is for those homeowners who already have an unpaid loan balance against their home. These are often Home equity Loans or Home Equity Line of credit loans.
The meaning of second mortgage is should your home be repossessed and sold, the second mortgage will be paid second after the initial mortgage. These often carry a higher percentage rate than the first mortgage, as people obtain a second mortgage to pay for the debt they have accumulated.
In reality, you do not pay off the debt by taking out more loans. Your debt continues to accumulate, and you are at higher risk of default with it.
Thinking of Refinancing a Mortgage
If you have a mortgage with a high percentage rate or a fluctuating percentage rate, you may be able to apply for a refinanced loan. The refinanced loan replaces the current mortgage.
- You have to apply for a new home loan
- You choose the interest rate and loan terms
- The new mortgage pays off the old mortgage then you begin paying on the new home loan.
This can help you pay your home off faster, or you might be able to use extra money from the new loan for other expenses.
Things Take into Consideration
Why do you want to obtain a mortgage? Getting a mortgage to help you pay for large projects such as home improvement, or unexpected hospital expenses are good reasons to consider taking out a loan. However, if you are just having trouble making daily ends meet, you may want to reconsider and find another way.
When you take out a mortgage, or a second mortgage, you are compounding any debt you already have. Make certain the extra debt is not going to be too much for you to handle. Try to find the lowest interest rate possible. You can use a Mortgage calculator to help you.
Not all lenders or mortgages are the same. Always read the fine print, ask questions and search for the lender who will do best for you. Watch out for lenders who try to have you pay more than you know you are able to. Be wary of deceptive mortgage ads. FTC says to watch for “buzz words” such as “Mortgage rate near 30-year lows!” or “low fixed rate.”