Home Buying Education

Understanding Mortgages

A mortgage is a loan used to purchase a home. You repay it over time with interest. The home serves as collateral for the loan.

Every mortgage includes:

• Loan amount (principal)
  
  

• Interest rate
  
  

• Loan term
  
  

• Monthly payment
  
  

Taxes and Insurance (often included in payment)

Common Mortgage Types

Conventional Loans

• Not government-backed
  
  

• Higher credit standards
  
  

• PMI required if under 20% down
  
  

FHA Loans

• Government-backed
  
  

• Lower down payments
  
  

• Flexible credit requirements
  
  

• Mortgage insurance required
  
  

VA Loans

• For eligible veterans/service members
  
  

• Often no down payment
  
  

• No PMI
  
  

USDA Loans

• Rural/suburban eligibility
  
  

• Income limits
  
  

• Low or no down payment
  
  

Fixed vs Adjustable-Rate Mortgages

Fixed-Rate Mortgage

• Same interest rate for life of loan
  
  

• Stable payments
  
  

Adjustable-Rate Mortgage (ARM)

• Rate changes after initial period
  
  

• Can increase later
  
  

Interest Rate vs APR

Interest Rate

Cost of borrowing the loan.

APR

Includes:

• Interest
  
  

• Certain fees
  
  

• Some closing costs
  
  

APR reflects the true loan cost

Down Payments

Typical Ranges:

• 0% – VA/USDA
  
  

• 3–5% – FHA/Conventional
  
  

• 10–20% – Reduced insurance
  
  

• 20%+ – No PMI
  
  

Higher down payments lower long-term costs

Mortgage Insurance

Private Mortgage Insurance (PMI)

• For conventional loans under 20% down
  
  

• Protects lender
  
  

• Can often be removed
  
  

FHA Mortgage Insurance

• Required on most FHA loans
  
  

• Often lasts much longer
  

Escrow

Escrow is a neutral account used to safely handle money during and after a home purchase.

Two common uses:

• During purchase — Holds earnest money and documents until closing

• After closing — Collects money monthly for property taxes and homeowners insurance

Escrow helps spread large annual costs into smaller monthly payments but increases the total monthly mortgage payment

Property Taxes

Property taxes are ongoing costs set by local governments to fund public services.

Key points:

• Based on your home’s assessed value

• Rates vary by location

• Paid once or twice per year

• Often included in your monthly payment through escrow

Taxes can increase over time, raising your monthly housing cost even if your loan rate stays the same

Closing Costs

Closing costs are one-time fees paid at the end of the home-buying process.

Typical range:

• 2%–5% of the home’s purchase price

Common costs include:

• Loan and lender fees

• Appraisal and credit report fees

• Title and settlement services

• Prepaid interest

• Initial escrow funding

Buyers usually pay most closing costs, though seller credits may sometimes apply

Credit Score Impact

Credit scores affect:

• Interest rate
  
  

• Approval
  
  

• Insurance costs
  

A higher score generally leads to lower premiums, while a lower score can increase insurance costs

Debt-to-Income Ratio (DTI)

Monthly debts ÷ Gross monthly income

• Example Scenario

  Gross Monthly Income (before taxes):

  • $4,000

  Monthly Debt Payments (minimum required payments only):

  • Car loan: $450

  • Student loan: $300

  • Credit card minimums: $150

  • Personal loan: $100

  Total Monthly Debts:

  • $450 + $300 + $150 + $100 = $1,000

    1000 ÷ 4000 = 0.25 (or 25% DTI)

Lower DTI improves loan strength

Banks vs Credit Unions vs Mortgage Brokers

Banks: Large institutions, wide products

Credit Unions: Member-owned, often lower fees

Brokers: Compare multiple lenders

Pre-Approval vs Pre-Qualification

Pre-Qualification: Estimate only

Pre-Approval: Verified and stronger

Homebuyer Education Courses

Some First-Time Homebuyers may be required or encouraged to complete a homebuyer education course, depending on the loan type or any down payment assistance programs being used. These courses are typically offered online through lenders, housing agencies, or state-approved providers and are designed to help buyers better understand the home-buying process and financial responsibilities.

Total Cost of Home Ownership

Includes:

• Mortgage
  
  

• Maintenance
  
  

• Repairs
  
  

• Utilities
  
  

• HOA fees
  
  

• Insurance changes
  

Common Home Buying Mistakes

Shopping Only by Monthly Payment

Focusing only on the monthly payment can hide the true cost of the home.

• Payments can be lowered by extending loan terms or increasing interest rates

• Taxes, insurance, and HOA fees may not be fully reflected upfront

• A lower payment does not always mean a better financial decision

Buyers should evaluate total housing cost, not just the payment.

Ignoring Maintenance and Repairs

Homeownership comes with ongoing upkeep costs that renters don’t face.

• Routine maintenance (roofing, HVAC, plumbing, appliances)

• Unexpected repairs can be expensive and urgent

• Older homes often require higher annual maintenance

A common rule of thumb is 1%–3% of the home’s value per year for maintenance.

Using the Maximum Approval Amount

Just because a lender approves a certain amount doesn’t mean it’s affordable.

• Approval is based on debt ratios, not lifestyle comfort

• Maxing out approval can leave little room for savings or emergencies

• Financial strain increases if income drops or expenses rise

Buyers should choose a price that fits their budget, not the lender’s limit.

Skipping the Home Inspection

Skipping inspections can expose buyers to serious financial risk.

• Inspections identify safety, structural, and system issues

• Hidden problems can cost thousands after closing

• Inspections provide negotiation leverage before finalizing the deal

An inspection is a relatively small cost compared to major repairs.

Not Comparing Lenders

Rates and fees vary significantly between lenders.

• Interest rates, fees, and loan structures differ

• Small rate differences can cost tens of thousands over time

• Comparing lenders can improve both upfront and long-term costs

Shopping multiple lenders often results in better loan terms.

Most home-buying mistakes come from rushing decisions or focusing on only one part of the process. Taking time to plan, compare, and understand the full financial picture leads to stronger long-term outcomes