Mutual of Omaha Mortgages Explained
- If you're thinking of buying a home or refinancing your current loan, a Mutual of Omaha mortgage could be the answer. Learn about the different options available.
A Mutual of Omaha mortgage can help you buy your dream home or get a better rate and payment on the home loan you already have. The following sections discuss the most important features of mortgages, including the different types available, the criteria to get approved and the things you should and shouldn't do before applying.
What Is a Mortgage?
A mortgage is a loan used to purchase or maintain a piece of real estate. The property serves as collateral, which means the bank or lender has a claim on the property as long as the loan is in force. If you default on the loan or fail to keep up your payments, the bank can either seize the property or place a lien on it.
If the bank seizes the property, it can sell it and use the proceeds to pay off the defaulted loan. If it places a lien, the bank can step in when you go to sell the property and claim a portion of the sale proceeds equal to the outstanding loan balance.
Because mortgages are secured by such a valuable asset, the lender has a lower risk than if it were issuing unsecured debt, such as a credit card. So, the lender doesn't need to charge high interest rates to compensate for risk. For this reason, mortgages tend to carry lower rates than other forms of debt.
What Are the Different Types of Mortgages?
Mortgages come in a lot of flavors. They can vary in how they're structured and what they're used for. The two biggest distinctions among mortgages are whether they have fixed rates or adjustable rates and whether they're used for purchases or refinances.
Fixed Rate Mortgage vs. Adjustable Rate Mortgage
One of the most important questions you can ask your Mutual of Omaha mortgage loan officer is whether the loan you're applying for is a fixed rate mortgage or an adjustable rate mortgage. Both have their pros and cons, and the best choice for you depends on your goals and preferences — in particular whether you prioritize security or flexibility.
A fixed rate mortgage is exactly what it sounds like: It's a loan where the rate of interest is fixed over the life of the loan. No matter what happens with federal interest rates, the housing market, the economy or any of the other factors that affect mortgage rates, your interest rate is secure and will never change if you have a fixed rate mortgage. It offers security and protection against market whims that may unfold in the future.
An adjustable rate mortgage (ARM) moves with the market. It is indexed to a benchmark rate, such as the federal funds rate or the London Interbank Offered Rate (LIBOR). When the benchmark rate moves up or down, your ARM will move with it. Compared to fixed rate mortgages, ARMs are often lower in the beginning — and many have initial fixed periods of 2, 3 or 5 years before resetting and becoming adjustable — but they come with greater risk down the road in the event of a rate spike.
Purchase vs. Refinance
A mortgage can be used to buy a house or to replace an existing home loan, a process known as refinancing. Homeowners typically refinance their mortgages because they believe they can get a lower rate or better terms or they want to cash out some equity in their home to pay off other debt or make home improvements.
A refinance loan that simply replaces an existing mortgage is called a rate-and-term refinance, but one that pulls equity out of the home is called a cash-out refinance. A cash-out refinance usually carries a slightly higher interest rate, as the borrower's reduced equity increases the risk to the lender.
Another type of mortgage is a second mortgage, also known as a home equity loan. This is a good option for borrowers who want to cash out equity but don't want to mess with their existing mortgage. A second mortgage provides a lump sum of cash, with the home's equity as collateral. It takes a subordinate position to the existing mortgage, meaning the second lender gets paid last if the borrower defaults. Because of this increased risk level, a second mortgage usually carries a higher interest rate than a first mortgage.
What Is Needed to Qualify for a Mutual of Omaha Mortgage?
Different lenders have different qualification criteria for different mortgage products. That said, lenders will always look at three factors:
- Your income. The lender wants to see that you have enough money coming in to make your mortgage payments and still meet the rest of your monthly obligations. If you are a salaried employee, you'll need to furnish W-2s to prove your income. If you are self-employed or an independent contractor, the lender will probably want to see 2 years of tax returns and possibly bank statements as well. They will calculate your debt-to-income ratio, and if it's above a certain threshold, you might struggle to get approved.
- Your assets. The lender will consider the value of your home (or the home you wish to purchase) as well as how much money you have in the bank, which is known as your cash reserves. Your requested loan amount cannot exceed a certain percentage of the home's value. The lender also wants to be sure you have the cash to meet the down payment requirements and cover closing costs.
- Your credit. This is a simple one. The lender will look at your credit score and the details of your credit report to gauge how likely you are to repay your loan and make your payments on time.
What Should a Borrower Not Do Before Applying for a Mortgage?
To maximize your chances of getting approved for a Mutual of Omaha mortgage, you should avoid the following when planning to apply for a home loan:
- Taking on additional debt. Remember, every dollar of debt you take on increases your debt-to-income ratio. Once this ratio crosses a certain threshold, you could be disqualified for certain mortgage products.
- Missing payments. The only thing worse to a lender than missed payments on a borrower's credit report are recent missed payments.
- Changing jobs. Lenders want to see stability in your employment history. A job change right before applying could throw up a red flag.
- Buying a new car. Don't make any major purchases — and especially don't make them using credit — until after your mortgage has closed, as this can negatively impact your borrower profile.
Learn More About a Mutual of Omaha Mortgage
A Mutual of Omaha mortgage can get you into the home you want at a competitive rate. But you should always be an educated consumer before making a major financial decision. A mortgage professional can help you get approved for the right loan product for your needs.