Understanding Mortgages is necessary, and a safe bet to secure yourself in making the right decisions when getting a home loan. By the end of this article, you’ll understand everything you need to know about mortgages in plain, simply.
What Exactly Is a Mortgage, Anyway?
Think of a mortgage like the money you borrow to buy a house – except in this case, from any financial institutions that lends people money. It’s basically a super-sized loan that lets you buy a home without having all the money upfront. You will then agree to pay it back over time, most likely with interest.
The thing is, most of us don’t have hundreds of thousands of dollars sitting in our bank accounts to pay for a house outright. This is where the mortgages come in – they are ticket to our homeownership except without winning the lottery first!
Breaking the Basic Parts of a Mortgage
Let’s break down what makes up a mortgage in everyday terms:
- Principal: This is the actual amount you’re borrowing. If you’re buying a $300,000 house and put down $60,000, your principal would be $240,000.
- Interest: This is what you pay the bank back for the money you were borrowed. Think of it as the “thank you” fee for letting you borrow such a large amount.
- Down Payment: This is the money you pay first. It’s like your skin in the game – showing the bank you’re serious about really owning a house.
- Term: How long you’ll be paying back the loan. Most people go for 30 years, but 15-year terms are also popular if you want to pay it off faster.
Types of Mortgages (Because One Size Doesn’t Fit All!)
In fact, there are different types of mortgages. Let me walk you through the main ones:
Fixed-Rate Mortgages
In analogy, this like ordering the same meal at your favorite restaurant every time – you know exactly what you’re getting. Your interest rate will stay the same for the entire loan period. If you start at 4%, you’ll end at 4%. No surprises to you!
The good stuff about fixed-rate mortgages:
- Your monthly payment never changes
- Easy to budget and you get to plan for the future, no surprises.
- Great when interest rates are low
The not-so-good stuff:
- Usually have higher interest rates than adjustable-rate mortgages to start
- If the rates drop significantly, you will have to refinance to take advantage
Adjustable-Rate Mortgages (ARMs)
These are more like trying the chef’s special – it might be amazing, however there’s some uncertainty involved. Your rate will start low but can vary time to time.
The good stuff about ARMs:
- Lower initial interest rates
- Possibly save money if rates climb low
- Good if you plan to move before the rate adjusts
The not-so-good stuff:
- Monthly payments can increase if rates go up
- Hard planning long-term
- Can be risky if rates rise significantly
Let’s Talk About Down Payments (The Big Upfront Chunk)
Remember when I mentioned down payments? Let’s dig deeper into this topic because it’s super important.
Traditional wisdom says you will have to put 20% down to buy a house. But here’s a secret: while 20% is nice, it’s really not in particular. Here’s what you should know:
If you put down 20% or more, You’ll:
- avoid paying PMI (Private Mortgage Insurance)
- have lower monthly payments
- likely get better interest rates
- start with more equity in your home
If you put down less than 20%, You’ll:
- probably need to pay PMI
- need to pay higher monthly payments
- need to deal with the possibility of paying slightly higher interest rates
- also enjoy getting into a home sooner!
The Application Process (Don’t Let It Scare You!)
Applying for a mortgage isn’t as scary as it might seem. Here’s what you’ll need to do, step by step:
Get Your Documents Together
You’ll need:
- Pay stubs from the last few months.
- W-2s and tax returns from the past couple of years.
- Bank statements.
- Information about your assets and debts.
- Your ID and Social Security number.
Check Your Credit
- Your credit score matters… a lot.
- Higher scores = better interest rates.
- Lower scores = higher rates or possible rejection.
- Aim for a score of at least 620, but 740+ is ideal.
Shop Around
- Don’t take the first offer you get.
- Compare rates from at least 3-4 lenders.
- Look at both big banks and local credit unions.
- Consider using a mortgage broker.
Hidden Costs
When creating budgets for your mortgage, remember there’s more to it than just principal and interest. Here are some other costs to keep in mind:
Property Taxes
- Vary with location
- Usually paid for as part of your monthly mortgage payment
- Possibility of increment over time
Insurance
- Homeowner’s insurance is required
- Flood insurance might be needed depending on location
- PMI if your down payment is less than 20%
Maintenance and Repairs
- Plan to save 1-2% of your home’s value annually
- Emergency repairs don’t care for your budget!
- Regular maintenance prevents bigger issues
Tips for Getting the Best Deal
Here are some insider tips to help you get the best possible mortgage:
Boost Your Credit Score Before Applying
- Pay down credit card balances
- Don not open new credit accounts
- Check your credit report against errors
Save More Than You Think You Need
- Down payment
- Closing costs
- Moving expenses
- Emergency fund
Time Your Purchase Right
- Interest rates are usually lower in winter
- Housing prices also usually drop in fall/winter
- Less competition during off-peak seasons
Red Flags to Watch Out For
Not all mortgages are created equal. Here are some warning signs to watch out for:
Prepayment Penalties
- Fees for paying off your mortgage early
- Expensive Refinancing
Try to avoid these if possible:
Balloon Payments
- Large payments due at the end of the loan
- Can be risky if you’re not prepared
- Usually best to avoid unless you have a specific strategy in mind
“Too Good to Be True” Interest Rates
- Super low rates might have catches
- Read the fine print carefully
- Ask lots of questions
The Bottom Line
Getting a mortgage should not be to complicated or scary. Yes, it’s big commitment, but also, your path to homeownership. Remember:
- Take your time and do your research
- Don’t be afraid to ask questions
- Shop around and check for the best rates
- Read everything before signing
- Get professional help if thought necessary
Mortgage could be thought of as a tool, and like a tool, it can be helpful when used correctly. The key is understanding the way it works and using it wisely to your advantage.
Now that the basics is grasped, you’re better prepared to purchase a house via a mortgage. Remember, everyone was a first-time homebuyer once, and millions of people successfully navigate this process every year. You’ve got this!
Have questions? Your local mortgage professional or real estate agent would be happy to help you understand more about your specific situation. After all, these basics apply on everyone, your perfect mortgage solution will depend basically on unique circumstances. Bet smart, Be Smart.
