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Mortgages 101: 4 Things To Know

Homeownership is one of the primary goals of most people nowadays. There are many ways in acquiring a perfect home. You just need to be very cautious about it because there are several factors that you need to consider and process to go through. One of the ways is taking out a mortgage. The entire process of this can be quite technical as you need to sign lots of documents and you'll have to come across with complex terms. You might end up being quite confused and frustrated in the long-run if you're not familiar with the process.

If you've been experiencing such an issue, you've come to the right place. Here's an ultimate guide to help you understand every vital detail you should know about mortgages. 

  1. What Is A Mortgage? 

Before diving even further and knowing essential details you should know about the mortgage, you must first understand what it is. Mortgage is a loan that you take with an intention to buy land or property. Most mortgages loan terms run for 25 years, it can either be longer or shorter than this. The loan's security is your home. Once you've completed the payments, you can be sure that your property isn't repossessed by your lender. 

Mortgages have three parts which are:

  • The Down Payment: This is an up-front sum of money you're required to pay to get the mortgage. Ideally, it's best to pay a larger down payment as this will improve the loan's terms and conditions. This means you get to pay less fees, lower mortgage interest rate, and your home's equity rises faster. 
  • The Fees: These are the different costs you'll need to pay to acquire the loan. 
  • The Monthly Payment: This is the payable amount throughout the entire loan's duration including the principal and interest. The monthly bill also includes property taxes as well as other fees.

Understanding the different parts of the mortgage is essential to help you understand what you're paying and where your money goes. It'll also help you decide whether you'll go for the performing vs. the non-performing notes which will be the terms you'll agree with the lender. 

        2. How’s Your Budget? 

When trying to secure a mortgage, it's essential to consider your income since the last thing you want is borrowing more than you can afford. Mortgage lenders also closely observe this as they don't want a situation where you can't fulfill your promise or to settle your dues.  The crucial items you should consider to determine your budget include; 

  • Mortgage principal 
  • Mortgage interest
  • Repair expenses 
  • Property taxes 
  • Mortgage and homeowner insurance 
  • Utilities such as water, electricity, cable, gas and internet

In addition to these, you need to determine the amount you'll pay for your down payment. It's crucial to do this as it decides your monthly payments. You need to know how's your income and how you can budget it. 

        3. What are the Different Types of Mortgages? 

There are two different kinds of mortgages:

  • Fixed-Rate Mortgage: These mortgages come with a fixed interest rate throughout the mortgage payment duration. it the uncertainty associated with the real estate market, fixed-rate mortgages are ideal as the is always constant even there were changes in the market. You should aim to get an interest rate that's at the lowest possible level. 
  • Adjustable-Rate Mortgage: For this type of mortgage, the interest rate changes from one year to another. The interest payable varies depending on the prevailing interest rates. Therefore, you need to be cautious when the interest rates are high and to take advantage when they're low. Some adjustable-rate mortgages are a hybrid of fixed-rate mortgages and adjustable-rate mortgages. For instance, the interest rate might be set at 5% for four years, after which the lender can adjust these rates accordingly depending on the market conditions. 

Before deciding which of these types of mortgages best works for you, make sure to examine each of them closely. This way, you'll be in an excellent position when you find out which one best suit your needs. 

        4. Understand the Mortgage Terms

The entire process of buying a house on a mortgage can be quite intimidating as there are several technical terms you'll encounter during this process. And to ease your worries and make these concerns less daunting, you should familiarize yourself with a few vital mortgage terms. These include; 

  • Appraisal: The process where an independent party comes to assess the home's fair market value. To determine this, the appraiser will consider the recent sales of similar property in recent years and their attributes. Having the home appraised is crucial as you don't want to pay the lender more than the home's actual market value. 
  • Amortization Schedule: This refers to the interest and the principal amount paid each month throughout the loan's entire period. 
  • Loan Term: This is the duration within which you're required to pay back the interest and principal amount. Many of the loan terms range between 8 to 30 years. 
  • Loan-To-Value: This is a metric that the lender uses to determine whether you're eligible for the loan. Usually, loan programs come with a maximum LTV calculated based on how much money you're borrowing that will be divided your property's value. 

Takeaway

If you desire to own a dream home but don't have the cash to pay for it, you should consider taking out a mortgage. But before doing that, there are several things you first need to consider such as the budget that you have. Familiarizing yourself with mortgages will help you choose which type will best suit you. Highlighted above are essential details you need to know about before you get a mortgage.