While it has become somewhat cliché, it cannot be understated that buying a home is probably the most important – and in most cases the largest – financial move that a person will make in their lifetime. Having said that, it is no wonder that finding the right mortgages, especially for first time buyers, can be overwhelming.
Many banks might want to simplify it for you, having you view this enormous loan in terms as simple as a monthly payment. But not having an understanding of how your mortgage works, and especially how your interest is calculated, can end up costing you tens of thousands of dollars – or more.
Interest Rates and Amortization
The interest rate on your mortgage will be the biggest contributor to your monthly payment. Based on a 25 year amortization and a $236,000 house, a seven percent interest rate will give you a monthly payment of $1652.99. Cut the rate to four percent and you will be paying $1241.41 per month. That is a difference of nearly $5000 per year.
With today’s historically low interest rates, you could be paying as little as 2.5%, so it is vital that you shop around and negotiate for the best interest rate possible. The following factors are going to determine how attractive your rate will be:
- Your credit score.
- Your current debt load.
- Your income.
- Your down payment.
Amortization is another factor that will contribute to your monthly payment. Amortization means the amount of time your loan repayment schedule is spread out over. A 30 year amortization period will mean significantly lower payments than a 20 year period. But, with a longer amortization period, you will end up spending much more on interest in the long run.
These mortgage variables will influence how much you pay for a house, regardless of the sale price of the home. There are m any useful mortgage calculators available online; take advantage of them and negotiate the best mortgage that works for you.
What is a Home Mortgage Loan?
A home mortgage loan, commonly referred to simply as a “mortgage”, is a loan taken out on the purchase of a home. Since the vast majority of people do not have the necessary cash on hand to purchase a home outright, banks offer loans that are secured with the property that is being purchased.
The property offers security to the bank in the event that the borrowers are unable to fulfill their repayment obligations. Should this happen, the mortgage will go into foreclosure, allowing the bank to seize the property and sell it to recoup their losses.
What is Required for a Mortgage?
Mortgages are one of the most common loan instruments used in America. A high level of importance is placed on home ownership, giving buyers a sense of pride and accomplishment. Fortunately, because the loan is secured with real property, mortgages can be relatively easy loans to get.
What will you Need?
Down payment – Most banks require a down payment of 20% of the purchase price of the home. This makes the transaction less risky for the bank. If you don’t have the extra cash, other options are available.
Private mortgage insurance is offered for individuals without large down payments. With mortgage insurance, mortgages can be obtained with as little as five percent down payment. In some cases zero-down mortgages are available.
Source of income – A steady source of income, usually in the form of full time employment, is required to be approved for a mortgage. This lets the bank know that you will be able to meet your monthly repayment obligations.
Credit history – Before granting a mortgage, lenders will run the applicants name through credit bureaus to find out their credit score. Credit scores are based on historical use of credit. A clean credit record should guarantee the applicant approval, and put him in a good position for negotiation. A poor credit score might mean that a mortgage is denied, or that the applicant will be paying higher than market interest rates.
Home ownership, typically the largest financial decision most people make, is not without risks. Make sure you do your homework and don’t over-extend your finances. In the event that mortgage rates skyrocket, or housing prices tank (both very realistic possibilities), you could find yourself in a very precarious financial situation.
With the right research, and some understanding of how mortgages work, you will find yourself one step closer to home ownership, and to getting the best deal available.