Buying a home is a big investment, and you’ll most likely need to borrow a mortgage to finance your purchase. Conventional wisdom says that mortgages are good debt because homes appreciate in value, but borrowing a mortgage has implications more complicated than that. You’ll have to pay back the mortgage you borrow in the future, and the monthly payment could amount to a significant amount of your monthly earnings. This could require you to make adjustments in regards to your spending habits, expenses on other things, and lifestyle. So you need to plan your finances thoroughly. What you want is to make the most out of the mortgage without incurring negative repercussions to your finances in the long run.
To help you understand how a mortgage works, and to turn the terms and process to your favor, here are 7 things you should know about a mortgage before you borrow one.
A Down Payment of At Least 20% Lowers Your Interest Payment
Financial experts advice mortgage buyers to save up for a down payment of at least 20% before borrowing a mortgage. This is because paying down that 20% enables borrowers to get less interest rate and low monthly payment amounts for the course of the loan. Paying down at least 20% of your mortgage amount also saves you from having to buy private mortgage insurance (PMI), an insurance used by lenders to cover their loss in the event of a loan default. PMI has an annual cost of roughly 1% of your outstanding loan balance which is added to your monthly mortgage payment. You can use a monthly mortgage payments calculator to see exactly how much you save by lowering your interest payment.
Find a Mortgage That Fits Your Budget
While looking for a house, you might be tempted to go for an attractive property that may be a little over your budget. But it is best to stick to your budget and base your home search on your budget rather than the other way around. Exceeding your budget means that you’ll have to increase your loan amount too, and this can hurt your financial management in the future. As a rule of thumb, avoid spending more than 43% of your monthly income on debts which includes your monthly payment. You can always use a monthly mortgage payments calculator to work out how much monthly payment a loan amount will require you to pay.
Consider Other Fees While Saving Up
While borrowing a mortgage, expect to have additional expenses coming from things such as commissions to your real estate broker, application or appraisal fees, insurance fees, expense on title search, closing costs, and other unforeseen sources. Accordingly save up taking into consideration these expenses to have enough money for a down payment after paying off other expenses. Some mortgages even have prepayment fees, an additional amount of money required to pay off a loan early. While you're looking for a mortgage, try to find one that has the most favorable terms.
Find a Mortgage The Fulfills Your Needs
There is a wide variety of different mortgage loans available, and some will suit your needs better than the others. Before you decide on buying a mortgage loan, make sure you have done enough research as well as searches to find one that fits your needs and financial situation well.
The most popular type of mortgage is a 30-year mortgage, but some can have a term as short as 10 years. If you're financially stable after buying a house, you can even pay off your mortgage early to avoid paying additional interest. The type of interest rate can also differ among differ mortgages. Fixed interest rate mortgages are a good option if you want monthly payments that don't change over time. If you afford to take a risk to save interest payment in the long term, a mortgage with adjustable interest rate is more favorable. There are even mortgage loans for commercial properties which are different from conventional mortgages. A commercial mortgage loan calculator can help you work out any estimations you need with commercial mortgage loans.
High Credit Score Matters
A high credit score not only increases your chances of approval, they help determine your interest rate. Some lenders may offer mortgages to applicants with low credit scores, but those types of mortgages typically have higher interest rates. If your credit score is high, it increases your chances of securing a low interest rate mortgage. You can increase your credit score by paying off any outstanding debt including your credit card balances and personal loans.
Before you go to your lender to provide your credit score, get a copy of your credit report beforehand and check for any error. If you find any anomaly, verify it and clear up any issues before you submit your loan application.
Lenders Consider Job Security
For lenders, your ability to pay back a loan matters. If you have a secure job and a stable source of income, that validates your ability to make regular monthly payments. It will most likely be impossible to borrow a loan while being unemployed, and even frequent job changes can result in lenders having second thoughts. If you're planning to borrow a loan, try to stay at your current job for as long as possible to show that you have a secure job and a reliable source of income.
Mortgage Prequalification And Mortgage Pre-approval Are Different
These are two processes you will go through when you borrow a loan and they are both different. Prequalification or being conditionally approved for a mortgage is a way to know how much amount you can borrow. The amount is calculated based on your income, credit score, employment, and bank account details. Pre-approval on the other hand, is given by your lender who has assessed your finances carefully. It determines how much you are allowed to borrow as well as your interest rate. Pre-approval usually succeeds prequalification, but neither guarantees a mortgage application..
Conclusion
Financing a home requires proper planning. Overspending or stretching your budget can have negative repercussions in the long run. Before you buy a loan, consider these points to make a sound and informed decision.
A great tool when comparing mortgages and mortgage amounts is a mortgage calculator. If you want to use a mortgage calculator where you can work out pretty much any amount involved in a mortgage, head over to miller mortgage for their free mortgage calculator.
