Mortgages are an important financial concept to understand. The commitment can be up to 30 years or even longer in some cases. You want to make sure you understand your part of that commitment.
Buying a home is probably the largest investment you will make in your lifetime. There are companies online, as well as local lenders, that are happy to help you with your questions and give you the information you need to make an informed decision. It’s good, however, to know the basics.
Mortgages primarily consist of your payment back to the lender for the property you are purchasing. So if your new home will cost $300,000 and you want to borrow $275,000, you will need to pay the lender back that $275,000. Your monthly payment will be based on paying back that $275,000, plus the interest that the institution charges you for allowing you to use their money, over a specified period of time. Your payment may also include:
– Property Taxes and Homeowners Insurance: Your annual property taxes and home insurance premium are divided by 12 and added to your monthly payment. This portion of your payment is held in an escrow account by the lender, until the taxes and insurance are due each year. If this amount changes, your payment may increase or decrease accordingly.
– Mortgage Insurance: Even though you may have personal insurance to cover your expenses in the event of your death, many lenders require you to purchase mortgage insurance if the value of your property is below a certain ratio to the amount they are lending you.
Rate Type – There are two main types of rates for mortgages.
– An Adjustable Rate Mortgage is one where the interest rate is usually lower than the market rate for the first few years of the loan term. Then it is adjusted with the market. The adjustment could be up or down, depending on the market, so the risk here is that the buyer’s payment could go up. Many Adjustable Rate Mortgages, however, include limits to how much the rate can increase. This is a good option for borrowers who may not qualify for a good, fixed rate mortgage.
– A Fixed Rate Mortgage is just that – the borrower agrees to pay the mortgage back at a fixed rate for a defined term. This means that even if the market interest rate goes up (or down), the borrower will continue to pay the same interest rate. The only factor that could affect the borrower’s payment with this type of loan is if the taxes and insurance added to the monthly payments are increased or decreased. This type of rate offers the buyer security in knowing that their payment will be fixed for the life of the loan.
Interest rates vary depending on the lender’s assessment of your risk. Different companies also offer different cost options; so, it’s best to shop around for the best rates! Many companies offer mortgages for special circumstances, such as construction loans that transition to permanent financing, programs for low- and moderate- income programs, and first-time, homebuyer programs. Your lender can help you understand if any special circumstances might apply.