Getting a Mortgage

October 23, 2020

Obtaining a mortgage enables individuals to purchase a home and pay for it over a set amount of time. Without such a loan, homeownership would prove impossible to most people because they do not possess the resources to pay the whole cost outright. However, this legal agreement to repay the amount borrowed also entails paying interest to the lender. Thus, smart homebuyers shop around to find the most favorable deal possible.

Mortgage Basics

A mortgage consists of a principal (loan amount), the interest rate charged on what is borrowed, and a term (length of time to pay back). All of these things influence how much you will pay per month.

Expect lenders to look at your credit rating, assets, and employment income when determining whether or not to offer you a loan and for what amount. In general, the more money you can put down on a house out of your own pocket the better when it comes to finding lenders willing to back you. Companies see you as a less risky investment and can reward with favorable interest rates. Making a down payment of 20 percent or more also should keep the lender from requiring you to buy private mortgage insurance (a policy designed to protect the lender if you default on your payments).

Mortgages typically employ one of two types of interest-rate methods: fixed or variable.

• As the name suggests, a fixed-rate mortgage comes with a rate that does not change for the entire period of the loan. You know exactly what the monthly loan costs will be all the time. Locking in a good rate from the start prevents worry over market fluctuations.
• Variable-rate mortgages (sometimes called floating-rate or adjustable-rate) tend to offer lower rates at the start but change over time. They prove attractive to people who foresee their income rising down the line, those who do not plan to stay in the house for very many years, and folks who didn’t qualify for the loan amount requested under a fixed-rate plan. The uncertainty of a rate that fluctuates according to market conditions makes variable-rate mortgages riskier to hold.

The “life” of a loan – the amount of time it will take to pay off borrowed money – varies but tends to fall into a range of 10-30 years. Fewer years of borrowing means less interest as well as building up home equity faster. However, shorter length also translates into higher monthly payments. Therefore, customers need to carefully evaluate what they can afford before agreeing on a timespan.

Other Considerations When Getting a Mortgage

Some people start their mortgage shopping at their local bank or credit union. Realize, though, that a lender does not need to be based in your neighborhood. The Internet has made finding potential lenders and comparing what they can offer very easy. Still, it’s a good idea to thoroughly check out an organization before giving it your business. A home purchase is too large and important to chance on a lender that might not be reputable.

Look, too, to see if you might qualify for a special type of home loan. For instance, the U.S. Department of Veteran Affairs helps with securing VA loans that allow veterans to obtain favorable terms. Similarly, Federal Housing Administration (FHA) loans can assist first-time homeowners who do not meet the income, down payment, or credit score requirements for conventional loans.

Market conditions and personal circumstances often change considerably during the course of the time it takes to pay off a home loan. If you feel it may be advantageous to renegotiate the terms of your mortgage, look into refinancing. Start with your current lender to see what might be available, but don’t feel you must stick with that company. Just as you did for the initial loan, check out the possibilities to find what organization can give you the lowest interest rate and the most favorable overall package.