Buying a home is one of the biggest investments you will ever make in your lifetime. As a first-time buyer, it’s best to be as prepared as possible before you begin this journey. A good way to start is by learning what you should expect from your mortgage.
A mortgage is the loan you will use to buy your home; they are similar to other loans in that the amount borrowed will be repaid to the lender with a rate of interest over a predetermined time-period. What sets mortgages apart from other loans, however, is that they can only be used to purchase real estate.
Why do buyers use mortgages?
You may have heard, buying a home is not cheap. Regardless of the price tag, most home buyers, especially first-time buyers, do not have the cash on hand to purchase a home. So if you want to buy a home, you must obtain a loan (mortgage). With a mortgage, the buyer borrows money from a lender to cover most of the cost of the home. The remainder of the money owed is known as a down payment. Just like every homebuyer is different, so is every mortgage– and your mortgage should be tailor fit to meet your needs.
How to qualify for a mortgage?
In order to qualify for a mortgage, you must meet a minimum standard, which differs between lenders. Loan qualification standards have lowered over the years, but most require you to meet a minimum credit score. You’ll then have to verify your income, providing your W-2s, paystubs, and federal income tax returns. In addition, your debts will be verified via a credit report.
How large should the down payment be?
Your down payment, essentially, is part of the home price that you’re not borrowing from the bank. Previously, down payments were 20 percent of a home’s sale price. Today, many lenders are accepting drastically lower down payment, close to three percent, some even as low as zero percent. While these are minimum payments accepted, you can always put down more. Keep in mind: when you make a larger down payment, your monthly payments are reduced because you’re borrowing less.
What will the monthly mortgage payments be?
Your monthly mortgage payment is made up of three things:
- The amount of money borrowed.
- Your mortgage interest rate.
- Your loan term.
If you’re using a fixed-rate mortgage, you can plug the above figures into a mortgage calculator to determine your monthly payment. The figure you calculated will stay the same as long as the loan is in effect. The opposite of a fixed-rate mortgage is an adjustable-rate mortgage. With this type of mortgage, your payments are subject to change. The loan’s interest rate remains unchanged for a number of years, but then vary during the remaining term of the loan. The most common periods for adjustable-rate loans are 5-7 years.