Mortgage is a type of loan where the borrower puts up collateral (usually real estate, but sometimes other assets) in exchange for an interest rate on the total amount owed. The borrower is responsible for repaying the principal on the mortgage as well as the interest and other costs.
The mortgage lender, usually a bank or other financial institution, will issue the loan to you on the condition that you will pay it back over a fixed term, with interest. The lender will have the right to foreclose on your home if you default on the loan.
Before you apply for a mortgage, it’s a good idea to review your finances to see how much you can afford to spend on housing. This involves looking at your income and expenses, along with debt-to-income ratios.
Ideally, you should spend no more than three times your monthly income on housing, which includes mortgage payments and any other debts you have. That’s because having more debt than you can afford will negatively impact your credit score, which will make it harder to get the best interest rates on your loan.
If you’re a first-time buyer, you may qualify for an affordable mortgage with the help of a lender or a friend. However, be sure to do your research and check out mortgage calculators to understand how your payment will change with the addition of a down payment and other factors.
The cost of a mortgage can vary, depending on the type of loan and the way in which it is repaid. Typically, there are two ways in which a mortgage is set up: a fixed rate of interest for the life of the loan or a variable rate relative to market interest rates.
In the United States, borrowers are allowed to deduct interest and other costs related to their mortgage from their federal taxes. This deduction is only available to those who itemize their tax returns.
Property taxes, homeowner’s insurance and monthly homeowners association fees are also incorporated into mortgage payments, and are paid to the tax authority, insurer or homeowners association as part of your mortgage bill, which is held in an escrow account. These recurring costs tend to increase with time due to inflation, so it’s important to track them.
Other expenses associated with owning a home can include maintenance, repairs, utilities, lawn care and cleaning services. Many of these expenses will be included in your mortgage payments as a percentage of your total loan amount, and some of them are even included as a fixed amount per month for the life of the mortgage.
Buying a house can be a huge financial decision, and you should take your time shopping around. It’s important to find a lender who can help you understand your options and offer competitive mortgage quotes.
A mortgage prequalification is an informal estimate of what a lender might be willing to lend you. You provide your basic information, such as your income and credit score, and the lender tells you what types of loans they might be able to provide you. A mortgage preapproval, on the other hand, is more formal and can give you a better idea of what types of loans you might be eligible for.