A mortgage is a loan that lets you buy a home, often with a low down payment. You then pay the remainder of your purchase price over time, usually at monthly intervals for 30 years or more. The mortgage is secured by the home youre buying as collateral, which means that if you cant repay it, the lender has the right to take back the property and sell it to recover the amount borrowed.
Your Mortgage Explained
A typical mortgage has four main components: your down payment, your loan amount, your interest rate and the terms of your loan. Each of these factors determines how much you can afford, how big your monthly payments are and how quickly you can pay off the loan.
Your down payment and your interest rate affect the amount of money you can borrow, so its essential to shop around for the best rates available before making an offer on a home. You can get quotes from credit unions, banks, mortgage-specific lenders and online-only companies.
A preapproval is a more formal process in which a lender checks your income, credit and other financial details to determine how much you might qualify for. Its an important step because it can help you find a home that you can afford and make the loan application process faster.
Avoid Taking New Credit
For several months before you apply for a mortgage and throughout the loan processing, its a good idea to avoid taking on any new credit debt. This will allow the lender to better assess your credit and debt-to-income ratio, two critical factors in determining whether you can afford the monthly mortgage payment.
Be Prepared For Closing
Once your mortgage application is approved, youll meet with a real estate professional and lender to complete the mortgage. This is also the time to pay your down payment and closing costs. At closing, the seller will transfer ownership of your home to you and youll receive the agreed-upon amount from the seller as well as the mortgage paperwork.
Learn About Your Loan Costs
A lot goes into your mortgage payment, including your interest, property taxes and homeowners insurance. Its important to understand all of the costs, as these can add up over the life of the loan.
Understanding your loans cost is the most important step to finding a loan that fits your needs. The Federal Trade Commission has a helpful worksheet that you can use to compare loan estimates from lenders.
ARMs: Adjustable-rate mortgages are usually 30-year loans with fixed rates for a set period (typically the first 5, 7 or 10 years of the loan). After that time, your interest rate can change based on market conditions.
You pay a large portion of your mortgage payment towards your principal, which is the amount you still owe on the home youre buying. This is a crucial part of the process, because paying more toward your principal will help you save on interest over time and will shorten your mortgage term.