A mortgage is a type of loan that allows you to buy a home. It works a lot like a car loan or other installment loan, where you pay back the money you borrow over time in regular payments. However, a mortgage differs from other types of loans in some key ways.
The most common types of mortgages are 30-year and 15-year fixed-rate loans, but there are also some shorter terms that are available as well. Regardless of the type, youll want to choose the right term for your mortgage so that you can make sure your monthly payments are affordable.
You should always shop around for the best mortgage deal by comparing offers from lenders and brokers. Its a good idea to compare loan terms from at least three to five different mortgage lenders, which will give you enough information to choose the right one for your needs.
Once youve decided which lender is the best fit for you, you can submit an application. This will require you to provide several documents, including income and employment records, as well as your credit report. The faster you respond with your documentation, the faster the process will go.
There are four core components to a mortgage payment: principal, interest, taxes and insurance (also called PITI), which together form the basis of your monthly mortgage bill. Some other costs can be included, as well.
Mortgages are secured by real estate, which means the property you purchase serves as collateral to secure your mortgage. If you dont repay your loan on time, the lender can foreclose and sell the property to recoup the money it lent you.
Borrowers usually need to meet specific requirements for mortgages, such as a certain debt-to-income ratio, stable job history and strong credit scores. These requirements are put in place to protect lenders and borrowers.
If you have an excellent credit score and can prove you can afford your mortgage, you can save a significant amount of money over the life of your mortgage by lowering your interest rate. Having a high credit score and paying your mortgage off early are the two main ways to do this.
Another way to save on your mortgage is to refinance it into a lower interest rate and term. Some people also choose to consolidate their other debt into one loan with a lower interest rate and longer term.
A home equity line of credit, or HELOC, is a popular option for homeowners. You can use your HELOC for a variety of purposes, including home improvement projects, medical bills or college tuition. It can also be used to cash out your home equity.
When deciding on a home equity loan, consider your credit history and debt-to-income ratio. A high debt-to-income ratio can cause your lender to consider you a higher risk, which could result in a higher interest rate and/or fees.
The best thing to do before you apply for a home equity loan is to review the Loan Estimate forms that lenders must provide. These forms will give you a detailed rundown of the terms of your loan and itemize all closing costs and fees that youll be responsible for.