All About Mortgages
All About Mortgages!
A mortgage is a loan that homebuyers use to pay for a house. A mortgage pays for a percentage of the home, and an initial down payment pays for the remaining amount. If a mortgage is for 80% of the price of a home, then a down payment is 20% of the price of the home. A down payment is cash paid upfront before the loan is closed.
Once the down payment is paid and the loan is closed, a mortgage consists of monthly payments, paid at a given interest rate. Mortgages differ based on the amount put down, the monthly payment, the length of the loan, and whether or not interest payments change over time.
There are four major types of loans: 15 year fixed, 15 year variable (or adjustable rate mortgage), 30 year fixed, and 30 year variable (ARM). The number of years refers to the length of time it will take to pay off the loan, and variable versus fixed refers to whether or not the interest rate will change over the loan term.
A fixed interest rate locks in the amount a borrower has to pay in interest for every payment period. A variable interest rate will change over time. Often times, a variable interest rate will start low but will increase more drastically in the future. As a result, a variable rate is often more attractive in the short run than it is in the long run. Since a fixed interest rate doesn’t change over time, it is a more stable option, since buyers know what they will be expected to pay over the course of the loan.
Most lenders will require some sort of down payment, whether it is a small or large amount. Keep in mind, however, that many lenders will require a buyer to purchase Private Mortgage Insurance, or PMI, if they are unable to pay 20% of the purchase price of a home as a down payment. Private mortgage insurance protects lenders against a buyer not being able to make their mortgage payments. PMI can be expensive as well, so it is important to keep PMI payments in mind.
When shopping for loans, its important to constantly keep in mind your financial life – how much you have saved, how much you can put down, what you can afford to pay every month, etc. This will help you to find the right loan type from the right lender. Savvy buyers will start shopping for a loan before they want to put an offer in on a house.