If you’re buying your first home, chances are you don’t know the first thing about comparing mortgages or what ‘amortization’
means. Buying a house is probably one of the biggest decisions you will ever make and undoubtedly your biggest purchase. Heading into such a decision, it’s important that you know everything there is to know about what this purchase will mean and require of you both now and in the future.
Unless you won the lottery or come from a very wealthy family, you will likely be funding your home purchase with a mortgage. What is a mortgage? Basically, a mortgage is a loan specifically for financing the purchase of a home. When you sign the paper work for your mortgage, you’re agreeing to the terms of a legally binding contract that include your house as collateral for the loan and an agreement that you will repay the debt, with the addition of interest, over the course of a set number of years. In the end, your total mortgage cost is the principal, or the amount of money you needed to borrow to buy the house, plus the fee to the lender for loaning the money, as determined by the current interest rate.
Each month, you will pay a set amount of money towards the debt, which will include interest, private mortgage insurance and taxes. Amortization is the process through which you reduce the size of the debt over the course of a set number of years. In the beginning, then, you will likely pay mostly interest each month and then the principal afterwards.
The way to reduce the amount of money you must borrow, and subsequently your monthly payments, is to make a down payment on the house. You will want to save up as large a down payment as you possibly can, as a lender will view a mortgage candidate with a down payment that’s less than 20% as higher risk, and may use an escrow account for collecting expenses like taxes and insurance, which will be built into the monthly mortgage payment.
When it comes to comparing mortgages, it’s important not only to know how they work, but also what the difference is between fixed and variable-rate mortgages. If you’re buying your first home, you may be tempted by the fixed-rate mortgage because you can expect to pay the same interest rate for a set period of time during the existence of your mortgage. With a rate and, therefore, monthly payments that don’t really change, it’s easier to devise and stick to a monthly budget.
Variable-rate mortgages, on the other hand, have fixed payments but the amount of interest you will pay does fluctuate with changes in the market. While this makes it less easy to budget your monthly mortgage payment, banks’ interest rates have been quite low in recent times, making these mortgages quite cheap and definitely appealing.
So, then, when comparing mortgages how do you know which type is best for you? Really, this depends on the type of person you are and whether or not you like risk. If you won’t be able to sleep at night because the interest rate has fluctuated by half a percentage then variable-rate probably isn’t for you.
But there’s much more to selecting the right mortgage than just choosing the type of rate. You will, for instance, need to consider the amortization period as well as whether or not the mortgage is portable, meaning the balance of your mortgage could be transferred when you move, without you incurring any penalties. What’s more is you should consider the total mortgage cost in relation to your current and projected income, the type of flexibility you’re looking for, among other factors, when choosing a mortgage so that you can avoid paying for any penalties. Don’t forget to account for any and all future financial goals or expenses when determining the size of the mortgage you can afford.
When it comes to comparing mortgages from different lenders, how do you know which is the best for you? The following describes some important mortgage terms that you will need to know in order to more easily navigate your options.
The first thing you will need to decide is whether you’re going to go with a mortgage broker or a mortgage lender. While a mortgage broker will work on your behalf, looking for the best priced mortgage and presenting you with your options, a mortgage lender actually represents a bank or other lending institution from which your mortgage will be given. There are pros and cons to both, mainly that a broker will offer you more options to consider while a lender is the most direct way to access a mortgage, so choose wisely before comparing mortgages.
The second, and perhaps the most important step, is to sit down and assess your finances. Knowing how much you can afford is the best way to ensure you don’t wind up with a mortgage that’s way larger than you can realistically afford. In addition to taking all of your expenses into consideration and weighing them with your monthly income, you will want to save a down payment, work on reducing your existing debt and know your credit score.
The last thing is to go into this process knowing which questions you should ask. One question that far too many first time home buyers fail to ask is what the clauses or contingencies are for the mortgage contract. So, for instance, if you want to be able to have the home inspected before purchasing, you would want to ensure that this is stated in your contract. Another important thing you will need to know beforehand is what additional expenses will be required at the time of closing. While some lenders will add these costs into the loan, others will tack them on later when some homeowners are unprepared and can’t afford to cover the expenses. Lastly, early on you will want to establish with your insurance lender or broker how it is that you should communicate with each other. You’re going to have further questions and there may be things on which they need to keep you updated. Find out how to best stay in touch and in the loop about your mortgage.
Before embarking on your adventure into home ownership, follow these steps to ensure a positive home buying experience. Comparing mortgages takes a bit of time, but it will be well worth it when you find the mortgage that suits your needs perfectly.