Mortgage Information
There’s a lot to know about mortgages and it’s smart to do some research before buying your home. This article will help you get up to speed on some of the mortgage basics you need to know.
The decision to purchase a home by taking out a mortgage is both serious and far reaching. You’ll be either increasing or entering into debt, which means you’ll be responsible to make significant monthly payments. There will also be upfront fees you must pay. Thus you should make sure that you understand the mortgage process and pick both your loan program and your lender wisely.
You’re mortgage education should start with some basic explanations that will help you understand and pick your loan: closing costs, APR, rate, monthly payment, ARM, fixed, and of course, mortgage.
First, what is a mortgage? A mortgage is a loan used to either purchase a property or to pay off an existing mortgage loan. The property itself becomes the collateral. In other words, if the borrower defaults on the mortgage, then the mortgage owner has legal claim to the house and can take possession of it.
The rate is the percentage used to calculate how much interest you’ll pay on your mortgage. This is an important number because it determines your cost for borrowing money. When the interest rate on your loan always stays the same, the rate is called “fixed”. When the rate has the possibility of changing, then the loan is called an ARM or adjustable rate mortgage.
While interest is the cost of borrowing money, there are additional costs associated with the mortgage application process. These costs are called “closing costs”. They include fees for checking your credit history and scores, applying for the mortgage, verifying that you qualify for a specific loan program (this is called underwriting), originating the loan, title search and insurance, and having the property’s value appraised.
Using the interest rate by itself an ineffective way of deciding where to buy a loan because two lenders with the same rate can charge different closing costs, making one loan more expensive than the other. That’s why you should always look at the APR, or Annual Percentage Rate. The APR takes into account closing costs and provides a more equalized measurement for comparing mortgages.
Besides looking at the APR, you’ll want to pay attention to the total monthly payment that you will owe. Besides including principal and interest, this amount includes property taxes, hazard or homeowner’s insurance, mortgage insurance, and HOA dues. Mortgage insurance is independent of interest rate, and when factored into your monthly costs, could result in a loan program with a higher interest rate having a lower monthly payment than a loan with a lower interest rate.
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