Mortgage Basic Concepts That One Must Know Before Getting Into It!
There comes a time in many adults lives that owning a home becomes a priority whether it is to raise a family or just to make an investment, the time spent saving and looking will finally pay off once that offer is accepted. It is at this time that the concepts of a mortgage will need to be learned and understood. It is crucial to do your homework and figure out all you can about home loans and what will work best for you. Here is a look at the basic concepts of a mortgage.
Loan Eligibility
There is a basic formula used by most Mortgage broker and lenders to determine loan eligibility; that your monthly mortgage should not exceed 28% of your gross monthly income. With a good credit history, there may be a chance to obtain a mortgage worth more than that amount. Be sure to take into account your debt to income ratio when you are trying to determine what you can afford. Although you may be able to afford a certain amount on paper, remember to account for the lifestyle that you lead. Playing it safe will reduce your chances of being house poor.
Different Types Of Loans
For the most part, there are three basic kinds of home loans; fixed rate mortgage, adjustable rate mortgage, and interest only jumbo mortgage. A fixed rate home loan consists of equal monthly payments and interest that remain the same for the entire duration of the loan. It is in the initial years of these types of loans that most of the interest is paid. Although the most popular duration of a fixed rate loan is 30 years, there are 10, 15, and 20-year loans available.
Adjustable rate mortgages (ARM), or variable rate mortgages, are mortgages in which the interest rate can change from year to year. These loans may be attractive to those who want lower initial interest costs and need to get approved easier with a low payment. Interest only jumbo mortgages allow homebuyers to only pay the interest for the first years of the loan. This kind of loan is a better option for wealthy home buyers who have a fluctuating income.
Mortgage Costs
It can come as a surprise to new homebuyers that your monthly mortgage payment will include more than interest and principal. The down payment will be needed in order to obtain the mortgage and is ideally 20% of the purchase price. Anything that is below this percentage will require the purchase of a PMI, or private mortgage insurance. Closing costs are needed when the title is given to the buyer.
There are two types of closing costs; recurring and nonrecurring. Recurring costs include property taxes and homeowner’s insurance. Non-recurring costs include loan origination costs, credit report costs, surveys, title search fees, origination points, and discount points. Origination points are paid to the lender for dispersing the loan. These points are generally 1% of the cost of the loan. Discount points eventually reduce the monthly mortgage payment and like origination points, are equal to 1% of the loan.
The amortization schedule, included in your mortgage documents, is a great way to understand all of the mortgage costs for the duration of the loan. This schedule shows how much principal and interest are being paid throughout the life of the loan. Even though the purchase price of a home may be 100,000 dollars, that could more than double by the time the loan is paid off due to interest. Plug in your numbers here to see what your amortization schedule will look like.
