A Beginner’s Guide To Mortgages
Buying a home for the first time is big deal. Finding the right property, making an offer, and getting a mortgage to complete the purchase are all big steps. If you are an aspiring home buyer, the whole process can seem complex and a bit daunting at the outset. Getting a mortgage may seem especially intimidating if you’re new to real estate.
The good news is, mortgages aren’t nearly as complicated as you may think. This short guide will help you understand what they are, how they work, and where to start when you’re ready to apply for one.
What Is A Mortgage?
A mortgage is a loan, plain and simple. The slightly longer answer is that a mortgage is a loan for purchasing real estate that comes with a specified schedule of repayment. The collateral for the loan is the property itself.
Most mortgages fall into one of two types: fixed rate or adjustable rate.
Fixed Rate: Fixed rate mortgages, as the name implies, offer a fixed interest rate over a period of 15, 20, or 30 years. The benefit of a fixed rate mortgage is that your monthly payment won’t increase even if mortgage rates increase after a few years.
Adjustable Rate: Adjustable rate mortgages include any mortgage where the interest rate can change while you’re still repaying the loan. These are the types of loans that were primarily responsible for the housing crash and subsequent financial meltdown in 2008.
While initial interest rates (often called the “promotional rate” or “teaser rate”) on adjustable rate mortgages may be lower than a similar fixed rate mortgage, even a modest increase after the promotional rate expires can leave borrowers unable to pay their mortgage each month.
How To Get A Low Interest Rate
While the basic terms of a mortgage are mostly standardized across the industry, what you as a buyer can have an effect on is the interest rate you are offered. Lenders base the interest rate they offer you on several factors, such as:
- Your credit rating and financial history
- The current credit market
- The size of your down payment
Your down payment will have the biggest impact on the interest rate you are offered. The more you pay up front, the lower your interest rate will be. Your credit score is also important. A bad credit score can mean up to an extra one and a half percent interest.
Applying For A Mortgage
Many first time home buyers end up relying on their real-estate agent to guide them through the process of securing a mortgage. What typically ends up happening in this scenario is that buyers end up choosing a mortgage lender referred by their real estate agent.
While this scenario is benign in most cases, it’s not always ideal. Keep in mind that your realtor’s priorities are to secure fast approval, not to negotiate the best interest rate. The faster they get you approved, the sooner they get their commission check.
The better alternative is to research and speak with at least three different lenders, or mortgage brokers, on your own before making a commitment.
Buying a home is a huge financial investment. The more information you have up front, the better. It’s also important to remember that every home will need further investment as time goes on, so the more you save in the beginning, the more you’ll have when it’s time to make improvements or repairs down the line.
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