Buying a house is one of the most significant financial commitments most people make in a lifetime. Most home buyers don’t make their purchase with one lump sum of money. A mortgage makes it possible to pay for a home over time. If you’re buying a house for the first time, it’s essential to understand how mortgages work, and what to expect from your loan. Fortunately, there’s plenty of help available, starting with our guide to home loan basics.
- How Does a Mortgage Work, and Why Is It Necessary?
A mortgage is a loan used to purchase a home, and in many ways, it’s similar to loans for a smaller purchase. The difference – aside from term and overall cost – is that a mortgage is specifically for buying a home, and it’s customizable. You borrow an agreed amount, pay a set or adjustable interest rate to the lender, and have a predetermined time to pay back the loan. - Key Steps Toward Qualifying for a Mortgage
There are a wide variety of mortgage types available when buying a house with varying qualification standards. In addition to conventional mortgages, the three types of government-backed mortgages are VA loans, FHA loans, and USDA loans. To qualify, you’ll need to meet a minimum credit score requirement, verify your income with documentation, and deal with any errors/issues on your credit report. Getting pre-approved for a mortgage gives you an idea of your buying power, and shows sellers you’re serious about buying a house. - How Your Down Payment Impacts Your Loan
The size of your down payment will impact the size of your monthly mortgage payment, and with conventional mortgages may also influence your interest rate. Making a larger down payment means you borrow less money, which may let you pay the loan off faster. - Interest Rates and Your Mortgage
Every mortgage type has a set, base interest rate. Your rate will also be influenced by how much you choose to pay in closing costs – paying more closing costs means a lower rate while opting to pay less can increase your rate. - Calculating Monthly Mortgage Payments
Your monthly mortgage payment depends on three key factors: how much you borrowed, how much interest you’re paying, and how long you have to pay back the loan. Plug those three data points into a mortgage calculator, and you can calculate your monthly payments. Remember that if you opt for an adjustable-rate mortgage, your payments are subject to change over time. - Speeding Up the Process of Paying Off Your Mortgage
If you wish to pay off your mortgage ahead of schedule, there are two main options. Either you can refinance, allowing you to pay off the loan more quickly, or you can pay more than required each month. If you want to pay off your loan early, work with your lender to find the path that’s best for you.
Working with a lender you know and trust makes life much easier. If you’re not sure where to start, your real estate agent can help you find a lender. By consulting trusted sources, doing your research, and asking key questions, you can navigate the process of securing a mortgage with confidence.
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