Home Mortgage 101
Very few people can purchase a home without use of a mortgage. When financing a new home is the only option left, there are many financing options that are available to meet your needs. Discussed below are many of these options that are popular today. Even if you already have a mortgage, you can learn options to use later in life or share with others.
First Thing is First
How much can you afford? A good general rule of thumb is to limit your mortgage to roughly 29% of your monthly gross income as most mortgage lenders will look for this. Knowing how much you can spend before you looks is key. It is certainly a great idea to get either a pre-qualification or pre-approval before shopping for a new home; especially for first time home buyers.
You may be wondering what the difference is between pre-approval and pre-qualification. Pre-qualificaiton is the process of reviewing your annual income, assets, and liabilities in an effort to determine a maximum amount of which to loan; this services is generally a free service by most mortgage lenders.
Pre-approval is the process of reviewing your credit worthiness then rendering a decision of an appropriate loan amount. This process is generally not a free service, however, because it is based on credit history alone, a larger loan approval amount could be obtained.
Common Types of Home Loans
Balloon mortgages are generally for short term periods (5 to 7 years), so this is generally a decent option for short term buyers. Balloon loan balances are due at the end of the mortgage period, however, payment schedules are based on a 30 year payment schedule; so payments can be considerably lower than other types of loans.
Fixed rate mortgages are best for home owners expecting to live in a home for several years. This loan has a fixed rate, so home owners know the exact amount of each payment in advance; both principal and interest payments will not change. Generally, when interest rates are low and expected to rise, a fixed rate loan will be a decent choice.
Adjustable rate mortgages are much like a fixed rate loan with the exception of the interest rate varying. Adjustable rate mortgages are great for home owners wanting the lowest payments initially. Interest rates stay low initially and are adjusted at mutually agreed upon dates; rate increases generally do not exceed 2% in any given year and no more than 6% over the course of the loan.
Shop Till You Drop
If you are considering a home mortgage, first shop around. Get many interest quotes and explore rates at your local banking institutions. Often times a decreased rate can be experienced with automatic payments and / or a banking relationship that is already established. Small differences in rates to the fraction of a percent can make a big difference when dealing with hundreds of thousands of dollars, so shop around as much as you can before making a choice.
Before you begin shopping around it will be helpful to know your credit score and what exactly is on your credit report. Read more about how to obtain your FREE annual credit report and score.
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