What is a Mortgage and When Should You Get One?
Mortgages are loans that enable you to buy or refinance a home. The lender gives you money based on the value of your house and requires that you repay it with interest over an agreed-upon period of time – usually 30 years for fixed rate mortgages, though 15 year options exist too.
What is a Mortgage and When Should You Take One Out?
When you borrow a mortgage, you are agreeing to give the lender legal rights to repossess your property if you fail to repay them with interest. That is why so many people use mortgages when purchasing homes.
Your mortgage payment consists of four elements: principal, interest, taxes and insurance (PITI). Each month you’ll pay part of the loan balance plus interest as well as other costs like property tax or homeowners insurance.
Mortgage loans come in many forms, each with its own advantages and drawbacks. To determine which one is best suited to you, consider your budget, needs, and long-term homeownership objectives.
Finding a mortgage that meets your needs requires that you prioritize finding a loan that you can afford given other priorities, not simply one that meets all eligibility requirements.
A lender will review your entire financial profile – including credit score, debts and income – in order to determine if you can make your mortgage payments. This process is called underwriting and could take weeks.
You may also try to reduce your debt-to-income ratio and raise your credit score in order to qualify for a better interest rate. Doing so will reduce the lender’s risk, making you appear like an increasingly responsible borrower.
If you have a co-borrower, they can help you qualify for a mortgage by increasing your total income or improving the combined credit score. Your lender will review both of your finances together to ensure both of you meet their qualifications.
Mortgage Types and When to Get One
There are two primary mortgage types: conventional and government-backed. Conventional loans are guaranteed by the federal government and follow certain guidelines set by Fannie Mae and Freddie Mac; they’re ideal for borrowers with consistent income streams and good credit histories.
Conventional mortgages typically require a down payment of at least 20%. They have higher minimum credit scores than other loan options and can be more difficult to qualify for, plus their interest rate is higher – making them less affordable compared to other mortgage products.
The most popular mortgage type is a 30-year fixed-rate, which guarantees your monthly payment remains consistent throughout the duration of the loan. This option works best for homeowners who plan to stay in their house longterm as it offers maximum stability.
Another type of mortgage is an adjustable-rate mortgage, which adjusts your payment based on market interest rates. These mortgages can be beneficial for people planning to relocate or who expect major changes to their circumstances in the future.