Mortgages are loans used to purchase or refinance a home. While they’re one of the most common ways to finance a property, there are various types available depending on your individual situation and preferences. Each mortgage will come with specific terms, conditions and costs which you should carefully consider depending on what best fits your needs and situation.
What Is a Mortgage and How Does It Work?
When you obtain a mortgage, you are agreeing to pay back the lender in monthly installments over time. Each payment covers part of the loan’s principal amount, interest and taxes; in the early years most payments go towards covering interest; at maturity most are used towards decreasing principal.
How Do I Apply for a Mortgage?
You have several ways to apply for a mortgage: online, at a financial institution or by speaking with a home loan broker. The process includes conducting credit and background checks to confirm you qualify for the loan you’re applying for. In some cases, lenders require you to find either a co-signer or guarantor who will guarantee payment of your debt should something unfortunate occur to you.
Your Debt-to-Income Ratio
A lender’s debt-to-income ratio (DTI) is an important factor in determining your ability to afford your mortgage and other loans. To help determine which lender is best suited for you, review your current DTI before looking for a mortgage.
Your Down Payment and Closing Costs
A down payment is the amount of cash you contribute toward the purchase of your new home. It can range anywhere from 3% to 5% of the total property value, though most buyers aim for a 20% down payment in order to avoid mortgage insurance payments.
Lenders will also take into account your closing costs and fees, which typically amount to 2% to 5% of the total home value. You have two options for payment: cash in hand or rolling them into the loan.
Your loan term and interest rate will be determined by your credit score, down payment amount and debt-to-income ratio. Since interest rates can change weekly, it’s essential to shop around and compare them before signing on the dotted line.
Lenders will examine your assets to assess whether you can repay the loan. They’ll take into account savings and checking accounts, as well as any investment accounts you own. They may also look into non-liquid assets like cars, homes and businesses to determine whether you possess them.
Your mortgage is likely the biggest financial commitment of your lifetime, so it’s essential to understand its intricacies and obligations as a borrower. Shopping around for rates that fit within budget will give you the most bang for your buck when borrowing money to purchase a home. The most efficient way to do this is by speaking with multiple lenders and asking what their criteria are when applying for a mortgage.