5 mortgage conditions you should understand before applying for a home loan
If you are preparing to buy a home, you will likely need a mortgage to finance that purchase. But if you’re new to the process, you might find yourself overwhelmed once you start preparing for your application.
Not only do you have to provide a fair amount of financial data for mortgage lenders to review, but you may also come across a number of terms that you don’t quite understand. With that in mind, here are some commonly used mortgage terms that he will help you become familiar with.
1. Fixed rate mortgage
With a fixed rate mortgage, the interest rate you pay on your home loan will stay the same until your mortgage is paid off. This means that you will benefit from predictable monthly payments. For example, if you sign a 30-year fixed loan at 3.2%, this 3.2% rate will apply to all your payments under that loan.
2. Adjustable rate mortgage loan
An adjustable rate mortgage (ARM) is a mortgage whose interest rate can change over time. There are different types of adjustable rate loans. An ARM 5/1, for example, gives you the same interest rate for five years, after which that rate can adjust once a year. An ARM 7/1 gives you the same interest rate for seven years before possibly being adjusted once a year.
The downside to an ARM is that your mortgage payments could increase over time if your rate goes up. But your rate could also adjust downward, making your payments cheaper.
3. Principal and interest
Your monthly mortgage payment is made up of a portion of principal and a portion of interest. Your principal is the balance of your loan that you are using. Interest refers to the interest you pay on that principal, and it will stay the same if you get a fixed loan and potentially change if you have an adjustable rate mortgage. To be clear, however, when we say “stay the same” we are talking about your interest. rate.
When you start paying off your mortgage, a large portion of your monthly payments will go towards paying the interest on your loan. Over time this will change and you will start paying more for your principal and less for interest.
4. Private mortgage insurance (PMI)
PMI, or private mortgage insurance, is a premium that you pay (usually on a monthly basis) in addition to your regular mortgage payment of principal and interest. PMI applies when you don’t make a 20% down payment on your home at closing. The goal is to protect your lender in the event that you fail to meet your monthly payments.
5. Closing costs
Closing costs are the various fees you will need to pay to finalize your mortgage. They are usually 2% to 5% of your loan amount and vary among lenders.
Closing costs are made up of various costs, such as administration costs and evaluation costs. They can sometimes be negotiable, but not always. You don’t have to automatically pay your closing costs when you sign up. If you’d rather not pay them up front, you can build them into your mortgage and pay them off over time.
Getting a mortgage can be daunting, especially when the terms are constantly mixed up and you don’t understand. Knowing these terms could help you approach the application process with a lot more confidence and less stress.