Last year alone, more than 6.1 million homes sold to new owners, many of them who are buying a house for the first time. If you’re one of them, congratulations! Making the decision to become a homeowner is a big deal.
Not only will you be able to build equity in a house, but you’ll be able to get out of the rental race once and for all. However, unless you’re planning on paying cash for the property, you’ll need to find a good mortgage to help you cover the cost of your house.
So, what is a mortgage and what can you expect when you start applying for the loan? Here’s what you need to know so you can proceed on your homebuying journey with confidence.
So, What Is a Mortgage Exactly?
A mortgage is a type of loan issued for the express purpose of buying property. This could be a house, a townhouse, condo, or even a mobile home depending on your personal preference.
The loan typically lasts for between 15 and 30 years. This term length makes it easy to repay the loan in full. Your monthly payments will be relatively low and you won’t have to worry about stretching your budget over time.
The property you buy secures the loan which encourages lenders to work with borrowers with less-than-perfect finances.
As long as you make your minimum required payments every month, you’ll be able to stay in the house and be on good terms with the lender. However, if you default on the loan, the lender can take possession of your property and sell it to settle your outstanding debt.
There Are Two Main Types of Rates You Need to Know
There are many different types of mortgages that help buyers get into different types of homes. For example, a USDA loan will help you buy a house in a rural area. A VA loan helps qualified veterans get into a house quickly and affordably.
Though there are many types of home loans out there, they all work about the same and are subject to the same types of rates. Once you start looking for loans, you’ll quickly realize there are two common types of rates that you need to understand.
A fixed-rate mortgage is a loan that has an interest rate that won’t change for the entire duration of your loan term. If you have a 15-year loan, the interest will stay the same for the full 15 years. If you have a 30-year loan, the interest rate won’t change even if the market changes over time.
These loans are ideal for borrowers buying when interest rates are low. You’ll end up saving money on interest payments over the life of the loan.
Adjustable-rate mortgages have interest rates that fluctuate with the market. Typically, these loans allow you to lock in an interest rate for the first few years of the loan term. This rate is usually lower than the industry average, letting you have lower payments upfront.
Over time and as the interest rates change in the market, the interest rate on your adjustable-rate mortgage changes, too. If rates increase, you’ll pay more in interest. If rates drop, you’ll pay less.
These loans are ideal for borrowers who plan to sell their home in the near future as it allows them to take advantage of below-average interest rates upfront. That said, if you plan to stay in your home for decades, a fixed-rate mortgage will end up saving you more money.
What to Look for in a Mortgage Lender
Once you figure out the type of mortgage you want, you’ll need to start looking for a mortgage lender to work with. Unfortunately, not all mortgage lenders will view your application in the same way, so it’s good to do your research.
Look for a lender that has good reviews and a solid reputation for helping prospective buyers get into their homes quickly. Then, research the mortgage rates each lender is offering currently.
This will help you narrow down your choices and identify lenders that you’ll want to submit applications with.
How to Apply for a Mortgage
Once you have a few lenders in mind, you’ll be ready to start filling out your application. As a general rule, try to examine your finances before you start applying for loans.
Check your credit score and see where you stand. The higher it is, the easier it will be to qualify for a good loan. If it’s on the low side, try to build it up by paying down your outstanding debts before applying for a mortgage.
Once you understand where your finances sit, start looking at the application requirements for each lender. Most will require you to provide bank statements detailing your income, copies of your W-2, and proof of your down payment.
Compile all the necessary documentation and apply with at least three lenders. Compare the loan amounts, terms, and interest rates in detail before accepting the money.
Only Borrow What You Need, Not the Max Amount
When you apply, lenders may qualify you for a larger loan than you truly need. This is fine and can make it easier to find your dream home without worrying about your financing falling through at the last minute.
However, you don’t have to borrow the full amount that you’re qualified for. In fact, you shouldn’t if at all possible. The less you have to borrow, the less you’ll pay in interest over the life of your loan.
Answering the Question, “What Is a Home Mortgage?”
When you first start thinking about buying a house, you’ll have many questions in mind. The first is likely, “what is a mortgage and how will it help me?”
Keep this guide handy and you’ll be ready to navigate the loan application process with ease. Just remember to choose the mortgage lender that offers you the best rates and the highest loan amount.
Looking for more tips and tricks to make buying property easy? Check out our latest posts in the Real Estate section of our site to learn more about mortgages, property management, and real estate investing.