Purchasing a home can be overwhelming. The amount of money you are about to put into your future house can seem alarming and maybe even impossible. This would normally be the case, but instead, we have mortgages. A mortgage is a loan that helps you purchase property by using the property itself as collateral. Mortgages are incredibly important to understand and fully utilize. To learn more about mortgages and the subsequent benefits, look no further.
How A Mortgage Works
A bank will loan you a specific amount of money that you will have to repay in a certain number of years with a certain set interest rate. Most mortgages are generally paid off anywhere between 15 to 30 years with monthly payments. Usually, you are also required to provide a down payment for a portion of the amount; the down payment value can range from 5% to 20% depending on the bank and your situation. It is important to keep in mind, that if your down payment is less than 20% you could be viewed as a riskier loan compared to others.
Mortgages use your home as collateral, which means if you don't repay the debt, the lender could potentially take back the property and sell it to cover the debt. This would affect your ability to buy a home in the future, so it is important to borrow wisely and avoid financial trouble.
Educating yourself is the best choice for smart financing, especially with the many different types of mortgages available.
Loans usually fall into one of two categories: Fixed-Rate Mortgages or Adjustable Rate Mortgages.
Fixed Rate Mortgages
Fixed rate mortgages have the same interest rate during the entire repayment term.
Adjustable Rate Mortgages
- Have an interest rate that changes over time
- Usually have a cap for the interest rate
Along with interest rates, loans can also be issued as government-insured loans instead of conventional loans.
Conventional Home Loan
A conventional home loan is one that is not insured or guaranteed by the federal government in any way.
Government Issued & Insured Loans
Federal Housing Administration (FHA)
The FHA loan is available to all types of borrowers.
US Department of Veteran Affairs (VA)
The VA loan is specifically for military members and their families.
The United States Department of Agriculture (USDA)
The USDA loan is for rural borrowers who meet certain income requirements.
Jumbo vs. Conforming Loan
Additionally, there is the difference between a jumbo and conforming loan. A conforming loan falls within maximum size limits, and otherwise "conforms" to pre-established criteria. While a jumbo loan exceeds the conforming limits established.
The Benefits of a Mortgage
Absorbing this much information at once can be overwhelming, but remember that having a mortgage on your home can be incredibly beneficial.
Mortgages make home ownership affordable and can help you lock in the dream home you've been hoping for. It is also helpful that interest rates on mortgages tend to be lower than any other form of borrowing, because the loan is secured against your property. Keep in mind that prompt and timely payments on a mortgage will help greatly improve your credit rating and increase your likelihood of receiving loans in the future.
Mortgages are very beneficial and continuously help homeowners find and purchase the property they desire. Take the time and effort to sit down and work through the different types of mortgages to determine which one is the best fit for you and will benefit you the most in the long run.