Choosing the Right Home Mortgage is Important
Unless you have enough cash to purchase a house outright, you're going to have to get a home mortgage. This is what the vast majority of people do. Although home prices have dropped precipitously in many areas, very few people have the cash that is needed to buy even modest homes without mortgages. While choosing the right home is important, selecting the right mortgage is too. In fact, your dream home could become a waking nightmare if you don't choose the right kind of loan. Learn more about home mortgages and the available options below.
What is a Home Mortgage?
A home mortgage is a loan in which the house and the land on which it sits are used as collateral. The bank is willing to loan you the money to pay for a home because it can take the home away if you stop making payments. Of course, banks don't loan people money out of the goodness of their hearts. They have to make money on the deal, and they do that by charging interest. Therefore, you don't just have to pay the sale price of the home, which will make up the principal of your home mortgage. You'll also have to pay interest.
The amount of interest you will pay will be reflected by the interest rate that's attached to your home loan. This is primarily influenced by current economic indicators. In the aftermath of the real estate bubble, for example, interest rates have been at historic lows. Your creditworthiness will play a role in how much interest you'll pay as well, and the amount of your down payment will have an effect on it too. The interest will be rolled into your monthly payment.
To make it easier for people to afford their monthly mortgage payments, home mortgages are usually spread out across long periods of time. Most commonly, the total term, or length, of a home mortgage is either 15 years or 30 years. The vast majority of people opt for terms of 30 years, which result in much lower monthly payments.
Principal and interest aren't all that are included in a home loan. Your monthly payment will also include homeowner's insurance and property taxes. An easy way to remember what's included in a mortgage payment is by memorizing the acronym PITI, which stands for principal, interest, taxes and insurance. If your down payment is less than 20 percent, you will also have to pay private mortgage insurance. This is another way in which the bank protects itself when loaning you money.
Without a doubt, the most popular kinds of home mortgages are fixed-rate mortgages. As the term implies, this type of loan has a fixed interest rate that doesn't change throughout the term of the loan. Fixed-rate mortgages are popular because they are predictable, which makes it easier to budget. When interest rates are low, as they are now, fixed-rate mortgages are especially worthwhile options.
Adjustable-rate mortgages, or ARMs, have largely fallen out of favor. When home values were through the roof, these loans were used to make buying a home more affordable. They offer low interest rates in the beginning. After the introductory period expires, the interest rate on this type of loan will vary depending on current economic indicators. While it can work in your favor when rates are low, it can backfire when rates climb. This type of loan is generally best for people who only plan to be in their homes for short periods of time.
Which Home Mortgage is Right for You?
To determine which home mortgage is right for you, you need to consider your total financial picture. How large of a down payment can you make? How expensive is the home you are buying? As low as interest rates currently are, you should lock in a great rate with a fixed-rate home mortgage today.