Buying your first home is exhilarating. You’ve worked hard and will finally have a place to call your own. However, making that big purchase isn’t completely stress-free. For first time homebuyers getting a mortgage can seem tricky. Here are the mortgage basics that you should know:
What is a mortgage anyway?
A mortgage is a type of loan that is specifically backed by real estate. Unless you have the cash to buy a house in full, you’ll need to take out a mortgage. The mortgage will cover the cost of the home minus your down payment. Learn more about mortgages.
What is a mortgage payment?
You’ll need to pay back your mortgage on a monthly basis. However, you’re not only paying the principal (the amount you borrowed). Mortgage payments also include taxes, insurance, and interest on your loan. You can eliminate the Private Mortgage Insurance (PMI) payment once you have put down at least 20% equity.
I keep hearing about “fixed-rate” and “adjustable-rate” mortgages…what’s the difference?
A fixed-rate mortgage means the rate of interest you pay stays the same for the “life” of the loan. On the other hand, an adjustable-rate mortgage will start at a lower initial rate and increase over a set period of time. This increase usually happens every few years.
If you are planning on staying in your home for a long time and interest rates are low when you are buying, then a fixed rate mortgage is better. If you expect to move soon after you buy or interest rates are high during the time you buy, then you may consider an adjustable-rate mortgage.
What is “pre-approved” vs. “pre-qualified”?
Pre-approval is a more in-depth version of pre-qualification. When you’re pre-qualified, a lender takes a look at your assets and income to determine what mortgage you may be approved for. However, this is not a guarantee that you will be approved for that loan amount.
Pre-approval involves an application fee and a more thorough analysis of your credit. Your lender will be able to give you an estimate of payments when you’re pre-approved. This is valuable information to have as you begin your home search.
What does it mean that part of my payment will be held “in escrow”?
An escrow account is like a savings account for taxes and insurance that your lender manages. A part of each mortgage payment will be held “in escrow” until the taxes or insurance are due (usually once a year). This is generally better for first-time home buyers who may not have a lot of money put away. Having an escrow account allows you to pay your taxes gradually every month instead of having a huge bill once a year.
What other mortgage basics do I need to know?
Shop around! As you’re looking for lenders, you need to compare the following:
- Annual Percentages Rate (APR)
- Pre-payment Penalty
Each of these has the potential to add cost to your mortgage that you need to know up-front. Once you’re equipped with the knowledge you need, you’ll find that getting a mortgage isn’t as overwhelming or stressful as you thought.