Mortgage Basics that You Should Be Aware of
When you decide to buy a house, your mind may be flooded with a number of questions about how to go about financing the purchase
. You will have to apply for a mortgage and for that you will first have to find a suitable bank or lender. You may find your local bank a good option, but there are more choices than you can imagine. An online search will yield thousands of results and you will be surprised to know that there will be a big number of mortgage lenders operating in your city. The next step is to compare different lenders, ask for quotes and then make an informed decision on the lender as well as the type of mortgage. You should also carefully look at costs like prepayment fee, especially if you feel you may be refinancing the mortgage later.
Here are some of the mortgage basics that all first time home buyers should be aware of.
Interest rate
The annual percentage rate or APR offered by different lenders should be compared. The APR will determine how much you will have to pay every month during the loan term to pay off the mortgage. The interest rates will also depend on the type of mortgage you go for. The two main types of mortgages are fixed rate and variable rate mortgages. A fixed rate mortgage is one whose rate of interest remains fixed over the term of the mortgage. You will have to make fixed monthly payments towards principal and interest during the loan duration. A variable rate mortgage is one whose interest rate is adjusted periodically on the basis of certain market indices. Consider factors like if you would like to have the current interest rate locked in, what is the cap if the rates keep increasing over the life of the loan etc. You can also go for mortgage refinancing if you are not happy with the type of mortgage that you have, but the whole process will be costly.
Points and closing costs
There are two types of mortgage points- origination and discount. One point' equals one percent of the mortgage/loan amount. Origination points refer to an amount that is paid to mortgage lenders to obtain the loan. Discount points is the amount paid to get a loan at a particular interest rate. All the costs involved in the transaction that the borrower will have to pay to obtain the loan should be carefully assessed. Seek clarifications from the lender on all the fees charged.
Down payment and pre-payment penalty
Typically, you will have to make a twenty percent down payment and a private mortgage insurance may be required if the down payment is under 20%. Another important consideration is the pre-payment penalty, which is charged if the loan is paid off earlier, which is typically done in case of refinancing. Check whether the loan can be paid off sooner and if there is a penalty associated with it.
Mortgage Basics that You Should Be Aware of
By: Jeff Livingston
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