Shopping for a Mortgage? Six Things You Should Know
When you begin your search for a home mortgage, having a good grasp of mortgage basics will help you find the best mortgage loan. Here are six essential pieces of mortgage information to assist you with your home mortgage shopping and help you save money in the end.
The Principal
- The amount of money you are borrowing to finance your home
If you are getting a home mortgage, you need to understand that the principal is not the total cost of your mortgage loan. You also have to include interest and closing costs to compare the real costs of borrowing money.
Fixed Rate versus Adjustable Rate
- Fixed rate mortgages: interest rates do not change
- Adjustable rate mortgages: interest rates do change
Some mortgage loans are a fixed rate. The interest rate charged by the lender is set or fixed, and does not change over the life of the loan. Advantages : You can easily calculate the total cost of the loan. There are no nasty surprises with monthly payments.
Other mortgages have adjustable interest rates. The interest rate is set at an initial level for a specific length of time. After the initial period, the interest rate will change based on the specific conditions of the loans. Advantage: Adjustable rate mortgages usually have lower interest rates initially than a fixed mortgage. Disadvantage : Every change in the interest rate changes the total cost of your loan.
Interest Rate
- The percentage amount of the principal charged by the lender as a periodic fee
The interest rate is part of the total cost of your mortgage loan. Usually, interest accrues annually, but this may differ from mortgage to mortgage.
Monthly Payments
- The monthly amount charged to the borrower to repay the principal and interest costs
When you are preparing for a mortgage, you need to be very careful to keep the monthly payments within your budget range.
Mortgage Loan Term
- The amount of time that the mortgage terms are in effect
Some very common mortgage terms are 10, 20, and 30 years. Shorter-term mortgages have higher monthly costs, but save you in interest charges. Getting a mortgage with a longer term lowers your monthly payments, but costs you more money over the life of the loan.
Closing Costs
- Fees charged to close a mortgage loan agreement
The last bit of mortgage info you need is about the closing costs. Closing costs are a group of charges that include title fees, inspections, documentation, and other miscellaneous costs. Ask for a good faith estimate of closing costs in order to calculate the total cost of your loan. Reasonable closing costs are generally between three and five percent of the principal of the loan.