Buying a home is an exciting experience! And, it doesn’t have to be overwhelming when you understand the steps.
Whether or not you’ve been through the process, if you’re considering buying a home, now is the time to brush up on what to know about mortgages before applying. Here, we’ll walk you through how mortgage payments work, the application process, and what mortgage options you have once you’ve made the purchase.
How Mortgage Interest Works
When it comes time to purchase a home, you’ll hear a lot about rates. Think of an interest rate as the price you pay for using someone else’s money. More specifically, your mortgage rate is what it costs each year to borrow the money. It is expressed as a percentage. The amount of interest you pay every month is added to the total owed on a loan, also known as the principal.
Belco offers a variety of fixed mortgage interest rates. Fixed interest rates stay the same for the entire length of your mortgage loan. This offers a predictable payment each month and makes budgeting easier.
How Interest Rates Are Determined
Your mortgage rate is a percentage of your total loan balance. Keep in mind, the actual amount is different for everyone based on several factors.
The strength of the economy has a lot to do with your rate. Mortgage rates are set by market forces to get the prime rate. These can move up and down daily, based on the current and expected rates of inflation, unemployment, and other economic indicators.
Rates trend higher when the economy is considered to be doing well — people are willing to pay more for goods and services and unemployment is low. Rates tend to fall when the economy is slowing down and unemployment is rising. Personal finance history also helps determine your rate. Your credit score, down payment, the amount of money you’re borrowing, and your income will be evaluated to help make the rate decision.
What To Know About Mortgages: Your Monthly Payment
The easiest way to remember what goes into your monthly mortgage payment is with an acronym: PITI. The total amount of Principal, Interest, Taxes, and Insurance on your mortgage matters because it gives an estimate of how much you can afford to purchase your new home.
Your principal is the amount of money in your payment going toward the actual cost of your mortgage. In other words, it’s the amount you pay back to the lender each month.
The most expensive tax you’re likely to pay is property tax, which varies by location. Property taxes support the local community and pay for things like libraries, public schools, road maintenance, and community development projects.
It’s hard to estimate an exact amount of how much you can expect to pay in taxes because they depend upon your home’s value and your local property tax rate. Taxes can also vary from year to year.
Mortgage and homeowners insurance will be combined in your monthly payment. Mortgage insurance, or PMI, protects lenders in case you default on your loan and can’t pay it back. It is typically required for loans with low down payments.
Your home is likely one of the most significant purchases you’ll make in your life — make sure to protect it with a homeowners policy. You’ll want to research your options to decide the provider and policy that works best for you.
Preparing for the Application Process
Among many other requirements to apply for a mortgage, you need strong credit and a downpayment.
All loan programs have a minimum credit score requirement. Higher credit scores typically point toward a strong credit history. This allows you to qualify for lower interest rates. Some loan programs require you to make a down payment of a certain amount. Remember, the more you put down, the less you pay monthly.
Application requirements can be lender specific but usually include proof of identity, bank and asset statements, pay stubs, and two years’ worth of your W2s. Documentation will differ if you’re self-employed — have your tax returns handy!
The “Why” Behind Refinancing
There are several reasons why refinancing your home mortgage could make sense.
With a refinance, you can lower your current interest rate on the amount of money you owe. This results in a reduced monthly mortgage payment with more of your money going towards the principal and less towards interest.
You may also choose refinancing to adjust your loan term. If your concern is the number of years on your current mortgage, refinancing to a shorter term may be the solution. A shorter term may increase your interest rate, but the reduced years of payments might make up for it, saving you more money in the long run.
As always, research thoroughly and shop around to get the best possible deal to make sure that refinancing will support your financial goals.
Making the Most of Your Home’s Equity
A home equity line of credit (HELOC) or a home equity loan are both ways to finance large expenses by tapping into your home equity.
HELOCs help cover ongoing costs. Home equity loans are suited more to one-time expenses. If you know how much you want to borrow and need the money upfront, a home equity loan is usually the best choice. How you use the money from a home equity loan is up to you.
If you prefer to have a line of credit readily available where you can draw from over time, a HELOC is probably the better option for you. HELOCs also allow you the ability to borrow as little or as much as you want — when you want — similar to how a credit card works.
Next Up: Choosing the Right Mortgage Lender
We’ve covered what to know about mortgages, but what about finding the right lender?
There’s no shortage of credit unions, banks, online lenders, mortgage brokers, and others eager to take your loan application. However, with every lending option comes a different level of customer service, personal attention, perks, and not to mention varying rates and terms. It is worth it to make sure you are partnering with the right lender to make your borrowing experience as easy and seamless as possible.