Very few can afford to pay cash for a home. That’s where mortgages come in. Mortgages give people the power to purchase homes they can pay for in affordable monthly installments. Let this guide to mortgages help you establish what you need to consider when applying for one.
WHAT IS A MORTGAGE?
A mortgage is a sum of money taken out for the purpose of buying a property. It is offered by lenders such as a bank or credit union with the requisite interest. Borrowers are required to pay back the mortgage in monthly installments. Once payments are complete, the borrower will own the property in question. If the borrower fails to meet their payments, they default on their mortgage, allowing the lender to foreclose or repossess the property.
TYPES OF INTEREST RATES ON MORTGAGE LOANS
Mortgage loans are long-term financial commitments that can be paid back for up to 30 to 40 years. Borrowers can choose between a fixed or floating interest rate when paying off their loan.
- Fixed-interest rate. When the interest rate stays the same for the entire duration of the loan.
- Floating interest rate. When interest rates can vary depending on the prevailing market rates.
Floating interest rates are generally lower than fixed rates, but can be very unpredictable. If you are comfortable with current rates, and plan to take out a loan 10 years or more, opt for a fixed- rate mortgage. If you want lower rates, you can choose to pay off the loan in under 10 years. If you can handle rate increases in the future, choose a loan with a floating interest rate.
WHAT TO CONSIDER WHEN TAKING OUT A MORTGAGE
When planning to purchase a home, it’s wise to know what your biggest considerations will be. With the right knowledge, you boost your chances of qualifying for a loan with favorable terms and put yourself in a good position to avoid defaulting on your mortgage.
Your credit score
A good-to-excellent credit score of 620 or above will help you secure conventional mortgage loans with low interest rates. Although you can still qualify for a loan with a lower credit score, you will need to make a larger down payment and pay higher monthly installments. If your score is below 620, it will be wise to work on improving it before applying for a mortgage.
Your budget
Be realistic about how much home you can afford. Look at how much you earn and how much you can set aside for mortgage payments. As a rule of thumb, try to keep your mortgage responsibilities below a third of your monthly income, so you can still live comfortably while paying off your loan. It’s also important to make the biggest down payment you possibly can to keep your interest rate low and ease any strain on your finances.
Due diligence
You need to do your homework before you move forward with the home buying process. The first items on your due diligence checklist: get to know the history of the home, along with the market values and trends in the area. Next is to have the home appraised and inspected.
Other due diligence checklist items include:
- Quality of schools in the area
- Access to amenities and transportation
- Security and safety
- Utility costs
- Taxes and insurance costs
Be thorough and meticulous in your due diligence. You need to do everything you can to ensure you are entering a good deal and your investment will yield positive returns.
If you want to learn about mortgages and the homebuying process in general, call me, Frank DeZao, at 201.953.9376 or contact me here. I am ready to answer your questions about taking out a mortgage to buy a house in Morris County, NJ.