by DigitechUnderstanding Mortgage Loans and Financing Options for Homebuyers
What is a Mortgage Loan?
Mortgage loans are type of loans taken against property. In this loan, an individual will pledge his property as collateral to get funds. It is a secure type of loan usually taken for real estate property. In this process until you make the loan repayment, your property will be pledged to the bank. The funds you will get in mortgage loans will depend on the mortgage rates and the cost of property you have kept as collateral.
Before taking any mortgage loan, you must know more about it to take informed decision. In this blog we are going to discuss everything about mortgage loan.
Types of mortgage loans
You must understand various types of mortgage loans that will help you get the best one for your property.
Fixed-rate mortgage
This type of loan has constant interest rate in the entire loan term and thus you can predict the monthly payments. Fixed-rate mortgage offers stability and safeguard you against fluctuating interest rate. You need to pay higher interest rates in this type of loan.
Adjustable-rate mortgage (ARMs)
The interest rate of this mortgage can be changed periodically as per the market condition. Initially the interest rate of this loan is low for a fixed period of time. This low rate in the beginning implies you need to pay less monthly payments in the beginning. Once you cross the initial period, payments will increase significantly, and hence you need to budget accordingly.
Federal housing administration (FHA) loans
There loans are government-backed loans that are suitable for low-to-moderate income homebuyers. These loans demand lower down payments and excellent credit score. First-home buyers can avail this type of loan, as it has lower down payment options like as low as 3.5%. This loan demands mortgage insurance premiums (MIP) that will increase the overall loan cost.
Veteran Affairs (VA) Loans
These loans are suitable for eligible veterans and active-duty service members and National Guard and Reserves members. There is no down payment for this type of loan and you can avail favorable terms. The biggest advantage of this type of loan is no private mortgage insurance (PMI), no down payment and competitive interest rates. You must meet the criteria and sometimes you may need to pay funding fee.
USDA Loans
These loans are suitable for suburban and rural homebuyers with moderate income. It comes with zero down payments for eligible properties. Although these loans don’t require any down payment and has lower mortgage insurance cost, this facility can be availed only in a limited geographical area.
Key mortgage terms to know
You must understand some of the key terms of the mortgage loans that you will hear frequently.
Principle: The money borrowed to buy the home.
Interest: The borrowing money cost, indicated as a percentage of principle.
Down payment: The payment made while buying any property, it is the percentage of the purchase price.
Low-to-value Ratio (LTV): The ratio makes comparison between mortgage loan amounts and increased property value. A lower LTV ratio will result in better loan terms.
Closing costs: It is the expenses and fees involved while closing real estate transactions, often ranges from 2-5% of loan amount.
Pre-approval: It is the written commitment stating the amount which lender will lend you as per your financial situation.
Financial strategies for homebuyers
Get pre-approval
Before looking for a property, you must obtain a pre-approval amount from a lender. This will let you know your borrowing capacity and will give a financial strength to you while making a deal.
Shop Around
Don’t ever finalize the very first mortgage offer. You must look for rates, terms and fees from various lenders to get the best deal.
Think about long-term plans
Consider the duration of your stay in the house. If you are planning to move in next few years, then you must go with ARM, while a fixed-rate mortgage will be a better option in case of long-term stability.
Evaluate down payment options
Although a larger down payment will decrease your mortgage and monthly payments, but you must have a balance between the two. You must go with FHA or VA option, if paying large down payment is a challenge for you.
Evaluate your budget
You don’t have to consider only the mortgage payment, but also insurance, property tax and maintenance cost. An overall budget will allow you to manage financial strain.
Conclusion
It can be an overwhelming experience for you to navigate through the financial loans and mortgage options. With correct knowledge you can take informed decisions as per your financial condition. By knowing various types of mortgage loans and familiarizing the different loan terminologies will ensure smooth journey to homeowners. Being a significant investment, you must do thorough research and to get your dream home.
