Mortgages represent a considerable financial commitment. The average individual will be paying back their mortgage for thirty years of their life, and even the shortest loans represent a financial commitment of at least a decade.
As such, mortgages are not something to take lightly. Before you decided whether or not you are ready for a mortgage and your new home, consider these important questions and make sure you have carefully considered all aspects of mortgages before committing to a loan.
Commonly Asked Question 1: What is Considered an Acceptable Down Payment?
The more of a down payment you can make on your new home, the lower your mortgage will be. Some lenders require large down payments – especially if you have a questionable credit score, while other lenders require a more standard down payment. Almost no reputable mortgage agencies will allow you to purchase a new home without some type of down payment to show financial means and commitment.
The minimum down payment for most lenders when you have good credit is going to be 5% of the total purchase cost. A 1 million dollar home will require a $50,000 down payment, while a 100,000 dollar condo will require as little as $5,000. It should be noted, however, that there are additional costs to purchasing a home that are not included in the down payment. Some lenders will require you to prepay insurance, while other lenders will require you to pay all of the closing costs of the loan right from the beginning. It should also be noted that the average down payment on a home is roughly 20%, to account for credit score problems and to lower risk (interest rates may drop if you can commit more money down).
If you are planning your down payment, it is best to make sure that you are prepared for all of these costs, with additional money in the bank to ensure that the down payment doesn’t sap your savings. A home is a great investment and a mortgage a valuable tool, but due to the importance of making each payment on time, you must make sure you have additional money in the bank after all fees have been taken.
Commonly Asked Question 2: What Are Average Monthly Payments for a Mortgage?
Because mortgages have so many different lending options, average fees are difficult to calculate. However, using the simplest type of mortgage available (the fixed rate mortgage) it is possible to estimate what monthly fees will be for both an average 30 year mortgage and 15 year mortgage, and it can be assumed that a loan with varying interest rates will still hover around these monthly payment tags.
- 30 Year Mortgage – For every $100,000 on the loan, at an estimated interest rate of 5%, the average payment will be $536.82. You can multiply that number by the amount of your mortgage in relation to $100,000. For example, a 250,000 mortgage will require monthly payments of $1342.05 (2.5 x 536.82). For every extra percentage in your interest rate, the cost of the monthly payments per 100k is approximately$50.
- 15 Year Mortgage – A 15 year mortgage seeks to pay off interest sooner, which reduces the total dollar value at the end of the loan, but also increases your monthly payments. For every $100,000 of the home loan, you will have a monthly payment of $790.79 with a 5% interest rate.
It should be noted, however, that this does not include additional fees like property taxes. But as far as monthly payments are concerned, the above examples are roughly true for all types of loans, with the numbers varying by the year of the loan and the interest rates.
Commonly Asked Question 3: How Much Does My Home Cost With a Mortgage?
Because mortgages charge interest, the total amount you are paying for a home is more than its price. When interest accumulates, you are ultimately paying for the home cost plus the cost of interest over the course of the loan.
The best way to view this is with numbers. Using the above example for a $100,000 dollar home:
- For a 30 year mortgage at an interest rate of 5%, each monthly payment is approximately $537.
- Over the 360 months of the loan, the total amount paid will be $193,320.
- So the cost of a $100,000 home if the entire loan was a mortgage is a little less than $200,000.
It is for this reason that many individuals choose to do shorter term loans, even though the monthly payments are greater. A 15 year fixed 5% interest rate loan will run a total cost of only $142,000 – $50,000 less than the 30 year mortgage.
However, it is far more important for you to be able to make your payments than it is to save this money over time. If you can, then a 15 year mortgage represents greater financial value, but if you cannot, a 30 year mortgage will allow you to live more comfortably during the time you are paying back your loan.
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Purchasing a home is a great investment. Beyond simply providing you with a place to live, it allows you to put your income into property that, over time, will inflate in value. But the cost of purchasing such a home is not insubstantial. When purchasing a home, you have two options:
- Pay the entire cost of the home in cash at the time of purchase.
- Secure a loan from a reputable lender, covering the costs of the home and allowing you to pay off the loan in simple, predetermined monthly payments.
With the average price of a house at over $250,000, few people are able to afford the costs up front, and so mortgages are the number one way that families and individuals purchase their own property.
What is Involved in a Mortgage?
In order to secure a mortgage, you first must find a lender. It is very important that you research reputable mortgage lenders in order to ensure that everything goes smoothly. Once you have sent in an application, a lender reviews your credit score and supplies you with an interest rate. Most mortgages are paid off over roughly a 30 year period, and most interest rates hover around 5%, depending on credit score, lender, and type of loan.
Types of Mortgages
In order to successfully satisfy the varying financial situations of borrowers looking for a loan, a variety of different types of mortgages exist. Examples of these mortgages include:
- Fixed Rate Mortgages – The most common type of mortgage is the fixed rate mortgage. Fixed rate mortgages supply you with a fixed interest rate that stays constant during the course of your loan. Loans are generally taken over 30 year intervals, but 10 year loans, 15 year loans, 40 year loans and 50 year loans are also available from some lenders.
- Adjustable Interest Rates – Another type of mortgage is an adjustable rate mortgage (ARM). Most adjustable rate mortgages are 10/1, but there are also 5/1, 7/1, 5/5 and 3/1 mortgages as well. Adjustable rate mortgages supply the borrower with a static interest rate for a pre-specified number of years, before adjusting interest rates every year after. So on a 10/1 loan, the interest rate is fixed for the first 10 years, and then the interest rate is recalculated for every year afterward until the end of the loan (usually 30 years).
- One Year ARM – Another option is an adjustable rate mortgage that changes every year based on the current loan index. These loans can be very useful if one expects the index to be low, but if the index skyrockets, you may pay more than you would have with a fixed rate loan. There is risk, but there is also reward, which makes this option a popular choice.
Other types of mortgages include 2 step mortgages, balloon mortgages, FHA and VA mortgages, and a variety of hybrid and specialty mortgages. Fixed rate mortgages are the simplest, while all other mortgage types weigh some degree of risk and financial reward.
What Happens If You Cannot Afford Your Loan?
When you sign up for a mortgage, the home is owned by the bank. Thus if you refuse or cannot afford to pay back a loan, the bank can decide to take the home for themselves and sell it to recoup their losses. This is known as “foreclosure.” A home that was foreclosed may go up on auction or sold on the market, and the money raised from the foreclosed home will be used to pay back any remaining debt.
Reputable lenders will be unlikely to foreclose on your home right away, providing you with ample opportunity to make your loan payments. But missed payments can affect your credit immensely, so loans should not be taken if missed payments are a possibility.
Mortgages – A Necessary Lending Option
Few families can afford the cost of buying a new home out of pocket, and even those that can would prefer not to risk their savings all at once. As such, mortgages are provided by banks and private lenders in order to help ensure that you are able to purchase a new home and have a place for you to live for years to come.
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Mortgages represent the largest loan you will likely receive in your lifetime. It represents an incredible opportunity for financial growth – allowing you to purchase property that will ultimately grow in value – but it also represents a considerable financial commitment, one that you will be paying back for a minimum of 15 years, and a maximum of as much as 30 years or more.
Because of the value of your investment, it becomes vital for you to ensure that you have done everything necessary to find the mortgage that is perfect for your circumstances. Here are several tips for finding the best available mortgage to meet your needs.
Finding the Best Mortgage
- Consider a Mortgage Broker
One method of ensuring you find the best mortgage is to have a broker find the best mortgage for you. Mortgage brokers are well versed in property law and have had a great deal of experience working with banks and reputable lending institutions to create the ideal mortgage based on current economic conditions as well as personal finances and options.
Good mortgage brokers are knowledgeable of a variety of lending facilities, know how to fill out the paperwork, and provide most of the legwork themselves while recognizing what is a good and a bad deal. They are a great option for helping you find a good mortgage loan. But do be careful – mortgage lenders are often paid by the lending agencies, so they do have a vested interest in having you sign papers on loans that may not be as financially stable. That is why it is also important to make sure that you have carefully vetted the broker and are working with someone that has good reviews and is trusted by friends or family.
- Compare Rates
It is absolutely vital that you do your best to compare interest rates of all of the leading lending companies. While you may come across a mortgage that sounds like a great deal, chances are there is another lender out there that is offering a better deal. Only by checking the rates of multiple lending agencies will you be able to know with certainty that you are receiving the best rate on your loan. Reputable lenders will allow you to look around before you commit to signing their paperwork.
Comparing rates also requires that you recognize available lending options. There are multiple mortgage types beyond the most popular mortgages, and depending on both the economic conditions and your own finances, you may choose to go with a different type of mortgage than the traditional fixed rate loans.
- Always Read the Fine Print
This past decade has highlighted problems that occurred within the mortgage industry. For a long time, less-than-reputable lenders were providing high interest loans to unqualified borrowers with substantial hidden fees that made it even more difficult for the borrowers to pay back the loans effectively. That is why it is vital that you compare fees and charges in addition to interest rates, paying close attention to the fine print including non-payment options, fees, foreclosure rules, and the ability for the lending agency to change its policies. Only by comparing and contrasting every aspect of your lending contract can you be absolutely sure that you have made the right decision with your loan. If you need more time, take more time, but make sure that you have read and re-read every part of your contract before giving it your signature.
Making Sure You Get the Right Loan the First Time
Mortgages are considerable financial commitments, but they also represent the best way to purchase a home in today’s market. If you get stuck with a loan with a high interest rate, there are refinancing options, but it is possible for these options to harm your credit score, which could ultimately raise the cost of your interest. It is best, then, to make sure that you get the right mortgage the first time, by following all of the above tips and ensuring you have done all applicable research. Only then can you find the best available mortgage loan – one that will allow you to make your monthly payments easily and have the house of your dreams for the rest of your life.
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