Mortgages do not have to be a scary word! Some people view mortgages as a burden that they cannot get rid of. Mortgages are essentially one big legal agreement. They are a contract between you and a bank or other financial company. With a mortgage, a creditor lends you money you need to buy your home. The money comes with interest.
You don’t have title to your home until you pay off your mortgage. Once you pay off your mortgage, the bank transfers title. Note that interest rates vary by lender. Mortgages have been in the news for a while. They have been a hotspot for legislation ever since the financial crisis nearly a decade ago. Mortgages do not have to be intimidating, however. There are ways to turn the debt into a positive. Think of it as a step towards a solid financial foundation: your home.
Before people take out mortgages, there are things you need to know.
What Can Owning a Home Do for You?
Owning a home is all too often considered a luxury. The benefits are considered in terms of the aesthetic, not the financial. But a home is a powerful financial tool in and of itself. When you own a home, you are making an investment, as the home usually appreciates. You also gain equity and access to the tax benefits the IRS gives homeowners. These tax breaks can add up to a pretty good chunk of change at the end of the year. Of course, you’ll also have the advantage of more freedom and control over your living space. When you rent, you can’t alter or make renovations. You’re beholden to the landlord. While that’s fine for a short period, it isn’t great forever. Home ownership gives you autonomy. And mortgages are tools to help you get on the path to that goal.
Fixed Rate Versus Variable Rates
If your mortgage is fixed-rate, the rate of interest set by the lender does not change over time. Fixed rate mortgages provide a big benefit if you’re facing uncertain national economic times. The rate of mortgages’ interest doesn’t drop or rise, giving you a sense of stability and surety. You know what you’re going to pay on your loan each month, and that’s a sense of safety.
A variable rate, by contrast, adjusts. The market rate is lower than a fixed rate, but it moves with the market. Variable rate mortgages have a fixed time period during which they will not change. But after that period, the interest rates change based on the market. That can be good or bad for a homeowner. So, while you have a lower rate, possibly, that lower rate can turn higher eventually.
What is Amortization?
Amortization is a term many people might not be familiar with. This is a technique that accountants use. Through scheduled charges to someone’s income, the asset someone is paying off lowers. Amortization pays off a loan over time in fixed payment rates. It’s like a car loan in that way. Also, capital expenses for the asset are spread out over time. This time period is the asset’s life and use. A goodwill, copyright, or patent’s useful life is measured differently than that of a tangible asset.
How to Find the Best Mortgage Lender
If you’ve decided you want to obtain a mortgage, you will need to first do some research. Compare financial institutions’ rates and reliability. As mentioned, predatory lending was not a non-issue. While legislation minimized the risk, you should tell review with the BBB and credit unions to ensure your lender is reputable.
After selecting a lender, you will need to pre-qualify and be pre-approved. In the next section, we will discuss what lenders look for when considering whether to give people mortgages. After these preliminary steps, you can officially apply. If approved, you then must close on the sale of the home. Mortgages come into effect the same day of closing.
What Lenders Look For
When a lender is deciding whether to give people mortgages, they look to someone’s reliability in repaying their bills. They look to a credit score, income, prior bill-paying record, family situation, and more. If you are unhappy with your score, you should take steps to raise it. Don’t use more than thirty percent of your credit. Pay bills in a timely fashion, do not take out new lines of credit, and keep older, even-unused accounts, open.
Mortgages are legal contracts. They depend on two parties’ trust in one another. The bank needs to be able to trust you to repay your mortgage, and you have to be able to trust the bank to have fair terms. Predatory lending is, unfortunately, a problem with mortgages. But through comparison sites and diligent research, you can cut down on your risk and increase your potential gains.