A mortgage is a type of loan that enables people to purchase property. Lenders provide money to buyers based on the value of the home, and the buyer agrees to repay it over a fixed term. This type of loan can be used to finance the purchase of residential, commercial and recreational properties.
Getting a mortgage: Understanding your options
When buying a home, lenders typically require borrowers to put down at least 20% of the purchase price. The higher the down payment, the better the lenders risk profile and lower the interest rate. Those who put down less than 20% must pay private mortgage insurance (PMI), which helps protect the lender in the event that the borrower cannot afford to repay the loan.
Your mortgage payment: What it includes
A typical mortgage payment is made up of four core components: principal, interest, taxes and insurance. The principal portion is used to pay down the loan balance, and the interest portion is what the lender charges you for using that money. Taxes and insurance are often collected by the lender, held in an escrow account until they are due and then paid on your behalf.
Getting a mortgage: How much you can afford to spend
A key factor when applying for a mortgage is your debt-to-income ratio, or DTI. The higher the DTI, the more your monthly payments will exceed your income.
Your credit score and red flags on your credit report can also help determine whether or not you qualify for a loan. A higher credit score demonstrates that you are a responsible borrower, and fewer red flags can make your application stand out.
Choosing your loan terms: Before you apply for a mortgage, you should shop around to find the best loan terms and rates available. This process can help you identify the best mortgage options for your goals, lifestyle and budget.
Estimating how much you can borrow:
A mortgage calculator is a useful tool to estimate how much your mortgage will cost. It takes into consideration several factors, including the interest rate and your loan term. A mortgage calculator can also give you an idea of how much you may owe at the end of the loan term, and it can help you determine whether or not you should pay private mortgage insurance.
Mortgage amortization:
A common mortgage repayment method involves making regular payments toward the loan principal and the interest over a set period of time. This is known as amortization and usually refers to a 30-year mortgage in the United States and a 20-year mortgage in most other countries.
The principal and interest payments on a mortgage are calculated based on a formula that considers the time value of money. The more you pay to the principal, the faster the loan will be paid off and the more equity youll have in your home.
When your loan is paid off, the remaining mortgage balance will have dropped to 80% of the original loan amount. This is called equity and it can be a major source of financial comfort for homeowners.
