Understanding Mortgage Basics

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Mortgages are loans that enable you to purchase or refinance a home. To be eligible for one, you must meet certain criteria such as your income level, credit score and debt-to-income ratio.

Understanding Mortgage Basics
Mortgages come in many different forms and features, making them all different for new homebuyers to understand the differences and decide which type is most suitable for their situation and loan amount.

Mortgage Definition
A mortgage is an agreement between a lender and borrower wherein the latter pledges their property as security for the loan. Subsequently, they agree to repay the lender over an agreed-upon term with regular monthly payments covering both interest and principal.

Typically, the down payment (the amount paid upfront to purchase a house) determines the mortgage rate lenders will offer them. However, there may be times when it makes financial sense for investors to mortgage a property even without any money down, such as when looking to free up funds for other investments or taking advantage of tax deductions.

Common mortgage types include conventional loans, FHA loans, VA loans, adjustable-rate mortgages (ARMs), and jumbo loans. Each has its own advantages and drawbacks.

Calculating Mortgage Payments
Your monthly mortgage payment will depend on several factors, such as your property’s value, down payment amount, loan term and interest rate. The more informed you are about these elements before purchasing a home, the lower your payments will be.

Mortgage Interest Rate
Interest rates on home loans can fluctuate considerably and tend to be linked to the economy. Therefore, it’s wise to monitor the current average rate in your area as well as Freddie Mac’s Mortgage Rate Tables regularly in order to stay informed on current rates and trends in the market.

When shopping around for a loan, remember to factor in the annual percentage rate (APR), which gives an accurate representation of what you’ll actually be paying. Doing this allows you to compare lenders and identify which offers the most competitive rates tailored towards your situation.

Lender Fees
Lender fees can add up to a considerable amount of money. These may include closing costs, appraisal fees and credit check fees. When looking for a home, make sure you inquire about the lender fees included in your loan estimate and compare them with what else is available.

Some lenders charge points, which can reduce your interest rate by up to several percentage points. These fees are typically added onto your monthly payment and could be an effective way for you to cut the cost of your mortgage.

Once preapproved for a mortgage, you will receive an official Loan Estimate outlining all associated costs. All lenders must use this format, making it simpler to compare different lenders.

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