A mortgage is a loan that lets you borrow money to buy or refinance a home. Its an important financial commitment and it can be an exciting time for a new homeowner. However, if youre not familiar with mortgages, it can be confusing to understand how they work.
Mortgages are the most common type of loans and are used to purchase a home, refinance an existing home, or purchase a home equity line of credit (HELOC). Theyre secured by the property, which means that you are borrowing against its value.
The lender is also entitled to take back the property if you default on your loan or fail to pay your monthly payments. Thats why its crucial to make sure you can afford the monthly payments if you ever experience a tough financial period.
Before applying for a mortgage, you should get a preapproval. That way, you can know what you can afford and know if your application will be approved. It also lets you shop around for the best mortgage rates and avoid being locked into a high interest rate if your preapproval doesnt work out.
Getting a mortgage can be a confusing process, so its important to have the right tools and information at your disposal. Youll need to have a down payment, have a job with stable income and good credit, and make sure you have enough funds for closing costs and points.
Once youve completed the application process, youll be sent to a mortgage underwriter for more detailed review. Theyll examine your employment history, credit history, finances and debt-to-income ratio to ensure you qualify for the loan. They may also order an appraisal and conduct a title search to make sure you have no liens or other claims against your property.
Your debt-to-income ratio is a number that lenders use to determine how much of your income is going toward paying off your bills, including your mortgage. Ideally, you should have a low DTI. This can help you save money on interest by reducing your overall debt load.
You can also make your mortgage payment more affordable by paying extra on your principal. This is the part of your mortgage that doesnt include interest and taxes. During the first few years of your mortgage, youll pay more on interest than you do on your principal, but that can change as you start to make larger payments on your principal over time.
The amount you pay for a mortgage will vary by home price, down payment, loan term and other factors. The lender will provide an amortization schedule, which is a table that shows you how your monthly payment will break down.
When you pay off your mortgage, youll have paid back more than the original amount borrowed, but the interest and fees will add up fast. So if you want to pay off your mortgage faster, make sure you have enough cash to cover those monthly payments and save on interest.