Owning a home is a dream many people have. Unfortunately, obtaining a mortgage is often a confusing and overwhelming prospect for many. The good news is getting a mortgage allows you to obtain a large, expensive asset with little money up front, and it’s not as confusing as most people think if explained right. Take a look below to begin learning how a mortgage works when buying a home.
The Home Mortgage Broken Down
Many experts like to make mortgages sound complicated, but the reality is, they are pretty simple if you break them down. Obtaining a mortgage to buy a home is much like obtaining any other type of loan. You borrow money from a lender, you make payments to the lender every month, paying back interest and part of the mortgage with each payment. The longer the repayment term, the lower the payments will be but the more interest you’ll pay because it takes you longer to pay the loan off.
Parts of a Mortgage
A mortgage is made up of several parts.
The down payment is a percentage of the purchase price the buyer must pay upfront. It can be as little as zero percent down up to 25 percent for investment properties.
The closing costs are separate from the down payment. They include fees like lenders fees, appraisals, pre-paid insurance and interest, and title insurance and title company fees. Closing costs fall between 2-6 percent of the purchase price and are usually paid by the borrower, although the borrower can ask the seller to help pay these fees.
The mortgage payment is figured using an algorithm that factors the length of the loan, the interest rate, insurance, taxes, and mortgage insurance to come up with a monthly payment. Property taxes and homeowner’s insurance are usually included in this payment via an escrow account.
Qualifying for a mortgage is determined by the lender. The lender will look at several factors including your employment and your credit history to determine your ability to repay a loan. It’s best to get pre-qualified for a mortgage before beginning your home search so you know how much home you can afford.
To qualify for a mortgage, you:
- Must have worked at the same job for at least two years
- You must have an average credit score of 620
- Your credit report can’t have a short sale or bankruptcy in the recent past
Buying a home is an investment that most people are glad they’ve made. With that said, obtaining a mortgage is a process that can be confusing and overwhelming, so you should do your homework to understand the process completely. If you have questions, don’t hesitate to ask your agent as she can help guide you through the homebuying process.