Paying off a mortgage takes considerable time, depending on the type of loan you have and your budget. Your monthly mortgage payment consists of the principal or loan amount, and the interest charged on the principal. You make monthly payments during your mortgage term based on the amortization schedule determined by your lender. Not all loans and lenders are the same, which is why you should do your research to understand what to expect when taking out a mortgage.
Know your credit score.
It’s a good idea to check your credit score and credit report to ensure there are no errors or surprises. The stronger your credit score and credit report, the more attractive interest rate lenders will offer. Each lender has its own definition of creditworthiness, but in general, a good credit score to qualify for a conventional mortgage is 620. Some lenders work with borrowers who have lower credit, but they require mortgage insurance and in some cases, a higher down payment.
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Calculate how much you can afford to pay.
Lenders consider your income when deciding on how much you are capable of borrowing. When determining how much you can afford to borrow, you need to consider several expenses. You’re responsible for the mortgage principal, the mortgage interest, property taxes, homeowners insurance, utilities, repairs and maintenance, and condo or association dues. The amount of a down payment you can afford to pay also affects the loan amount and monthly payments.
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Understand your mortgage options.
There’s a range of available mortgage options, each of which varies based on the loan amount, the loan term, the interest rate type, and affiliation with a special lending program. Each type of loan comes with pros and cons, so it’s a good idea to take your time when researching your options. Conventional loan terms are between 15 and 30 years. Shorter-term loans tend to have lower interest rates and lower total costs. Longer-term loans tend to have higher interest rates and higher total costs.
There are two types of interest rates lenders offer on home loans. A fixed interest rate won’t change during the life of the loan, which means you’ll always have the same monthly payment. An adjustable interest rate fluctuates based on the market. This means your monthly payments will either be higher or lower based on your interest rate.
Most hopeful homeowners are familiar with the concept of conventional loans. It’s possible that you could qualify for a special mortgage depending on your situation. Programs such as the U.S. Department of Agriculture, the U.S. Department of Veteran Affairs, and the FHA offer special types of loans to eligible borrowers.
It’s important to have a clear view of your credit score, housing budget, and mortgage options before you begin approaching lenders. Once you get pre-approved for a mortgage, you can start house-hunting.