Few people who buy a home can afford to do so without a loan from the bank, commonly known as a mortgage. The mortgage is the amount you borrow — the cost of the home minus the down payment. The interest rate on the loan is projected and may change, depending on the length of the mortgage and your credit history.
With all the different mortgage products on the market, there is no “one size fits all” and that makes choosing the right mortgage more challenging.
Savvy buyers will do their homework on the different types of loans and how each can make a big difference in monthly payments and the overall cost of the loan. They will also pick a lender who will guide them through the mortgage process.
Things to Consider When Choosing a Mortgage
The amount you can borrow and your monthly payment will be contingent on several things, including your income, down payment and credit history, the interest rate, and the lender. To live comfortably, a general rule is that your monthly debt should not exceed 36 percent of your gross monthly income and your mortgage payment should not exceed 28 percent of your gross monthly income.
An online home loan calculator can help you understand the impact that different mortgage rates and the length of the loan will have on your monthly payment. Remember than if your down payment is less than 20 percent, lenders will require Private Mortgage Insurance (PMI), which protects lenders if a loan is not repaid, and a house goes into foreclosure. The fees vary, depending on the size of the loan, but it can cost between 0.5 and 1 percent of the mortgage on a yearly basis.
A mortgage is a long-term commitment, you should talk to multiple lenders to find the solution that best fits your needs. Exploring mortgage options with multiple lenders could potentially save you thousands over the life of your loan depending on the term, type and interest rate.
Type of Mortgages
Fixed-rate mortgage: The most common mortgage keeps the interest rate the same over the entire term, usually 15, 20 or 30 years. If interest rates drop, you may be able to refinance at a lower rate.
Adjustable-rate mortgage: An ARM usually offers the lowest interest rates but only for an introductory period. After that, rates vary over the term of the loan.
FHA Insured Loan: Insured by the Federal Housing Administration, these loans have lower down payment requirements and flexible lending standards. The program helps make home ownership accessible to everyone.
Balloon mortgage: Regular payments are made for a specific period of time, then the remainder of the loan is repaid in a single lump-sum payment at the end of the term.
Interest-only loans: Only the interest is paid on the loan, in monthly payments, for a fixed term. The balance of the loan is due after an initial period, which could mean paying a lump sum, higher payments or refinancing.
Your monthly mortgage payment will consist of principal, interest and depending on the terms of your loan, escrow (including taxes and homeowner’s insurance), and private mortgage insurance.
