Buying a home can be a scary process. Mortgages, interest rates, amortization and closing costs. There’s so much you have to know to make sense of it all. If you don’t understand what’s going on with the mortgage application process, you can actually end up losing money by paying too much.
Understanding the mortgage process is not as difficult as it sounds. First, you need to know what makes up a mortgage payment. Find out what types of mortgages are out there and what you can do to save money on your mortgage.
What is a mortgage?
Mortgage is just a fancy word for a very large loan to purchase a house. The mortgage payment is made up of four different payments:
When the bank tells you what mortgage payment you can afford, remember that the amount they give you is the total of the principal, interest, taxes and insurance. Keep this in mind when you’re looking at houses. Remember that even though a mortgage calculator says you can afford that bigger, newer house, you may not actually be able to afford it. You still need to factor in interest payments, property taxes and insurance premiums.
Types of Mortgages
There are 3 main types of mortgages: fixed-rate, adjustable-rate and balloon-rate. Each one has its advantages and disadvantages. You need to understand them to know which one is going to save you money on your mortgage.
A fixed-rate mortgage can have a term of 30, 20 or 15 years. The shorter the term, the higher your monthly payments will be. But your interest rate will be lower. However, you’ll be paying off more principal than you would with a longer term. So you’ll be making a higher monthly payment than with a longer term loan. Use a mortgage loan calculator to find out what this mortgage would do for your monthly payments.
An adjustable-rate mortgage (ARM) can be set up for different terms. For instance, a 5/1 year ARM means that your interest rate will be fixed for 5 years, but starting on the 6th year, it will increase every year. A 3/3 year ARM will be fixed for 3 years, but on the 4th year your interest rate will increase every 3 years. ARMs usually come with caps. This means, for instance, that the interest rate can only increase a maximum of 1% with every adjustment, and 6% total over the term of the loan. If you’re considering an ARM, check out this ARM mortgage calculator to see what your payments would look like.
Balloon mortgages are really only a good option if you know for sure that you will be able to sell your house, refinance your mortgage or pay off the full balance of your loan in 5 to 7 years. Otherwise, you could be stuck with over $100,000 to pay off in one big chunk.. If you’d like to see what a balloon mortgage would do to your monthly payments, try out this balloon mortgage calculator.
How to save money on your mortgage
Choosing the right mortgage is the best way you can save money. A 30-year, fixed-rate mortgage is the most expensive mortgage you can get, unless you plan on staying in your home for the long haul. So make sure that you think ahead and figure out how long you will be in the house. Knowing this can save you money on a mortgage.
If you make extra payments, you can save a lot of money by chipping away at your principal. It will leave you with less interest to pay. Anytime you make an extra payment, it goes toward your principal – not your interest, taxes or insurance. Even if you an only pay an extra $50 from time to time, anything can help you save money in the long run.
When setting up your payment schedule, you are usually given a choice between monthly or bi-weekly payments. Paying bi-weekly is a great way to save money as it sneaks in an extra payment each year. Plus, it can help knock a lot of time off of your mortgage. So if you have a 30-year mortgage, you can actually pay it off in less than 24 years with bi-weekly payments.
Always put at least 20% on down payment for a house if you can. Otherwise, you will have to pay private mortgage insurance (PMI) on top of your regular mortgage payment. This is a type of insurance that protects the lender should you default on your mortgage. If you are unable to put 20% down, make sure that you keep an eye on your mortgage payments. When you see that you’ve paid off 20% of the principal, have the PMI removed from your payments.
When looking into buying a house, be realistic and take your time. While a house may steal your heart, it can easily steal your wallet, too.
