Homebuyers: Understanding Mortgage Loans

One of the biggest financial decisions–if not, the biggest financial decision–people can make in life is to purchase a home. But with more flexibility in renting, why would someone want to invest in their own property? Homeownership allows people to build their own equity and to deduct mortgage interest from their taxes, which makes it the single biggest break from their taxes as possible. There is also the advantage of investing in a home that could increase in value throughout time. And since Mortgage rates have been ticking up as the U.S. economy continues to repair itself, there may be more pressure on potential homebuyers to invest before it turns back into a seller’s market.

When someone buys a home, their monthly expenses usually increase. Regardless, owning a home can be rewarding if people make the right decisions from the beginning, and that starts with understanding mortgage loans and mortgage interest rates.

What is a Mortgage?

Let’s take things down to the basics and learn what a mortgage is. As a first-time homebuyer, it’s important to have a feel for how the home buying process works, and what someone should expect from mortgage loans.

Mortgages are the loans people will use to buy a home. The main part of a mortgage that makes it different from other loans types is that mortgages are specifically used for purchasing some type of real estate and can be customized. There are a number of mortgage loan programs available for today’s home buyers such as low- and zero-down payment loans, and loans for members of the military.

Based off of someone’s loan, the way they live and operate their expenses will be affected. From monthly budgeting to finding the Best Homeowners Insurance for their home to determining refinancing options in the future, finding the best mortgage rate and loan package is important for homebuyers.

How Do You Qualify for Mortgages?

To qualify for a mortgage, a potential home buyer must meet certain qualification standards of whichever loan type they determine is best for their unique needs. There are plenty of loan types, but the most common types in the U.S. are the conventional mortgage, the VA, the FHA, and the USDA loans.

Each type of loan differs from the next, with varying standards for qualifications. First, someone will need to meet a minimum credit score standard. Then, jobs will need to be certified through W-2’s, pay stubs, and federal income tax returns. If a credit report happens to include errors or omissions, you can provide documentation to your mortgage lender and mortgage loan officers to correct mistakes.

How Long Do I Have to Pay Back a Loan?

As the borrower of a mortgage loan, the term of a loan is also up to you. The length of a loan is the number of years until the loan is paid in-full. The most common loan term for mortgages is 30 years, but there are other options, including 10-year, 15-year, and 20-year terms.

The benefits of a short-term loan is that a mortgage rate is typically lower, plus the loan gets paid off sooner based on a mortgage rate calculator. These factors can reduce the long-term interest costs of owning a home, so with a shorter-term loan, it ends up costing the homeowner less to buy the home.

On the other hand, there are reasons to choose a longer-term mortgage loan. Because mortgage repayment gets spread over a large number of years, each mortgage payment is smaller compared to the payment with a shorter loan period. The payment on a 30-year mortgage can be up to one-third less than the payment for a 15-year term.

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