Basic explanation of mortgages
Ninety percent of today’s homeowners finance their home with a mortgage. According to Wikipedia: “A mortgage is “a legal agreement by which a bank or other creditor lends money with interest in exchange for taking title to the property from the debtor, on the condition that the transfer of title becomes void upon the debt payment. “
Mortgage payments are made up of four parts: principal, interest, taxes, and insurance (PITI).
P.The principal is the amount of money you borrow from the bank.
IInterest is what the lender charges you for borrowing money.
Taxes are property taxes paid to the state and municipality (and sometimes the county).
Ininsurance which may include homeowner’s insurance, hazard insurance, and for FHA and government-backed loans, mortgage insurance.
Once you know your PITI (national average 1.15%), you can use a calculator to estimate your monthly mortgage payments. Go to your FREE Mortgage Calculator HERE.
(In many home loans, the lender will include your property taxes in your mortgage payments and pay them on your behalf. In other cases, you pay the taxes directly.)
The main types of mortgages are:
A fixed rate mortgage: An interest rate that remains the same (fixed) throughout the life of the loan. This is the most popular type of mortgage loan. Most people want a mortgage that stays the same throughout the life of the loan so they don’t risk variable or high payments.
An adjustable rate mortgage (ARM) This is an interest rate that varies over the life of the loan based on an index like Libor or the prime rate. If you plan to stay in your home for a short time, you can save money with an adjustable-rate mortgage or ARM, but if interest rates rise, you’ll want to refinance to a fixed-rate mortgage. It’s easier to budget for monthly expenses with a fixed-rate mortgage.
Government Backed Mortgages are very popular loans today. These loans include FHA, VA (Veteran Loans), USDA home loans, and a myriad of other federally backed loans. These loans are perfect for first-time home buyers and veterans. They are carried out by private lenders and mortgage banks. Thanks to the federal loan guarantee, many of these secured lenders make qualifying for these loans much easier, with lower credit scores and lower down payments required. Interest rates and fees are also generally lower.
You also need to consider your payment terms. If you can afford a higher payment, you may want to opt for a shorter term to pay off your mortgage faster. I generally recommend taking a slightly higher interest rate and longer term. You can then make additional payments on the capital monthly while repaying your loan early. If work-related circumstances change, you can always stop paying the supplement and pay less monthly. This protects you against all sorts of unknowns that may arise in the years to come.
To get a clear idea of which mortgage is right for you, contact CambridgeHomeLoan.com HERE!