Shopping for a mortgage can be a very confusing experience, particularly if you are unfamiliar with the process. There is a lot of paperwork to sign, documents to read and procedures to be followed. You’d think you were applying to go to Harvard or Yale, except they don’t require that much paperwork for you to be admitted!
There are three terms that every mortgage shopper should know to better understand what he or she is getting into. Going into a mortgage knowing just a few facts will help you immensely in understanding what type of commitment you are getting into.
The first term you should understand is, amazingly, the word “term.” Term refers to the length of the mortgage you are taking out – or the amount of time you are making payments.
Many mortgages run the gauntlet of between ten and thirty years. The longer the mortgage, typically the lower your monthly payment will be (and the more interest you will pay over the life of the loan). There is a trade off here. Although it makes sense to go for the shortest term you can comfortably afford, the reason why 30 year mortgages are by far the most popular is, because of the reduced monthly payment. If a month comes along and things are tight, you won’t be expected to make the higher monthly payment. At the same time, you can always make extra payments to principal any time to reduce the remaining term of your loan.
Next, understand the interest rate on your mortgage and how it is calculated. The interest rate refers to the amount of interest charges you will pay for the money you are borrowing expressed as a decimal – such as 4.25%. Is it fixed or adjustable? In other words, will it be the same throughout the life of the loan, or does it change at specified periods in time? Most home buyers should try and steer clear of adjustable rate mortgages even though they can look better up front. They can often reset to higher interest rates and come back to bite you if you aren’t ready for a jump in your monthly payments!
Finally, understand what closing costs are and how they are going to affect your purchase price. On a purchase money mortgage, you are going to be responsible for coming up with closing costs out of your own pocket. Closing costs consists of things such as appraisals done on the house, attorney fees, title fees, recording fees, etc. Be a smart and savvy consumer, if you see a fee that you don’t understand or doesn’t seem right – speak up! With the new mortgage disclosure laws just enacted in 2015, you will have a chance to review all your closing costs well before you close your loan. I always make sure to go over all these costs with my clients.
Understanding these three terms can help make you a more informed home buyer and help you find the mortgage that is right for you.