The Beginner’s Guide To Home Loans
What Is A Mortgage?
The terms ‘home loan’ and ‘mortgage’ are often used interchangeably. A mortgage is a loan an individual takes out to buy a home. Signing a mortgage means the lender agrees to loan the borrower (you) a specific amount of money. In turn, you agree to repay in installments over a preset period.
What Comprises Your Mortgage Payment?
Your monthly mortgage payment is decided by taking into account the principal loan amount (the amount borrowed) and then applying the respective interest rate on that sum. What you owe is spread over the repayment period. Typically, the repayment period is either 15 years or 30 years. If you choose the former, the overall interest will be less, but your monthly payments will be higher.
Applying For A Mortgage
The first step to getting a mortgage is researching lenders and the interest rates they offer. The interest rate you get determines how much the loan will cost you, and having healthy credit can help you get a competitive interest rate on your loan.
Mortgage rates can be of two types—fixed or adjustable. A fixed-rate mortgage guarantees the same interest rate throughout the term of the loan. An adjustable-rate mortgage, however, has a varying interest rate, so you may start by paying little interest, but over time, it may increase.
What You Need To Get A Mortgage
To secure a mortgage, you’ll need:
- A Low Debt-To-Income Ratio: Your debt-to-income ratio measures the amount you owe on current debts in comparison to your monthly earnings. To be granted a mortgage, lenders prefer candidates with a debt-to-income ratio of 36% or less. Anything higher than this reduces your chances of getting the mortgage.
- Good Credit: Credit scores usually range between 300 and 850, but having a score of 670 or above is favorable to get a mortgage. If your score is lower, you may qualify for a mortgage, but the interest rate offered may be higher.
- A Down Payment: You’ll need to put down some money to buy your home. This amount varies based on the mortgage you get. Usually, if you take out a conventional loan, you’ll need to make a down payment of 20%.
Irrespective of the type of mortgage you’re considering or the amount you plan to borrow, ensure you shop around and give yourself time to understand the process.