A mortgage is an important factor in buying a house. Without a mortgage, you might not be able to buy the house that you really want.
A mortgage is a contract between two parties which creates legal obligations between the borrower and lender. The borrower agrees to pay back the loan with interest and repayments while the lender agrees to provide credit at an agreed-upon rate.
It sounds simple enough, but deceptively so. For first-time home buyers, a mortgage can be quite difficult to understand. In this post, we want to point out some of the basics to help you understand what you’re getting into.
So here we go. Here’s how to understand your first mortgage on your first house.
What Are the Two Types of Interest Rates?
There are two types of mortgage interest rates: fixed and variable.
Fixed mortgage interest rates are usually lower than variable mortgage interest rates. Fixed rates typically have a set rate for the life of the loan, while variable rates are subject to change.
Variable mortgages are often used when borrowers need a flexible payment plan that can be adjusted to accommodate changes in their financial situation.
Variable mortgage interest rates can change over time, but they also tend to be higher than fixed rate mortgages. The difference between fixed and variable mortgage interest rates is sometimes referred to as “the spread.”
The Down Payment and Mortgage Payments
The down payment is one of the most important factors in the mortgage process. It helps to reduce the monthly payments and make sure that you don’t go into debt.
The down payment is a percentage of the total loan amount and it can vary depending on your lender. But, it’s always recommended that you put at least 20% of your loan amount as a down payment.
It’s important to understand how much money you need for a down payment so that you don’t end up paying more than what you can afford or wasting money on unnecessary fees.
You can use a house payment calculator to get some clarity into what you can expect to pay.
What About Refinancing?
Refinancing a mortgage is an option that many homeowners have when they want to lower their monthly payments. It is an option that allows you to borrow more money against your home, pay off the outstanding loan, and then start with a new loan.
One of the main reasons why homeowners choose to refinance their home loan is because they can save money on interest rates by getting a lower rate on the new loan.
Think of this example. You have a fixed mortgage at 5%. Later, the rate comes down to 4.5%. You get completely new financing to restructure what you owe based on the lower rate.
Ultimately, people do this to save money on their mortgage. It’s not necessarily a beginner’s option, but it’s there if you need it.
So there are some basics about mortgages. We hope you’ve learned a bit about this important tool in the home-buying process!