Buying and owning your own home is a special thing, and to many considered an essential part of development as an adult. With a home under your own name, you have something to leave behind for your children, along with the freedom to make whatever alterations you want to the house.
One of the main steps in getting your own house is getting a mortgage, but to the uninitiated, that might just seem like a word that’s hard to pronounce. We’ve put together this guide on mortgage basics to help you get to grips with the world of homeowning.
What is a Mortgage?
Simply put, a mortgage is a loan used to buy a house. Most people can’t afford to pay for a house outright, especially with property prices rocketing like they are, so they go to a lender such as a bank or a mortgage specialist and agree to pay them interest in exchange for the money for the house. Some people will even mortgage properties as a way of freeing up funds for other investments.
There are two main forms of rates that people can pay their mortgages and interest off at.
Fixed-Rate: A fixed-rate mortgage is a mortgage in which your interest remains the same until the whole thing is paid off. If your fixed rate is 6% interest, then 6% interest is what you’ll pay off with every mortgage repayment. This is why many choose fixed-rate plans, as they facilitate stability in repayments.
Adjustable Rates (ARM): These plans begin with a period of fixed-rate repayments, however, after this period your interest rate can go up or down. These are considered a risky option by many, however, the fixed-rate period is usually cheaper than a genuine fixed-rate mortgage, so if you’re not going to stick the entire thing out before selling the home it might be right for you.
A term is the amount of time you’ll pay off the mortgage within, and you’ll generally be able to choose the length of your own term. Most people choose to pay off their mortgage over a period of around 30 years, which means each payment will be smaller and more affordable. On the other hand, 15-year terms are also popular, with the advantage of shorter terms being lower interest rates and fewer payments overall, meaning less being in interest in two ways.
The terms available to you will vary from lender to lender.
Different Loan Product Types
Conventional Loans: Not government-backed / small down payments / good credit required
FHA Loans: Government-backed / lower credit requirements / small down payments / mortgage insurance required
VA Loans: For active-duty servicemen & veterans only / no down payments / no insurance required
USDA: Government-backed / Subject to income limitations / only for homes in certain rural areas
Hopefully you found this guide on mortgages for beginners helpful! Happy house-hunting!