Obtaining a mortgage to buy a house is a big financial commitment. It isn’t a decision that should be made lightly. Before you agree to the terms of a mortgage, you should certainly know what you’re getting yourself into. If you are more educated on mortgages, you will be able to make a more informed decision. Below are five things you should know.
1. The Annual Percentage Rate
At the top of the list of things you should know before agreeing to a mortgage is the APR. APR is short for annual percentage rate. You can think of the APR as a figure that represents the cost of taking out a loan. You need to know the APR because the interest rate does not include all the possible costs that go into taking out the mortgage.According to ConsmerFinance.gov, the APR also takes into account origination fees, mortgage points and other charges. The APR can give you a clearer picture of the total cost of the mortgage.
2. The Monthly Payment
Second, you need to know what the monthly payment will be. You should only choose a mortgage with a monthly payment that will be feasible with your future income. However, there may be certain benefits to taking a higher monthly payment if the term of the loan is shorter. You may be able to pay it off quicker. Alternatively, a lower monthly payment may have some downsides like increased fees and a shorter fixed interest rate period.
3. The Term of the Mortgage
The mortgage’s term refers to exactly how long you will have to make monthly payments until the loan has been satisfied. After the term has ended, you will own the home completely with no future financial obligations to the lender. Common mortgage terms include 10, 15 and 30 year mortgages. With longer terms, the monthly payment will be lower. However, you will also be paying more interest on the loan in exchange. According to the US Census, most Americans don’t pay off their mortgage until their 60’s.
When you get a quote from a mortgage lender, that quote will include the proposed interest rate. However, mortgage interest rates do not stay the same. They can go up and down based on market forces. They are in fact traded in markets. Such changes could even make purchasing a mortgage unfeasible before the deal is finalized. This is why making sure the mortgage rate is locked in early is so important. You may also have the choice to “float” down to a lower rate if market conditions improve during that time span. If they worsen, you will still be locked in at the original rate.
5. Adjustable Rate Versus Fixed Rate
You should also learn whether it is a fixed rate or adjustable rate mortgage, sometimes referred to as an ARM for short. With an ARM, the interest rate will change over the lifetime of the loan. Alternatively, the interest rate of a fixed rate mortgage will stay the same.