Getting a mortgage can be a very confusing 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! Although getting a mortgage can be a confusing process, there are three terms that every mortgage holder should know to better understand what he is 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 twenty five to thirty years. The longer the mortgage, typically the lower your monthly payment will be (and the more interest the mortgage company makes). Generally speaking, you should go for the shortest term you can comfortable afford – you’ll save potentially tens of thousands (and in some cases potentially over a hundred thousand) dollars in interest by keeping the length of the mortgage as short as you can.
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 4.5 for 4.5%. Is it fixed or variable? In other words, is it the same through the life of the loan or does it change at specified periods in time? Most home buyers should try and steer clear of fixed 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 “funds to complete” or “closing costs” are and how they are going to affect your purchase price. Often times, you are going to be responsible for coming up with these closing costs out of your own pocket. Funds to complete consists of things such as valuations done on the house, legal fees, mortgage duty, stamp duty – if there is a fee they can think of it usually falls under here. Be a smart and savvy consumer, if you see a fee that you don’t understand or doesn’t seem right – speak up! Some mortgage lenders try to sneak in any fee they can think of to make a few extra dollars profit.
Understanding these three terms can help make you a more informed home buyer and help you find the mortgage that is right for you. As with any product, it is important to shop around for a mortgage when you are considering buying a house. Even a small change in the interest rate between two lenders can often to amount to thousands of dollars in savings. Don’t be afraid to comparison shop – it’s your money after all!
