Buying a home is a very confusing process, particularly when it is the first mortgage a person has ever dealt with. There are several key factors that a person should be aware of before starting the process. All these are very important aspects to take into account before signing the documents or selecting the furniture.
The difference between interest and principal is one of the first key concepts a borrower must understand. The principal represents the amount that is being lent. Accrued interest on the amount of principal remaining in each payment period. It is the cost of borrowing. The bulk of the first few years of payments, therefore, will go toward interest and not principal payments.
Another important element is the difference between a fixed rate mortgage and a variable rate one. The former offers the advantage of a constant interest rate and a constant monthly payment. The second, however, changes in relation to how the market rate fluctuates. This provides an opportunity for a lower payment when it falls. But, it can also result in a higher payment when it increases. It’s a little riskier.
Typically, a lender will offer the buyer the option to choose the length of time in which they have to repay the loan. This is known as the term, and is generally available for 15 or 30 years. The shorter term means higher payments, but less overhead associated with the loan because the interest has risen less. However, the longer period allows the person to pay less per month.
One area that is often quite confusing for most people thinking about buying a home is the points that the lender offers. For a larger down payment, equal to 1 percent of the total amount borrowed, the lender will reduce the interest charged. 25 percent in most cases. For those who are thinking of staying in the house for a long period of time, this is usually a good deal to try and take advantage of. Reduces the total cost of the loan.
Each month, the homeowner typically makes one PITI mortgage payment. This means principal, interest, taxes and insurance. It is important for a person seeking to borrow funds to understand how other factors will affect what he pays. A high tax area is going to increase what they owe each month.
When a person starts looking for a home and a lender, they will often talk to several different people over a period of time. Market rates often change during this period, causing the mortgage terms to fluctuate as well. A borrower must understand that when she finally chooses a house and a bank, the contract may differ somewhat from the first time she spoke with the institution.
There are two ratios that can help individuals or couples determine if they can afford their first mortgage. The first compares the total monthly house payment against the income received during the month. It should not exceed 18 percent. If the remaining debts owed each month are added to this, the amount should not exceed 36 percent of income. This is a good means of measuring affordability.
