Even if you’re renting, housing costs are probably your biggest expense. So buying a home might seem impossibly expensive. A mortgage can help make it affordable.
Back up. I’m new to the whole ‘mortgage’ thing.
A mortgage is a special loan for wannabe homebuyers. In most cases, you’ll only need to hand over 3%-20% of a home’s sticker price to seal the deal. Your lender (usually a bank or credit union) pays the rest. And you pay them back over time.
What's the catch?
Just like with any other loan, you pay back more than what you borrowed. (Hi, interest.) Meaning, you’ll pay more than the home’s value by the end of the loan.
How much more?
It depends on your mortgage. Most buyers go for a fixed-rate mortgage. That’s the kind where your interest rate stays the same every month. When you apply for a fixed-rate mortgage, you also lock in a payoff period. 15, 20, and 30 years are the most popular ones.
Keep in mind: the shorter the term, the higher your payments will probably be. But the less interest you’ll pay.
There are also adjustable-rate mortgages, or ARMs. They usually come with lower rates than a fixed mortgage…at the beginning. After the first couple of years, the rate on an ARM changes. And it could go up or down, depending on a national benchmark. The big choices here are how many years you pay that first rate, and how often the rate can change after that.
Which one’s better?
That depends. On top of how much you can realistically afford, consider how long you plan to stay in your new home. Some experts say an ARM could be the move if you’re not sticking around too long. Check on the avg interest rate, too. If it’s relatively low right now, you might want to lock it in with a fixed-rate mortgage. It all depends on your financial situation, and how risk makes you feel.
So I'll just pay back what I owe, plus interest.
You'll actually pay more than that. And hear the acronym PITI a lot. It stands for principal (how much you borrow), interest (how much you pay to borrow), taxes, and insurance. Put them all together and you get your monthly mortgage payment. In some cases, you can pay your property taxes and homeowners insurance separately.
Lenders have lots of thoughts on PITI. They typically suggest keeping yours below 28% of your gross monthly income. Let’s say you make $50,000 a year, or about $4,100 a month. Ideally, your PITI would be $1,100 or less.
Amortization is another hot topic. Your lender will probably show you a schedule or calculator to help explain it. Basically, it’s the breakdown of principal vs. interest for your loan payments. The more payments you make, the more principal you’ll pay each month. And the more equity you’ll have in your home.
A mortgage can help make your homebuying dreams come true. But in most cases, it still means taking on a big pile of debt...and sometimes, paying it off for decades. Understand what you’re getting into before you commit.
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