Want to buy a home? Chances are you’ll need a mortgage. The world of mortgage loans may have its own language, but once you understand the terms, you’re that much closer to securing your dream home.
A mortgage is a loan specifically used in real estate. Most homebuyers don’t have the upfront cash to purchase a property outright, so they work with lenders to secure financing.
The mortgage, a legal agreement between the lender and borrower, allows the borrower to live at the property and make payments over time, with the loan secured by the property.
Below, we’ll break down the different types of mortgage loans, what mortgage payments are “made of,” and how homebuyers can start the search for a mortgage.
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Types of Mortgages
The type of mortgage a buyer applies for will depend on the individual’s finances and preferences. When it comes to interest rate, they have choices:
- With a fixed-rate mortgage, the interest rate remains the same for the life of the loan.
- An adjustable-rate mortgage (ARM) typically begins with a fixed-rate period, and then the interest rate can vary based on the economy and other factors. A 7/1 ARM, for example, has a fixed interest rate for the first seven years. After that, the rate can adjust once every year for the remaining life of the loan.
- With an interest-only mortgage, the borrower pays just the interest for a certain period of the loan term, and then starts paying the principal and interest back. Monthly payments usually start low and end up significantly higher.
In addition to interest rate, borrowers can choose between:
- Conventional loans. The government does not insure conventional loans. That might sound scary, but in fact, conventional loans are the most common mortgage product. Because conventional loans are not insured by a government agency, they carry more risk for lenders and tend to have stricter eligibility requirements.
- Government-insured loans. Even if the borrower defaults, the lender won’t lose any money. Government home mortgage loans can come directly from the government or private lenders, though not all lenders offer each type of loan. Because of the government backing, these loans can be easier to qualify for and sometimes have lower interest rates or more lenient terms than conventional loans.
On top of where buyers get the mortgage, they’ll have to decide how quickly they want to pay off the loan. Mortgages have different “terms,” or lengths:
- A 30-year fixed-rate mortgage is the most popular choice because a longer term equates to lower monthly payments. In the long run, the borrower often pays more interest than with a shorter-term loan, but lower monthly payments make housing more affordable and typically easier to qualify for.
- A 15-year mortgage can be paid off in half the time of a 30-year mortgage. This means less interest paid over the life of the loan and ultimately owning a home faster, but the shorter term will mean higher monthly payments, which can be challenging for some buyers.
- Some lenders offer 10-year and 20-year home mortgage loans, and even some customized loan terms.
- Some borrowers struggling to repay a mortgage may have a 40-year loan modification option to help them avoid foreclosure and remain in their homes.
As buyers begin the mortgage process, they have a variety of choices regarding closing costs and paying back their loan. No one mortgage is the best fit for all borrowers.
Getting a Mortgage
For many homebuyers, securing a mortgage comes before finding their perfect home. Borrowers can take steps before making an offer to find the right financing for them. Getting a mortgage loan can involve:
- Prequalification. Early in the home shopping process, many buyers elect to get prequalified from a lender. Prequalification is considered a “soft credit” inquiry, when the borrower shares some financial information. Then the lender provides a general idea of how much applicants could borrow and on what terms.
- Preapproval. Mortgage preapproval means a lender has approved borrowers for a loan up to a certain amount at a specific interest rate based on their financial history. Applicants have to provide more personal information and financial documentation than with prequalification, but it can give them more concrete terms for a mortgage. And a preapproval letter can signal that a buyer is serious about purchasing a home shortly.
Getting a mortgage loan may not be right for you if you’re interested in buying a tiny home. A lender’s mortgage minimum financing may exceed the cost of a tiny home. As you shop around for the best mortgage fit, you can approach the process by working with a mortgage broker or directly with a lender and mortgage loan officer.
Working with a mortgage broker grants buyers access to a variety of loans from several lenders. The buyer provides the broker with their financial documentation, then receives multiple mortgage options from which to choose. Mortgage brokers are paid either by the borrower or the lender but not both.
Going directly to a lender is a more in-house experience. The borrower applies to the financial institution, such as a bank or credit union. A borrower’s route when shopping for a home mortgage loan will vary based on preferences and experience. No matter what direction a buyer takes, they should work with experienced mortgage professionals who can answer their questions and walk them through the process.
Elements of a Mortgage
Mortgages break down into a monthly payment due to the lender at the start of the month. However, monthly mortgage payments often have several components:
- Principal. The principal is the outstanding total of the loan. A portion of the mortgage payment will go toward the balance owed in the loan each month. The portion that goes toward loan principal each month will vary.
- Interest. The amount of interest paid on a mortgage each month will vary based on the loan’s amortization schedule. Generally, the amount of the monthly mortgage payment that goes toward interest will decrease over the life of the loan, as more of the payment goes toward the principal.
- Taxes. If the terms of a borrower’s mortgage include escrow, the lender will break down estimated annual property taxes into monthly payments. The lender disburses the payment when taxes are due.
- Insurance. Most lenders require the borrower to have insurance on their property. Like taxes, the lender collects the property insurance premium monthly and pays the homeowner’s policy annually through the escrow account.
- Private mortgage insurance. If buyers make a down payment of less than 20%, they may also need private mortgage insurance, commonly called PMI.
As buyers budget, they should keep in mind that their monthly mortgage payments are likely to be more than just the estimated cost of the loan’s principal and interest. A mortgage calculator can help you estimate what your monthly payments could be.
The Takeaway
While it’s not as much fun as browsing through homes, learning about mortgages is an important first step in the homebuying process. Getting preapproved for a mortgage means searching for the home of your dreams within your means.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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Are my retirement goals realistic?
The median retirement account balance for all working Americans is $0, and half of those households are over age 55 (not a typo). But it’s not just a problem for the Boomers. Research has also uncovered that 95% of Millennials are not saving enough for retirement. (Also not a typo.)
It’s a bleak picture, to be sure. But when reality hits hard, motivation can follow. And no one wants retirement to just become one of those things that our parents and grandparents used to enjoy, back in the day.
On average, Americans spend 20 years in retirement. If you earn $75,000 a year when you retire and want to keep the same salary, you’ll need a total of $1.5 million squirreled away.
This is the part where many people might utter the word “impossible.” But if you start saving for retirement now, and make your retirement contributions just as mandatory as your electric bill, that number can start to look a little less intimidating.
In fact, just using a retirement calculator can put you in a better position than many Americans — fewer than half of them have done the math. And once you have your own enormous number, it can get easier to break it down into smaller, more attainable goals along the way.
To be sure, though, the road to retirement is paved with homework and sacrifice. It’s estimated people need 70% to 90% of their pre-retirement income to maintain the same standard of living after they stop working.
So perhaps more than any other financial decision you’ll make, reaching personal retirement goals takes diligence, preparation, planning for the “what if’s” and lots of willpower.
It may seem overwhelming, but it can help to start by determining your retirement objectives. Then you can find your own personal way to crush them. Everyone’s financial situation is different, and this plan is not the only solution out there, but here is one possible way you might go about determining your goals.
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One step you can take to determine your future is to get a solid picture of your present — somewhat like a personal audit. A careful inventory of your current expenses, income, taxes and savings can give you an honest picture of where you are, as well as a realistic look at where your money is going each month.
Once you’ve determined your day-to-day financial picture, you can create a list of any current retirement savings you already have, such as 401(k) accounts, IRAs, or high-yield savings accounts. Total up that number, because you’ll be able to subtract it from your goal.
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A retirement calculator can help you figure out your overall, 20-year lump sum goal by working with variables such as your current age, salary and savings, your desired retirement age and how much you save per year.
Here’s where you can change up the numbers and consider several scenarios. If you were to retire at 67, for example, how much money will you need? What would happen if you were able to up your yearly savings by just 3%? You might even calculate the amount of money you’d need to save to retire early.
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Take a deep breath. Then plan on.
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One possibly helpful way to tackle anything large is to break it down into digestible chunks. To do this, you could subtract your current age from your intended retirement age, then divide that number by the total. That’s your yearly goal. If it’s still overwhelming, you might divide that number by 12 for your monthly goal. Go as far as you need to make it palatable — those “for as little as 3 dollars a day” commercials make it sound easy, right?
For example, if your total number is $800,000 and you’re 30 years from retirement, that breaks down to around $75 a day. But that doesn’t mean you have to put that much into the bank by yourself. A next step you could take is finding the retirement savings plans that will do the most to grow your money.
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With the drastic decline in the traditional, company-provided pension and the uncertain future of Social Security, a number of different individual retirement savings plans, each with specific benefits, have stepped in to take their place.
If your employer offers a 401(k) matching plan, one of the easiest ways to grow your retirement nest egg is to contribute the max amount of money each paycheck that your employer is willing to match.
The contributions are automatically deducted from your paycheck pre-tax, and since you never see the money, it can be much easier to just pretend like it was never there to begin with.
For the self-employed, or for diversification, traditional or Roth IRAs are also specifically designed to help your savings grow.
The biggest advantages of 401(k) and IRA plans are their potential tax savings. However, they can come with yearly contribution limits that don’t mesh with your retirement objectives.
In this case, a general investment account is another possible consideration for growing your wealth. While it likely doesn’t come with tax advantages, it doesn’t come with contribution limits, either.
If investing in the market leaves you feeling wary, or you don’t like the idea of not having access to your money until you reach a certain age, another option to consider is a high-yield savings account.
It’s a cash-based account that has as much flexibility as a regular checking or savings account, but instead of the paltry 0.09% interest offered by some traditional banks, your money can potentially earn 2% or more.
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You’ve calculated your retirement goal. You’ve determined a plan to reach it. And now it’s time for arguably the hardest part — sticking to the plan.
For as many investment or retirement accounts as possible, you might consider setting up automatic contributions to withdraw every payday. The more you can automate, the less you’ll be tempted to move things around.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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