5 Things Everyone Needs to Know About Mortgages
In this article, 5 Things Everyone Needs to Know About Mortgages we’ll cover the five most important things you need to know about mortgages right now. Whether you’re a first-time homebuyer or looking to refinance, understanding the essentials can help you make better financial decisions.
1. How to Look at Interest Rates
The first of 5 things everyone needs to know about mortgages is interest rates. Currently, most lenders in Utah are offering interest rates at or below 7.25% as of summer 2024. At UCCU, our interest rates on mortgage loans are between 5.6 – 6.8% with APR ranging from 6.1 – 7.2% as of Summer 2024.
Interest Rate vs. APR
The interest rate is the cost you will pay each year to borrow the money. The APR, or annual percentage rate, is more broad and includes the interest rate, any points you may have, broker fees, and other charges that you may pay when you get the loan.
When comparing different lenders, the APR will give you a better idea of the true payment you will be making on the loan.
What to Look For
Regularly monitoring economic news and forecasts can provide insights into future rate movements. Working with financial advisors or mortgage brokers can also help you stay informed about market trends and make timely decisions.
Additionally, subscribing to mortgage rate alerts or using rate comparison websites can provide real-time updates. Being proactive in monitoring these trends can give you an edge in securing the best possible rate for your mortgage.
2. There are Different Types of Mortgages
There is not just one kind of mortgage loan—rather, there is a loan for almost everyone in every kind of situation! Here is a simple overview of the different types of mortgages. If you would like to learn more, read this blog.
- Fixed-Rate Mortgages: Set interest rate for the entire term of the loan.
- Adjustable-Rate Mortgages (ARMs): After an initial fixed-rate period, the interest rate adjusts as the market conditions change. This means potentially lower rates and payments.
- Federal Housing Administration Loans (FHA): Lower down payments and more flexible qualification criteria.
- VA Loans: Mortgage loans for eligible veterans, active-duty service members, and surviving spouses. No down payment and no private mortgage insurance requirements.
- USDA Loans: Loans for eligible rural areas with competitive interest rates and low or no down payment.
- Jumbo Loans: For high value properties and luxury estates.
These are the main types of loans that you will see most when doing research. Take your time to compare each lender’s terms to see what fits your financial situation and goals the best.
3. Loan Terms
Common loan lengths include 15, 20, and 30 years. The length of the loan affects:
- Your monthly payment
- Your interest rate
- How much total interest you pay over the entire loan length
For example, a shorter term of 15 years may have lower interest rates and lower total costs, but higher monthly payments. In contrast, a 30 year mortgage loan will have lower monthly payments but higher monthly interest and overall interest payments.
While a 30 year mortgage loan is the most common choice due to the low monthly payments, you should calculate how much you and your family can afford monthly before choosing the right term length.
4. Use a Mortgage Calculator
A simple mortgage calculator can be a valuable tool when planning your mortgage. It helps you estimate your monthly payments based on the loan amount, interest rate, and term. This estimation can provide a clear picture of how much house you can afford and assist in your budgeting process.
Moreover, mortgage calculators can help you see how different factors affect your payments. For example, you can adjust the loan term or interest rate to see how these changes impact your monthly payment and total interest paid over the life of the loan.
How to Use It
Input the principal loan amount, the interest rate, and the term length. The calculator will then provide an estimate of your monthly mortgage payment, allowing you to budget accordingly. Some calculators also allow you to include property taxes and homeowner’s insurance for a more comprehensive estimate.
Exploring different scenarios using the calculator can help you make informed decisions. For instance, you might see how increasing your down payment or choosing a shorter loan term can reduce your monthly payments and total interest costs. This tool is essential for anyone looking to understand their financial commitment better.
4. Requirements to Qualify for a Mortgage Loan
There are some things everyone needs to know about buying a mortgage and have before being able to get the loan. Here is a simple overview:
- Evaluate Your Credit Score: Higher credit scores usually result in lower interest rates which can save you thousands. Lenders use your credit score to assess your financial reliability and risk level. Some ways to improve your credit score include paying off debts, making timely payments, having a low credit utilization, and having multiple lines of credit open. The best offers usually come when your credit score is in the 700s and above.
- Calculate Your Debt-to-Income Ratio: This is calculated by summing up all of your monthly debt payments (car, credit card, etc.) and dividing that by your gross monthly income. The lower the DTI, the better. Usually, it is advised that you keep your DTI below 43%.
- Save for a Down Payment: Usually, it is recommended to have a 20% down payment saved. So, if the house you are looking at costs $400,000, you should try to have about $80,000 saved for a downpayment. However, this depends on the kind of mortgage loan you get, so keep that in mind. It is also very important to have enough funds in your savings to live on for at least 3-6 months in an emergency.
Getting Pre-Approved
Once you do all of these things, it is highly recommended to get pre-approved. Getting pre-approved for a mortgage is a crucial step when preparing for buying your first home. It gives you a clear idea of how much you can afford and shows sellers that you’re a serious buyer, which helps in a competitive environment. And don’t worry, the pre-approval process is usually straightforward.
5. There Are More Costs Than Meet the Eye
There are several costs you need to be aware of when buying a home that are more than just the down payment. Here is a list of all the fees and payments to be aware of:
- Down Payment
- Monthly Mortgage Payment
- Closing Fees
- Homeowner’s Insurance
- Property Taxes
- Utility Costs
- Maintenance Costs
- HOA Fees
Research on the internet as well as ask friends and family members what the average costs of each of these categories are. It will vary based on where you live, what your income is, and what your financial goals are. Knowing that there are many costs that come with buying a home can help you mentally and financially prepare for purchasing.
Though there are other things you should know when buying a home, these are 5 of the most important things everyone needs to know about mortgages so that they are better prepared to get a mortgage. Understanding interest rates, knowing the different types of mortgages, knowing the loan term lengths, understanding the various requirements and the importance of getting pre-approved, and knowing all the costs associated with buying a home can make your home-buying experience much easier, quicker, and overall, better.