Buying a home is a very confusing process, particularly when it is the first mortgage that a person has ever dealt with. There are several key factors to which a person should be made aware prior to initiating the process. This are all very important aspects to be aware of before the documents are signed or furniture is picked out.
The difference between interest and principal is one of the first key concepts which a borrower should understand. The principal represents the amount that is being borrowed. Interest accrues on the amount of principal that remains each pay period. It is the cost of borrowing. Most of the first several years of payments, therefore, will go towards interest and not paying off the principal.
Another important element is the difference between a fixed-rate and a variable-rate mortgage. The first offers the advantage of a steady rate of interest and a steady 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 is a bit more risky.
Usually a lender will offer the buyer a choice for the length of time in which he has to pay off the loan. This is known as the term, and is usually available for 15 or 30 years. The shorter period entails higher payments, but less overall cost associated with the loan because less interest accrues. The longer period allows the person to pay less per month, however.
An area which is usually pretty confusing for most people that are thinking of buying a house is the points that the lender offers. For an increased down payment, equal to 1 percent of the overall amount being borrowed, the lender will reduce the interest it charges by . 25 percent in most cases. For those that are thinking about staying in the home for a long period of time, this is usually a good offer to try and take advantage of. It reduces the overall cost of the loan.
Each month, the homeowner makes a PITI mortgage payment, usually. This stands for principal, interest, taxes and insurance. It is important that a person seeking to borrow funds understand how the other factors will affect what they pay. An area of high taxes is going to increase how much they owe each month.
As a person begins to shop for a home and a lender, they will frequently speak to several different people over a span of time. Market rates often change during this period, causing the terms of the mortgage to fluctuate as well. A borrower needs to understand that when they finally choose a house and a bank, the contract may differ somewhat from the first time they spoke to the institution.
There are two ratios which can help persons or couples determine if they can afford their first mortgage. The first one compares the total monthly housing payment to that of income received during the month. It should not exceed 18 percent. If the remainders of the debts owed each month are added to this, the amount should not exceed 36 percent of income. This is a good means to measure affordability.
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