House hunting is an intimidating process. Whether you’re a first-time buyer or a seasoned upgrader, there are so many steps, so much paperwork, and, frankly, way too much jargon. Plus, it can feel like you’re at the mercy of the real estate agent and potential lenders, who often talk fast and don’t take the time to clarify. That’s why it’s crucial that you do your own research and make sure that you understand the process yourself. That way, you can protect your own interests.
And, if you’re going to learn anything, you need to get a grip on the financial side of home buying — and that means mortgages. Unless you can afford to buy a house in cash, mortgages are the large loan that you’ll get in order to purchase a home. Not only will you be paying the loan back, you’ll also be paying a hefty amount of interest, so it’s important that you understand the terms and conditions of your loan. Feeling overwhelmed? Don’t worry, here are the basics of mortgages that every house-hunting couple should know, because getting approved for a mortgage doesn’t necessarily mean you should take it.
Get Pre-Approved Before House Hunting
Getting pre-approved for a mortgage will give you an idea of the amount you can actually spend, so you don’t waste time (and emotion) falling in love with houses you just can’t afford."You get pre-approved, and then you find a home," Steve Anderson, a broker and owner at Re/Max Benchmark Realty in Las Vegas, told Bankrate. "That way you'll make a financial decision versus an emotional decision.” Be aware, this is not the same as pre-qualification (confusing, I know). It’s a mistake that a lot of people make, that can lead to a lot of disappointment.
Pre-qualification is just the first step, but you want to go for the whole pre-approval process. They’ll check your credit score (which falls between 300 and 850 and gives an idea of how reliable and desirable of a candidate you are when it comes to paying off loans), as well as your income, assets, and any other financial information. You should also shop around with different lenders to find the best deal.
Now, when you’re getting pre-approved and then getting your actual mortgage, there’s a lot of jargon you’re going to have to work your way around. Some of it is about the type of mortgage you’re getting, some of it is about the whole process and repayment.
Fixed Rate Mortgage v. Adjustable Rate Mortgage v. Interest Only Mortgage
Mortgages are not one size fits all. There are a lot of variations, mostly to do with the interest rates that you’re paying. A fixed-rate mortgage means that you have one rate for the whole period of the loan — 15 years, 20 years, 30 years, or whatever period you agree on.
Adjustable rate mortgages often start out lower and seem appealing, but those rates can (and most likely will) vary as time goes on. It may be every couple of years or longer, but the rate will adjust and your payments may rise.
Interest-only mortgages are exactly what they sound like — you’re only paying the interest on the loan, rather than paying off any of the principal. In this sense, you’re not really buying any of the equity in your home, you’re just paying interest to keep the loan at bay. Often you can set them up so you pay just the interest at the beginning of the loan and then switch to paying the principal (the loan balance) as well.
You Can Get The Loan— But Can You Pay It?
When you’re going through the pre-approval process, your bank will come up with the number they’re willing to lend you — but before you run off looking for a house that costs $350,000 or $725,000, look at the actual cost of that mortgage. Can you really afford the $2,500 per month repayments? Are you looking at apartments that come with a huge co-op fee on top that? Just because you can get a loan for a certain amount, doesn’t mean you should take. Crunch your own numbers, after the bank crunches theirs.
And, on top of everything else, don’t forget all of the money that’s going into buying the house. You’ll have closing costs, maybe even taxes, moving costs, and furnishing costs. Make sure you’re figuring these into your budget so you don’t have any nasty surprises.
Don’t Forget About Refinancing
Once you're settled in your new home and happily making payments, it’s still important to keep your eye on your finances. If you find that you come into extra cash or you get a big bump in salary, you may want to consider refinancing. Refinancing allows you to get a new loan and agreement — this can mean paying off your mortgage faster and, ultimately, paying less interest in the long run.
On the other hand, as you gain more equity in your home, you may be able to borrow more from it. Equity is the total value of the property minus the existing loan, so this will vary based off of the amount that you actually have paid off on the loan and also the current house value. If there’s a good amount of equity in the home, you may be able to get home equity loan or a home equity line of credit, which is essentially borrowing against your equity in the home. But again, you’ll still be paying interest on this — although the interest is often tax-deductible.
Buying a house can be an incredibly overwhelming experience. If you're feeling overwhelmed or not sure, check out this handy list of jargon or talk to a friend who’s been through it. Doing your research now can save you a lot of strife during the house-hunting process. And once you understand the terms and the language, you’ll be able to go into the whole process with more confidence and assurance, so you can find your dream home as seamlessly as possible.