A mortgage is a loan that people use to buy or maintain a house, land, or other forms of real estate, with the property as collateral. Borrowers agree with lenders on the amount, payment period, interest, and monthly repayment rates.
The first step in getting a mortgage is to complete an application for a loan with your preferred lender. You must meet requirements like minimum credit score, income level, and down payments. Your credit score is one of the most important factors because it determines your interest rates and the amount you qualify for.
The higher your credit score, the lower your interest for the amount of a loan you can get. The lender will also consider your debt-to-income ratio, employment, income history, and assets.
While there are several types, the most common are fixed and adjustable rate mortgages. Also known as traditional, fixed-rate loans are the standard type, and they come with fixed interest rates and monthly payments throughout the repayment period.
The main benefit of getting this mortgage is that you are safe from significant increases in interest rates and monthly payments, making it easier to budget. One of the disadvantages is that it may be hard to qualify if it has high-interest rates and you'll need a lower debt-to-income ratio.
On the other hand, adjustable-rate mortgages have fixed interest rates for a specific period, after which they change depending on prevailing interest rates. The first interest rates are usually below-market, making the mortgage cheaper than the fixed-rate mortgage for the first three to seven years.
However, if the interest increases, it could become way more expensive. These loans usually have a cap or limit on how much the interest rates can increase each time and throughout the loan period.
Another disadvantage is that it's hard to budget because even the monthly payments can change. This makes this mortgage suitable for people who want it for the short-term and bump-up-in-income earners or those who have the money to repay the total amount before the interest rates increase.
One similarity with both types is the loan term, usually 30 years. However, you can reduce that period depending on how you repay the loan. Reducing the loan term can save you a lot of money in the long run that you would have paid in interest.
One way to reduce the term is by making bi-weekly payments every two weeks instead of monthly. This could see you pay off your mortgage approximately eight years before the expected period, saving you around 23-30% of your total interest costs.
This is because, by the end of the year, you will have made an additional payment that goes towards the loan principal. To get your bi-weekly payment, divide your standard monthly payment by two. It also makes it easier to afford the payments.