Learn the basics of home loans

According to real estate company Zillow nearly 70% of homeowners in the United States have taken out a mortgage to buy their home. This translates to roughly 21 million people that are making payments to banks and financial institutions. The financial aspect of the home buying process can be confusing, stressful, and simply information overload. I felt it may be beneficial to start a financial series that highlights certain things that home buyers will encounter; today we are starting with the basics of home loans.

Mortgage Basics

Owning a home is one of the most rewarding feelings you will experience in your lifetime. It is your land that allows you the have the freedom to shape and grow in nearly any way you see fit. In the financial sense it is also a huge investment that can earn you a very nice return years down the road.

As mentioned at the beginning of this post seven out of 10 people will likely take out a mortgage with a bank to help finance their home purchase. A home loan at its most basic level is split into two parts: principal and interest. The principal is the amount that you originally agreed to pay back to the bank; the interest on the other hand is the cost you have to pay to the bank for allowing you to borrow the money. In addition to principal and interest there will also be fees, taxes, insurance, etc. My website is equipped with a mortgage calculator that will allow you to calculate monthly payments based on different criteria.

Fixed-rate vs Variable-rate

There are essentially two different loans you can choose from when it comes to home loans: fixed-rate mortgages and variable-rate mortgages (also known as adjustable-rate mortgages, or ARMs). A fixed-rate mortgage is the traditional route and has an interest rate that never changes during the life of the loan. Here are the pros and cons of a fixed-rate mortgage:

Pros-

  • Protection from rising interest rates
  • Less complex compared to variable-rate mortgages
  • Monthly payment will always be the same

Cons-

  • Eligibility for fixed-rate mortgages tends to be more difficult
  • The amount of money a potential homebuyer would qualify for with a fixed-rate mortgage tends to be reduced due to higher interest rates
  • While you are protected from rising interest rates, you may also be stuck paying a higher interest rate if rates fall lower than what you’re paying

A variable-rate mortgage allows borrowers to have a changing interest rate, which causes monthly payments to be adjusted constantly. Here are the pros and cons of a variable-rate mortgage:

Pros-

  • Lower initial interest rates compared to fixed-rate mortgages
  • Eligibility for variable-rate mortgages tends to be easier
  • Allows buyers to choose their own terms for a lower initial payment

Cons-

  • Payment shock: if interest rates quickly rise, you will most likely have suddenly higher monthly payments
  • Far more complex compared to fixed-rate mortgages
  • More difficult to understand due to more terminology relating to floating interest rates

If you are looking to get pre-approved for a home loan you should know that I work with some of the top lenders in the city. Give me a call with any questions you may have – (502) 759-6355! In the meantime feel free to explore my website, PremierHomesTeam.com, and let me know if you find a home you want to see in person.

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