Answers to common mortgage questions
One thing you don’t typically learn too much about in high school is home buying and mortgage tips. By the time you make it to the “real world,” you have a lot of big concepts that can affect you financially over the long-term. Loans, credit, and financial planning become a part of daily life, and purchasing real estate and your mortgage are two of the most significant financial decisions you’ll make. From the home appraisal to the interest rate, it’s beneficial to understand how it all works.
Understanding Mortgage Basics
Simply put, a mortgage is a legal agreement where a bank (or lender) lends money in exchange for the title of the purchaser’s property until the debt is paid off. When paid in full, the debtor officially owns the home.
To make a mortgage worthwhile for lenders, there is an interest rate associated with the loan. In other words, it is the price you pay to get the loan. The principle is the total money you borrow to buy the home.
If you fail to pay your mortgage, lenders can take the home from the debtor and sell it.
Home Appraisals and other Common Mortgage Questions
It’s normal to have questions about mortgages, appraisals, interest, taxes, insurance, and more. In fact, it’s important to understand it all, so you are confident in your decisions. Here are answers to some of the most common mortgage questions.
How is the value of a home appraised? – A bank or lender needs to ensure that the loan they are giving is of value. Homes can be overpriced, and if not enough money is put down, it can put the lender at risk. If a buyer defaults, they are left with the home, which they don’t want to sell at a loss. This is where the home appraisal comes in during the buying process. For a mortgage loan to be approved, the home appraisal must show that the home’s market value matches its price.
A home appraisal takes several factors into consideration. A professional, skilled appraiser will visit the home and look at home condition, physical characteristics, improvements, neighborhood, comparable sales, sales history of the house, and the current real estate market. Other things can affect the estimated value as well, but in general, those are the main aspects taken into consideration.
An appraiser undergoes extensive training and often has years of experience in real estate. Their home appraisal weighs heavily in the final decision regarding the loan amount.
How much should the down payment be? – The general consensus still says that putting 20 percent down on a home is optimal. This is for several reasons. It shows lenders you are serious about your investment, but it also makes monthly payments more reasonable. In general, though, you’ll want to purchase a home you can afford. Don’t stretch your budget in a way that puts it at risk. Putting 20 percent down also means you’ll have less to pay in interest in the long run. Every dollar you add to the loan means more interest to pay over time.
Why do you need mortgage insurance? – Many people don’t fully understand the purpose of mortgage insurance. First, it typically applies to people who don’t put 20 percent down. When you put money down, you already have equity in the home, which helps cover a loan should you have to sell for some reason. For people who don’t put that much down, mortgage insurance minimizes the risk to lenders and borrowers.
There are many common questions about mortgages. With an investment as significant as buying a home, you should never hesitate to ask your bank or lender for more information.
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