To understand the home buying process is to understand the mortgage process. So before buying your first home, it pays to brush up on your mortgage knowledge.
Let's start with the basic parts of a mortgage. Understanding these three elements will help you determine your financial comfort zone, because when combined these elements will determine your monthly payment. Also, if you use an online mortgage calculator, these are the three elements they will ask for.
The Primary Parts of a Mortgage Loan:
1. Size of the loan
2. Interest rate on the loan
3. Term (or length) of the loan
Size of the Mortgage Loan
This one is fairly obvious. How much will you borrow? The size of your loan will primarily depend on your budget, your credit, and how much of a down payment you can afford.
Interest Rate
The interest rate is the amount of interest charged on a monthly mortgage payment. It is a percentage of the principal loan amount. To find the current interest rates, you can start by visiting Bankrate.com or Interest.com.
Term / Length of the Loan
Just like there are many types of mortgage loans, there are also a lot of mortgage terms (or lengths). The 30-year fixed-rate mortgage is one of the most common terms. "Fixed rate" means that the interest rate you get upon loan approval is the interest rate you maintain for the life of the loan.
Fixed-rate mortgages also come in the 15-year variety, but you'll generally pay a lower interest rate with the 30-year option.
Variable or adjustable rate mortgages offer shorter initial terms, sometimes as low as three or five years. With these types of loans, you would generally refinance or sell before the initial term expired.
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