Investing in a home is one of the best financial decisions a person can make. Homebuying builds wealth more effectively than most other options for investment, especially for young individuals who don’t have a lot of capital to work with.
Not to mention that owning a home is an exciting and meaningful step in a person’s life. We’re going to take a look at some essential mortgage information in this article, giving you the foundations of what to know about mortgages as you move forward.
Essential Mortgage Information for Millennials
Understanding mortgage information is crucial to demystify the idea of acquiring your own home.
It was once taken for granted that a person could buy a home, almost regardless of their job or position in society. Millennials weren’t dealt the same economic hand, though, and a lot of young people don’t see themselves owning a home.
That doesn’t mean that it’s not in the picture or that it’s impossible for a person of modest income to purchase a home, though. The big thing is understanding the process and how you can work yourself into it.
To start, let’s answer the question, “what is a mortgage?”
What to Know about Mortgage
A mortgage is a loan that you get in order to cover the cost of a home. It’s the way that individuals can acquire a piece of property that costs hundreds of thousands of dollars without having that money in the first place.
If we didn’t have the option of home loans, very few people would ever be able to purchase a house. Your ability to get a mortgage is dependent on how well you can reasonably be expected to pay it back.
Your likelihood of paying the loan back is called your “creditworthiness,” and this is reflected by your credit score. If this is your first mortgage, you might not have a whole lot of credit history.
Many first-time home buyers don’t have a lot of credit history, though, so don’t let that scare you away from the process. Depending on your credit report, your mortgage will come with a unique set of specifications.
Your credit and income influence how much money you can get approved for, the interest on your loan, and the amount of money that you’ll have to put forward as a down payment.
Understanding Mortgage Factors: Downpayments
Generally speaking, the lower your credit score, the more money you’ll have to pay in interest. You’ll also be expected to put more money down if you have poor credit.
It’s generally thought that a person needs to put 20% down on a home. That’s an idea that applies to people who have already owned a home in the past, though.
There are incentives that allow first-time homebuyers to put as little as 0% down in some cases. The advantages you get as a first-time buyer will depend on the lender you choose, the state you live in, and the value of the home you’re looking at.
That said, you should try to put as much as you can down. Even if you get the chance to put as little as 3% down on a $200,000 home, that’s still $6,000 that you have to come up with.
For most of us, that’s a pretty hefty chunk of change.
When you put more money down, though, you can put yourself in a position to get a lower interest rate. The interest rate is the way that your lender makes money off of the agreement.
The remaining value of your loan accumulates interest that you have to pay off over time. The longer the term of your lease, the more interest you’ll end up paying.
On the other hand, though, longer lease terms are good for those who can afford only lower payments. When you get a 15-year mortgage, the value of your loan is spread into monthly payments across that time-frame.
Squeezing those payments into a 10-year frame will increase the monthly value you end up paying. So, it might actually be a good idea for you to pay more interest over time if you’re better able to afford the monthly payments.
Options for Refinancing
The beautiful thing about getting a mortgage is that the terms can change once you’re ready to adjust them. Let’s say you get a mortgage with a high-interest rate because you can’t afford to put very much money down, and you have poor credit.
Over time, you’ll make your payments, and your credit will rise as a result. You might also get a raise at work and start taking out other lines of credit. As you pay your bills on time and responsibly use different lines of credit, your credit score will rise.
At that point, you can consult with your lender to see if refinancing your mortgage would be a good idea. Refinancing is the process of adjusting your loan to achieve different terms and put yourself in a better situation.
Additionally, your home is likely to accrue value over time. So, five years after your mortgage starts, you might have better credit and $20,000 of equity in the home. When you refinance, you get that $20,000 back and can use it however you please.
If you were to put it back into the refinanced loan, your principal loan value would be lower, you could expect a lower rate, and your future payments on the home would be significantly lower.
Owning a Home vs Continuing to Rent
Note that a high-interest mortgage payment is unlikely to be as much as your current rent payments. At worst, your mortgage payment will be equal to the average rent payment in your area.
Further, mortgage payments are simply going into the value of your home. The only cost that you lose is the value of interest that you’re paying.
So, while it is a commitment, owning a home is almost always a better financial decision than renting.
Want to Learn More About Buying a Home?
Hopefully, the mortgage information above was useful to you as you start thinking about buying a home. There’s a lot more to learn, though, and we’re here to help.
Contact us to learn more about how you can get pre-approved for a mortgage, refinance a current loan, or learn anything else about the homebuying process.