Purchasing a home involves taking out a mortgage which is one of the largest single expenditures most individuals will undertake. If you take a home loan, then for several years, you promise to pay tens of thousands of dollars on your house.
Due to the duration and length of this commitment it is very important that you consider understanding most of the terms of the mortgage before agreeing to them. It helps in making the right borrowing decision in the event that you are in need of funds.
As a result, continue reading before you look for the shortest mortgage term.
Interest Rate
Of course, you have to understand the rate of interest you will be subjected to on the mortgage loan. Your rate defines how the interest piles up on your balance for years.
0.5% may not sound as much but it can mean tens of thousands more in unnecessary interest charges. To save on the interest rate, it is advisable to compare the interest rates offered by different lenders.
Moreover, also be aware if you will be getting a fixed or an adjustable rate. Although adjustable rates are initially low, they have the potential of increasing in the future and thus cost you more on your loan.
Length Of Loan
Apart from your rate, it is essential to understand the term of your mortgage loan. The majority of home loans come with a 15 or 30-year repayment period. Choosing a 15-year mortgage means you pay off the loan early and save a lot of interest expense.
However, your monthly payment is higher. To avoid being trapped by long-term loans or the short-term loans that may be costly, you need to understand the differences that exist between the two types of loans.
So, you can be able to make the right decision with regard to the right time period to take for your loans. Also, do note that you can always pay extra each month to pay for your loan early.
Closing Costs
This is the total amount of money that you will be required to pay when you are applying for a mortgage which may include fees such as the appraisal fee, legal fees and prepaid interest.
These fees are often between 2 to 5 percent of the overall loan amount. Obtain the total closing costs from your lender and make sure that you have enough cash for this lump sum when closing your loan.
Avoiding financial shocks is possible when one knows in detail the amount that they are required to pay at closing.
Prepayment Options
Besides closure expenses, identify any prepayment penalties or restrictions that may be associated with your home loan. While most mortgages allow borrowers to pay off their loans in full before the agreed time, some have provisions that discourage early repayment.
Apart from mortgage loan questions about the best refinance lenders, ensure that you have adequate knowledge on when prepayments and extra payments are allowed. Many loans do not allow you to make extra payments to pay off the loan balance quickly.
Fees
Lastly, understand all the different types of costs associated with the mortgage. Common charges are penalty charges for late payments, returned check charges, charges for lien releases when you clear your balance and processing fees for acquiring loans.
Where possible, consider no fee mortgage products so that there are no additional charges to be made. Though rates constitute the major preponderance of the monthly charges, hefty fees translate into big bucks over time. Here, therefore, always beware of all the charges imposed, including small annual charges above major expenses.
Conclusion
It is thus evident that understanding some of the mortgage loan terms is in your best interest. Reviewing rates and costs in lending contracts before signing them prevents one from being surprised later on by other charges.
If any of the points mentioned in these documents is not clear, do not stop questioning your lender to ensure you understand everything. Be alert all the time from the onset to completion.
Besides, avoiding additional costs and extra time you could spend in case you need 30 years to pay off one mortgage is possible only if you know all the pros and cons of the loan before signing the papers.
