Your monthly loan payment will have two main components: the principal – or dollar amount you’ve borrowed – and the accrued interest.
Higher rates will mean higher monthly payments, and more interest paid over the life of your loan. While you can’t control or change rates, you can adjust the terms of your mortgage to make your interest payments better suited for your individual situation.
For example, a longer term of 30 years will give you lower monthly payments, but you’ll pay less interest in the long run for a loan with a shorter term of 15 years. And you can opt for a “fixed rate” or “adjustable rate” loan.
With a fixed rate mortgage, your payment remains the same for the duration of the loan. If you intend to stay in the same place for the life of the loan, you may be better off with a fixed rate mortgage because you’ll be protected against rate increases.
An adjustable rate loan is fixed for an initial period of time — three, five or seven years. Then it fluctuates based on market interest rates. The "caps" on your loan will indicate how much the mortgage rate can change after the initial fixed period. But the rates during that fixed period are typically lower and they are for a fixed rate mortgage. If you think you’ll move after a few years, an adjustable rate loan is likely your best bet.
A prequalification letter from your mortgage lender tells you how expensive a house you’re qualified to buy. Some real estate agents won’t even show you a home without this letter. But in any case, it will make the whole process a lot easier.
Preapproval takes it a step farther and gives you a significant edge during the home-shopping process. It involves the lender evaluating your income, debts, assets, and overall financial picture, and determining what loan amount you would be qualified to borrow – although it doesn’t constitute an actual loan approval. The benefit is that preapproval will help you narrow your home search, because you’ll know what price range to shop for. In a competitive buyer’s market, it will also give you a big advantage over other potential home buyers who haven’t taken that step.
Many people think you will need a minimum down payment of 20 percent to get a mortgage. This isn’t necessarily true. For a conventional loan, you can pay as little as 3 percent. The down payment for government-backed FHA loans can go as low as 3.5 percent. And government-backed VA and FHA loans don’t require a down payment at all. In most cases, you’ll probably need to get private mortgage insurance if you pay a down payment of less than 20 percent. VA loans require no down payment and no private mortgage insurance, although you will have to pay a funding fee to the U.S. Department of Veterans Affairs.
For more in depth information on downpayments, check out the page of the loan you are interested in.
Closing is the final step in the home-buying process before you take ownership of the home and begin paying off the mortgage. It usually takes place at the offices of the lender, the title company, or an attorney. In addition to yourself and any co-buyers, the attendees may include the seller, attorneys representing you or the seller, the real estate agent, a representative of the lender, and a representative of the title company. You will review and sign all the closing documents such as the property deed and bill of sale. You may also be required to provide a check to cover the down payment, closing costs, and other fees such as taxes and insurance.