Are you thinking about applying for a mortgage? Before you start shopping around for lenders, you should read these important facts about mortgage loans.
There Are Fixed Rate and Variable Rate Mortgages
You will be presented with two main choices for mortgages by a lender: a fixed-rate mortgage and a variable-rate mortgage.
With a fixed-rate mortgage, your mortgage’s payment amount and interest are locked in for the entire term. Neither will change.
With a variable-rate mortgage, the interest rate is not locked in. It will change as the market rate changes. If the market rate goes up, so does your interest. In that case, your monthly payments should remain the same—however, your payments will prioritize the interest over the principal. So, a higher interest rate could mean a longer amortization period. On the other hand, if the market rate drops, you could stand to benefit from lower interest. It all depends.
Your Mortgage Isn’t Set in Stone
Your mortgage isn’t set in stone. You have the option to refinance. The main motivation for refinancing is to improve your terms and lower your rate (at least by 1%). You could also benefit by extending your mortgage terms to a longer period (like 10 years, 15 years or even 30 years). While a longer period will make you pay more interest in the long run, you will reduce your monthly payments — this could be effective when your budget needs more wiggle room.
You may not want to refinance at this very moment. Right now, mortgage rates are very high. They hit approximately 7% in November. The year before, they were approximately 3%. That’s a massive jump.
So, if you’re hoping to change the terms of your mortgage rate, this may not be the best moment to make your move. You may want to wait for a more opportune time.
Missing Payments Is Risky
While it’s never wise to miss any type of bill payment, you especially want to be careful when it comes to your mortgage payments. Missing a single mortgage payment is risky. You’re not just risking late fees and a lower credit score. If you take too long to catch up on your payments, your lender could start the foreclosure process. The lender could seize your asset (your house) and sell it.
So, out of all your monthly payments, you should make this one your top priority. Adjust your monthly budget so that you always have enough for your scheduled payments. Automate your payments to your lender so that you never miss a deadline.
Payments Lead to Home Equity
The more that you pay down your mortgage, the more home equity you should have. Home equity is a useful borrowing tool that you can turn to in the future. With enough home equity, you could apply for a home equity line of credit (HELOC).
What is a HELOC? A HELOC is similar to a standard personal line of credit loan, but it’s typically used for major financial matters, like paying for home remodels or consolidating debts. Personal lines of credit loans are ideal for smaller emergencies, like urgent home repairs, car repairs and appliance replacements.
Only homeowners with a certain amount of home equity are eligible for HELOCs. Personal line of credit loans doesn’t have this same restriction. You don’t have to have home equity to apply for these types of emergency loans when you need them — that’s not an essential qualification. You will need to be an adult with a regular source of income and an active bank account.
Don’t stumble into a mortgage loan uninformed. Remember these important facts when you apply!