The 3 Most Important Questions to Ask Before Getting a Mortgage
The answers will affect whether your home loan is the right one.
Before you get a mortgage loan, you need to make sure you understand the financial obligations you're committing to. That means there are three crucial questions that you should know the answers to before you commit to taking on this large debt. Here's what they are.
1. What will your monthly payments be?
This question is the most important of all because you never want to consider taking out a mortgage unless you're 100% confident that the monthly payments will easily fit into your budget.
Most often, your monthly payment includes the principal and interest you owe your mortgage lender. That's the amount you need to pay each month to reduce your balance and cover the cost of borrowing. The amount is calculated based on what you need to pay to become debt-free by the end of your mortgage term, which is usually 15, 20, or 30 years.
Many lenders also require you to make a monthly payment towards your taxes and insurance. They collect that money and keep it in a special account, called an "escrow" account. Then when your insurance bill or property taxes are due, the lender pays them out of that account.
If you make a small down payment, then private mortgage insurance (PMI) premiums may also be part of your monthly payment. PMI protects against lenders losing money if they have to foreclose, even though the obligation for paying for this insurance falls on you.
It's important to understand the total monthly payment you'll owe and to come up with a budgeting method that shows you can afford the total amount along with your other financial obligations. If you can't, it's a good idea to wait before borrowing.
2. What will the total costs be?
It's also helpful to look at the total amount your loan will cost you over time.
You can expect to pay tens of thousands of dollars in mortgage interest over the entire life of the loan. You should be aware of the total amount you will owe and make sure you're comfortable with it. If you're deciding between different mortgage payoff terms, looking at the total costs can help guide you in the best direction.
A loan that has a shorter payoff time will have higher monthly payments, which may make it seem less attractive. But once you see the total costs and find out how much it saves you over time, you may decide it's actually a better bet for you.
3. Can my monthly payments change over time?
Finally, you need to understand whether your monthly payment could ever change during the loan payoff period.
If you have a fixed-rate loan, then the amount you pay for principal and interest should stay the same during the entire duration of the repayment period. Your monthly payment could go down a bit if you are able to drop mortgage insurance once your loan falls below a set percentage of your loan's value.
Also, it could fluctuate slightly if your insurance or property tax costs change, and you're making monthly payments towards them in your mortgage. But your payment should be largely stable with a fixed-rate loan.
If you have an adjustable-rate mortgage (ARM), however, then you may be at risk of big changes to your monthly payment. That's because your initial starting rate will be guaranteed only for a short time, after which it moves in conjunction with a specific financial index. ARMs can be very risky because if interest rates go up, your monthly payments and total cost could rise considerably.
In situations where your rate is adjustable, you must make sure you can afford payments even if they go up. If you can't, then you probably don't want to take the risk of taking out that loan, since there's no guarantee you'll be able to refinance to a cheaper one in the future.
By asking yourself these three questions, you'll get the information you need to see if the mortgage you're considering makes sense. You don't want to regret your choice to borrow for a home, so it's well worth getting the answers early in the home buying process.
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