A mortgage is a big financial obligation, and if you've never been through the process of obtaining one, it can seem a little daunting. Whether it's understanding the difference between prequalification and preapproval, or figuring out loan terms and managing your monthly payments, here are some mortgage basics to keep in mind.
What Is a Mortgage?
A mortgage is a loan you borrow from a bank, credit union or mortgage lender to purchase a home. These financial institutions will likely look at your credit history, credit score, income and current debt to determine how likely you are to pay back the loan. If you're approved, the lender will decide how much you can borrow, as well as an interest rate.
What Are Loan Terms?
A mortgage loan is typically made up of several components:
Principal: The original amount you borrowed.
Interest: An additional fee the lender charges for loaning you the money, which is typically expressed as a percentage (for example, 3.25%).
Private mortgage insurance (PMI): This is usually what you pay if your down payment is less than 20% of the home's purchase price. PMI usually goes away once you pay down your mortgage balance to 80% of your home's original appraised value.
Prequalification vs. Preapproval
Most mortgage brokers and real estate agents will request that you get preapproved or prequalified for a mortgage before looking for a home.
With prequalification or preapproval, you typically provide the lender with financial information to determine if you qualify for a mortgage loan — and for what amount. The lender then typically provides a prequalification or preapproval letter with this information.
Going through this process can be important because it can indicate to sellers that you're serious about buying a home. Prequalification and preapproval are both terms lenders use for this stage in the process. Each lender may also require different financial information, regardless of which term they use.
Keep in mind that preapproval or prequalification doesn't mean you're guaranteed that specific loan amount from that specific lender. You'll still likely have to go through the mortgage application and final approval process once you find a home you'd like to buy.
How Do I Find the Best Mortgage?
The most effective way to find the best mortgage rate is to shop around. If you already have accounts with a specific bank, you may want to check with them first to see what mortgage rates they offer. You could also check out their competitors and do online research to find other mortgage lenders.
You'll likely want to compare interest rates, loan terms and fees. You'll also want to understand how these variables can affect your monthly payment and how they'll affect how much you pay over the course of a 15- or 30-year loan.
How Can I Help Protect My Mortgage?
A home is likely one of the most valuable assets you'll ever own, so you may want to plan ahead by protecting it if you were to lose your income or ability to pay the mortgage payment. One way to do this is with life insurance because it can provide a death benefit, which can help provide your beneficiaries with money that could be put toward paying off your mortgage in the event of your death.
A term life insurance policy provides this protection for a specific period — typically up to 30 years, depending on what policy you have. Whole or universal life insurance offers longer-term protection because these policies are permanent. However, you'll likely want to consider which type of policy makes sense for your budget. And as with any financial decision, it's important to consider which life insurance type is best suited to your overall goals. Consider speaking with a financial representative for more information.
Be Informed About the Mortgage Process
Understanding mortgage basics can help you more confidently navigate the homebuying process. Applying for, acquiring and protecting your mortgage is a huge financial commitment, but being knowledgeable about the process can help you be successful.
