If you are looking to buy a home now or in the near future, there is an excellent chance you'll need to take out a loan to make the purchase. These types of loans, called mortgage loans, offer a way for consumers to buy a home or property without having to come up with the entire amount at once. In exchange for the loan, the home gets used as collateral.
Before you take out a home loan, here are three things about mortgage loans every homebuyer should know.
1. Different Lenders Often Provide Different Interest Rates
When you take out a mortgage, you will have to pay interest on the loan. You might be led to believe that every lender provides the current average interest rate. However, that is simply not the case. If you have good credit, a lender might offer you a loan with a lower interest rate.
The interest rate might also be different because of the length of the loan. For these reasons, it's always in your best interest to shop around when getting a mortgage loan.
2. Paying More Can Drastically Reduce the Length of Your Loan
Two of the most common types of mortgage loans are 15-year and 30-year loans. Thirty years seems like a long time to be paying on a loan, but the good news is, by paying more than the minimum amount due each month, you can drastically reduce the length of your loan.
For example, by paying only $50 extra dollars a month, you can reduce the length of your loan by four years. As an added bonus, you will also be saving $30,000 in interest.
3. Your Income Is the Primary Thing Lenders Look At
When getting approved for a mortgage, one of the primary things a lender looks at is how much money you make. The number one reason for this is they want to make sure you are bringing in enough income to make your payments.
Most lenders will use your debt-to-income ratio to determine if you're going to be able to pay off your loan. This debt-to-income ratio usually ranges anywhere from 36% to 43%. Besides your income, another factor lenders consider is credit history and whether or not you make all your payments on time.
By shopping around for the best rate, having the ability to pay more each month on your loan, and knowing your debt-to-income ratio, you will be well on your way to getting the mortgage loan that works best for your financial situation.