Each mortgage loan offers its own set of benefits and features.
Since everyone’s home buying journey is different, certain types of loans will suit some people better than others. When you look into lending options, understanding the mortgage loan terms and conditions is a must before signing any agreements.
Going for the lowest interest rates is not always the best route to take. The most important thing to know is if a loan is the best choice for you in the long run as you pay off your home. Here are four things you need to know to understand your mortgage loan terms and conditions.
1. Required Fees
Lenders may charge fees that can add up to thousands of surprise dollars if you are not prepared.
Some lenders charge more of these fees than others. Even if they offer a lower interest rate, they could end up charging you more in fees than another lender that offers a higher rate. When discussing loan options with a lender, be sure to read the fine print on what type of fees are involved with the agreement.
2. Mortgage Terms
The term of a mortgage loan is the amount of time you have to pay it off. For instance, 15-year and 30-year mortgages are popular loan terms. Some lenders offer terms of up to 40 years, and some loans are as short as five. Shorter loan terms are best for homebuyers with plenty of savings and a high income who wish to pay off their loans quickly. On the other side, extended mortgage terms are better for low-income buyers to make affordable payments over an extended period.
Since it is possible to receive approval for a loan that is too high to pay off in time, finding out what option you can afford will help you avoid financial stumbling blocks in the future.
3. Understanding Amortization
It’s easy to assume that loan amortization is the same as a loan term. However, there’s a difference between the two.
Loan terms are how long a buyer has to pay back the loan.
Amortization is a calculation of how long it will take for a buyer to pay interest and principal within a specific schedule, such as 20 years.
While amortization and mortgage loan terms may parallel each other, in some cases, they do not. Amortization can be longer than a loan term. For instance, you could follow an amortization plan of 30 years while paying a mortgage term of 10 years. After the term expires, you need to renew your existing loan or take out another with a different lender to continue paying off your house.
It’s important to become familiar with your amortization schedule as it details how much you pay in principal and interest each month. A balloon mortgage, for example, only involves interest payments for most of the loan. At the end or middle of the term, buyers must pay off the entire loan or most of it in a lump sum payment. Agreeing to a balloon mortgage is a financial disaster unless you have enough savings to pay off the loan when the day arrives.
4. Loan Types
A loan option that is right for a homebuyer in a rural area is not necessarily a good fit for someone in the city.
Popular mortgage financing options such as VA (Veteran Affairs) loans, USDA (U.S. Department of Agriculture) loans, and FHA (Federal Housing Agency) loans offer their own specific sets of benefits.
Banks and private lenders also provide financing options, which vary in specifics.
When researching mortgage financing options, your income, the amount of time you will need to pay off your home, and what fees you can afford are essential factors to consider. For instance, it could be a bad idea to take out a 15-year loan if you think you may struggle with high monthly payments.
A thorough understanding of all loan agreements that you consider is essential to choosing the right mortgage financing option.
Understanding mortgage loan terms and conditions and doing plenty of research is a must before taking out a loan. To help you memorize relevant terms, bookmark a reliable resource that defines each one.
At Supreme Lending, we specialize in matching homebuyers with the loan programs that are right for them. Whether you are refinancing, moving to another home, or entering the real estate market for the first time, we are here to help. Find out more about the loan programs we offer now.