You’ve heard the term ‘mortgage’ over and over again throughout the years. What is a residential mortgage loan anyway? Typically when someone is looking to purchase their first home they have to obtain a mortgage loan from a bank to fund the home completely. Whether you’re working with a realtor or an agency you’ll need to obtain the capital to buy the home and then you will end up paying the mortgage company or bank of your choice for the mortgage loan used to purchase your new house.
This is a binding legal contract and if you don’t follow up on your end of the deal the bank or mortgage company has the legal right to take your home, forclose and sell it. To avoid this scenario it’s important to understand the numbers side of a mortgage as well as the other costs associated with purchasing real estate.
Understanding the technical side of mortgage loans, what the difference between a 15 and a 30-year mortgage is, and how interest rates affect your loan term is essential.
What are the typical mortgage loan terms?
Before we get into the pros and cons of a 15 and 30-year mortgage you should know that before you purchase a home, a down payment is necessary. The cost of this down payment depends heavily on your credit history and credit score. The higher your credit the less risky you are to mortgage companies — thus a lower down payment is required. You’ve probably been taught that 20% of the home is required as a down payment but that’s not always the case when you have a conforming or FHA loan which we will touch on in another blog.
Now, if you can obtain the funds, a 20% down payment is ideal because you will end up with less interest and a lower mortgage payment every month. If your credit is not ideal then it’s best to wait and boost your credit score before even applying for a loan. This way you get the best price possible and won’t miss out on money down the line.
Most people opt for a 30-year mortgage loan because their monthly payments will be much lower than the 15-year mortgage option. A 30-year mortgage is also associated with the ability to buy more real estate or a bigger house since the loan will span 30 years — the realtor will be more likely to get you a house with a little more space than you would have been able to get with a 15-year mortgage loan.
You’ll also be able to invest some of your money into the stock market, your 401k or a 529 plan to fund your child’s education later on down the line. The biggest con associated with this loan term is the fact that you could be paying into it until retirement.
On the flip side, a 15-year mortgage rate is seen as less risky to the company lending to you. This is why the interest rates will be lower. Although most people opt for the 30-year loan you’ll have to make the decision that best suits you.
Here’s what you need to know about interest rates
Interest rates are a tricky aspect of mortgage loans because most people simply don’t understand what the interest rate has to do with their home. Interest is a set percentage on your mortgage loan at an additional charge. If you have what is called a ‘fixed rate’ loan then your interest rate will say the same over the course of the loan term.
When you have a 30-year mortgage loan you’ll find that you’re paying your monthly bill to reduce the interest rates. These loans have higher rates than 15-year loan terms and you end up paying the interest rates first instead of the principal (the actual amount of the mortgage loan)
This makes a 15-year mortgage loan more attractive for some. So, when you start paying off your home and receive the first few mortgage statements you won’t see a big change in the amount you owe because you’ve been paying off the interest on the loan first and then after you’ve paid the interest you begin to see a lower principle because you’re now paying into the actual loan. The average interest rate for a residential home is between 3-5% depending on the house you’re buying, your credit score, credit history and the mortgage company you’re going through.
Taxes and Insurance
Understanding the tax laws in your city and state it crucial. Home insurance, flood insurance and other types of insurance based on where you live may be required by law. These are fees that a realtor will be able to help you gain clarity on. Each situation is different for everyone but knowing that you will be expected to pay some sort of a fee associated with these two things will prepare you for success.
It’s always a good idea to shop around for insurance so that you get the best rates for you and your family. Now that you know the basics of residential mortgage loans you can rest assured that when the time comes when you need a mortgage loan or know someone who does you can explain these basics to them. For more questions and to speak with The Zion Group Brokerage click here.
Keith McLaurin | Licensed Commercial Broker ID#01190109 / NMLS#1209195