Whether we like it or not, we all have to deal with the challenges and stressful procedures of home ownership. You may have experienced one, you might be going through with one, or you might face one sooner. But the question is, how you deal with one.
Looking and shopping could be exciting especially if you’re a first-time buyer. However, we must not forget that it could be a long and tough process. That is why we created this informative article that could apply to almost everyone and to help you on your mortgage journey!
What is a Mortgage?
A mortgage is a type of loan and a legal agreement between a borrower and a lender that is used to purchase or refinance a property. Large banks, credit unions, trust firms, and other financial institutions lend money along with an interest in exchange for taking the debtor’s property title. This agreement of conveyance of title will be voided once the borrower has paid all his debt.
A mortgage term is the time-span of your mortgage product’s specific conditions. This sometimes typically refers to a fixed interest rate duration for a period of time that will determine when it will be stopped, change to a new rate, or mature.
Fixed Interest Rate
Rates of your mortgage are fixed for an agreed period of time. Borrowers with this type of mortgage product are not affected by the mortgage’s interest rate fluctuations.
Variable Interest Rate
Rates are set by a bank, lender, mortgage broker, or financial institution. In this type of mortgage product, your rate may vary depending on the current market situation.
If interest rates go up, payments could go towards the interest more. When the interest rate goes down, most of your payments could go to your principal amount.
Hybrid Interest Rate
Hybrid adjustable-rate mortgage (Hybrid ARM), also known as fixed-period ARM, contains a mix of a fixed-rate mortgage and a variable rate mortgage. This type of mortgage grants you to lock your prime rate at a higher fixed interest rate and a lower rate portion for your variable rate.
The amortization schedule shows you the amount of time needed to be able to pay off your principal and interest on your mortgage. The shorter the amortization, the higher your monthly payments but it could free you from debt sooner.
Usually, the mortgage’s with subject properties with 25 years amortization has insurance along with it, on the other hand, amortizations with 30 years don’t.
What is Open Mortgage?
An open mortgage is a type of mortgage that allows the principal to pay off their mortgage, or increase their monthly payments at any time, without having any penalties. It has no repayment restriction.
An open mortgage has a shorter period of time compared to a closed mortgage, the period may vary from six months to a year at least. However, the interest rate comes a little higher due to the repayment flexibility.
What is Closed Mortgage?
A closed mortgage (also referred to as a locked system) is a type of mortgage that cannot be prepaid, renegotiated, and refinanced without a penalty charge. A closed mortgage plan comes with a much lower interest rate. It also allows you to pay the principal amount in different payment options and depending on your availability.
A Closed mortgage benefits you if you want fixed monthly payments and might help with your budgeting of expenses such as your electric bills, groceries, water, etc.
Difference between Open and Closed Mortgage
Some people are often confused about the two types of a mortgage; open mortgage, and close mortgage. Some may think that they have the same option and benefits, however, those are indeed different.
The main difference between an open mortgage vs a closed mortgage has to do with the ability to pay the mortgage during the agreed terms.
Generally, an open mortgage is suitable when you expect on getting extra income or an influx of cash (i.e. salary increase, inheritance, etc.) and plan to sell your home during the term. While a closed mortgage works best when your situation is not anticipated during the terms.
A Mortgage Pre-Approval means the lender will look into your account; your credit history, income, debt, and assets. After they investigate your account, they will now set a specified amount of money you can borrow and the interest rate as well.
When your house hunting, applying for a mortgage pre-approval would be a good idea to start when buying a home, and getting approved.
Coming to have an overview of your financial budget and money allocation for a purchase price would give you an edge for the coming mortgage amount. You could know how much you could afford for a mortgage payment and receive an estimated maximum amount for a mortgage loan from mortgage lenders.
What is the best mortgage loan for bad credit?
The best mortgage loan will depend on how bad your credit score stands. Buying a house with poor credit is not that easy. However, some mortgage broker deals with bad credit for home loans. If your score is in the 600 range, you have many more options. However, if your score is below the 600 range, you may consider looking at an FHA loan or discuss with a licensed mortgage broker. Indeed, the best option is to improve your credit score first before shopping around.
Buying a new home for the very first time can be challenging, exciting, yet stressful because you need a lot of time and effort to put in for the requirements. However, buying a new home can be easy if you are on the right track, with enough knowledge, and choosing the right plan that would fit your financial status.