Getting a mortgage and buying a house is very exciting. Many people look forward to the day when they can own their own house. However, if you are a first time homebuyer, there are things that you need to know about a mortgage. This is not as cut and dry as something like an auto loan. Here are some things you should be aware of.
1. Interest on the Loan Is Front Loaded
First, it is important to know how interest on the loan works. When you buy a car or finance something on a credit card, the interest is evenly spread out over each payment. For instance, if you have a $200 payment each month, $160 of that may go to the principal, and $40 may be in interest; that means each month you are paying the same amount in principal and interest throughout the life of the loan. Mortgages do not work that way. Instead, for the first year, your payments may be around $1000, and your principal will only be $100; $900 will be interest. Then at year two, it will be $850 in interest and $150 in principle. Then, at the end of the loan, the majority will be principal, and you will be paying very little interest.
This is important because it helps you know how much equity you are actually growing on the house in the beginning. The first couple years your equity won't be very much, and this is to be expected. That is why it is best to stay in the house for a good amount of time if possible.
2. There Will Be Many Different Types of Insurance
When you get a mortgage, the bank will want to know that their investment is protected so they may require you to get certain types of insurance. For instance, they will require you to have homeowners insurance, which is to be expected, but in other cases they may require something called private mortgage insurance (PMI); this is insurance that protects the bank if you default on the loan. This can be an good chunk of money, and that is why most people put down at least 20 percent in a down payment. If you can put down more money in a down payment, you won't have to get PMI, and it will save you money on interest as well.
By understanding these things about getting a mortgage, you can be prepared when the time comes to get the mortgage. Talk to a company such as Dave Schell at Guaranteed Rate Mortgage to learn more.