A Beginner’s Guide to Your First Mortgage

Getting your first mortgage can be a daunting task. There are new terms that can be confusing. The thought of having a massive payment for 15 or 30 years can be a very scary thought. It’s not necessary to be overly stressed. Here are some important things to remember when you go to take out your first mortgage.

What’s Your Limit?

The first thing you’ll need to do before taking out a mortgage is actually getting approval for a loan. Many realtors will not even work with people who are not already approved. To get pre-approved, you’ll need to go to a bank and fill out an application. If you get approved, the bank will give you a letter that states how much you can borrow. This will give you and your realtor an idea of the types of houses you can look at. You may or may not want to look for houses that reach your borrowing limit. A lower payment means more flexibility in your budget for as long as you hold the mortgage.

What You’ll Need for Your Application

When you go to get pre-approved, the bank will want information. You’ll have to authorize a prospective lender to pull your credit report. The credit score on this report will go a long way to determining the amount of credit a bank will extend to you. It will also impact the interest rate you’ll have to pay. Additionally, your bank will likely want to see recent documents. The most important documents to pull together will be your recent pay stubs, your tax returns and your bank account statements. These will help your banker decide whether you’ll have the ability to pay back a loan.

Save Some Money

You’ll need to save up some money to put toward the purchase of a home. It’s a good idea to try and save up 20% of the home’s purchase price as a down payment. You’ll be able to avoid having to pay private mortgage insurance if you have 20% equity in your home. A 20% down payment will get you there.

Additionally, you’ll need some cash on hand to pay for the closing costs. There are fees for titles, bank fees, legal fees and prepaid insurance and taxes that will be due at closing. Your banker should be able to detail exactly what you’re getting charged for closing costs. The more you pay for your home, the more these costs will be. There are some programs through the VA and the USDA that allow buyers to get into homes for no money down, and FHA loans only require 3.5% of the purchase price as a down payment. These special lending programs will come with additional insurance costs. When you go to purchase a home, it’s a good idea to see if the bank has any incentives for first-time home buyers.

What Monthly Costs Should You Expect?

Your monthly mortgage payment will likely consist of several different components. There will be expenses for principal and interest. Additionally, you’ll likely have an escrow payment that will save money to pay for additional costs related to buying your home.

Principal

This is the amount of your payment that goes toward actually paying down the loan. In the early years of your mortgage, very little of your payment will go toward paying down the principal. This amount will increase a little bit each month. Around the midpoint of your term, the amount of your principal will really start to decline with each payment.

Interest

If you take out a mortgage, you’ll also have to pay interest costs. The amount of interest will be assessed to the amount of principal that remains unpaid each month. For example, in the first month of a $100,000 mortgage that’s borrowed at a 4% interest rate, you can expect to pay $333.33 in the first month. That’s one-twelfth of $4,000, which is 4% of $100,000. Each month thereafter, the amount paid in interest will go down based upon the length of the loan.

Escrow

Most mortgages will have an escrow account tied to them. You’ll have to add the cost of estimated property tax and homeowners insurance premiums to your monthly payment. The bank will hold these amounts in the account until they’re due. The escrow account protects the bank in case your house burns down or you decide not to pay your property taxes. They will pay the bills for you out of the escrow account until you pay the mortgage off. If you live in a flood plain, your flood insurance premiums will also go into the escrow account. Finally, if you have less than 20% equity in your house, the monthly private mortgage insurance premium will go into your escrow account.

While getting a mortgage can seem like a stressful task, you can avoid much of the stress by knowing what to expect. Be sure to have all of your papers together so that your bank can let you know what you can borrow quickly. Additionally, don’t be surprised when your monthly bill is more than the simple principal and interest charge.

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About the author: Wifred Murray

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