Getting a mortgage is one of the most stressful parts of buying a home, and it can be hard to get the answers you need in order to understand the mortgage process more fully. To help, this article has put together some of the most frequently asked questions that Motley Fool members ask, along with guidance to point you in the right direction. From mortgage brokers, banks, and loan terms to rates and credit history, find out what you need to know below.
1. How much can I borrow?
Several factors go into how much you can borrow on a mortgage. Your income plays a key role, and your credit score also comes into play in determining what interest rate you'll be able to get on your mortgage and therefore how big the monthly payments are likely to be. The type of mortgage you get also plays a factor, with some lenders limiting how much they'll want to lend to 80% or less of the home's value, while other special programs allow you to borrow between 95% and 100% of the value of the home if you qualify.
2. What will my monthly payments be?
What you pay each month on your mortgage depends on the length of mortgage you choose and its interest rate, along with ancillary costs you pay through your mortgage lender. The longer the repayment period, the smaller the monthly payment, so 30-year mortgages have smaller payments than 15-year mortgages. Many lenders incorporate real estate taxes into the payment you make, holding money in escrow until your tax bill comes due.
3. Do I have to pay PMI premiums?
Lenders will typically require that you obtain purchase money insurance or private mortgage insurance (PMI) if you borrow more than 80% of the value of your home. Once you've built up enough equity in your home to bring your mortgage below the 80% mark, then your lender should stop charging you for PMI. If your lender doesn't, get in touch and find out the exact details on when you'll be free from this sometimes costly insurance.
4. Should I pay down my mortgage early?
Many homeowners feel uncomfortable with their mortgage debt and see it as a huge psychological benefit to pay down their mortgages as quickly as possible. In general, though, the question to ask is what the best use of your money is. Given how low mortgage rates have been lately, paying down a mortgage essentially offers you a guaranteed return that's relatively low. Moreover, because mortgage interest is tax-deductible for many homeowners, all you'd have to do is to find an investment that returns more than your mortgage rate to end up ahead. Still, for those who don't want the stress of a mortgage payment, considering prepayment can be a smart move for your peace of mind even if it doesn't always produce the best results if you focus solely on the numbers.
5. Can I deduct my mortgage interest?
Mortgage interest is deductible on purchase loans of up to $1 million and on home equity loans of up to $100,000. However, to claim the deduction, you have to itemize your deductions on your tax return. Those who take the standard deduction won't get any extra tax benefit from mortgage interest unless it pushes them over the threshold, at which it makes sense to itemize. For many homeowners, the combination of state and local real estate taxes and mortgage interest are enough to make itemizing deductions worthwhile, but it still pays to run the numbers both ways and see which way leaves you ahead.
6. Should I refinance my mortgage?
In general, refinancing a mortgage makes sense when the savings you'll get from lower monthly payments is greater than the added costs of refinancing. Just like you do when you first get a mortgage, closing costs will include things like title insurance, real property deed recording fees, appraisals, background checks, and application fees with your bank or mortgage broker.
Usually, you'll be able to come up with a total cost of refinancing and monthly savings from doing so. Divide the one-time cost by the monthly savings, and you'll know how long it will take for a refinance to pay for itself. If you plan to be in the home longer than that, it's smart to bite the bullet. If not, it'll be cheaper to make higher monthly payments to avoid the need to pay closing costs again.
Mortgages can be hard to understand, and these are only a few of the questions you might have. Learn more about your mortgage and you'll be better able to get the best deal available and make it that much easier to afford the home of your dreams.
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