For most people, a mortgage is the biggest financial commitment they will ever make, so it helps to know exactly what you are getting yourself into. Home loans are complex financial instruments, and there are a lot of things that the average person doesn’t know about them. Here are three interesting facts about mortgages that you probably didn’t know.
1. It’s all about your credit score
People will probably offer you a lot of advice about how to best qualify for a mortgage. You may get advice about saving for a down payment or how important it is to have a stable job. But the single most important factor in getting a mortgage is your credit score. No matter how big of a down payment you have or how much income you have, if you have a poor credit score you are unlikely to get the best deal on an interest rate. The lowest rates, the ones that banks and mortgage brokers advertise, are reserved for people with high credit scores, usually about 740 and above on the FICO scoring system. If your score is lower than that, you are likely to pay a higher rate, which will mean thousands or even tens of thousands of dollars more in finance charges over the life of your loan.
2. Different loans have different rates
When you see a loan rate advertised, such as 3.5 percent, that’s usually the rate offered on a 30-year mortgage for a home purchase. Other types of loans and different loan terms typically carry different rates. For example, if you purchase your home with a 15-year mortgage instead of a 30-year one, you typically pay about a half a percentage rate lower. So if the rate on a 30-year loan is 3.5 percent, it would be around 3 percent for a 15-year loan. You also will get a lower rate on an adjustable-rate loan, at least initially. On the other hand, loans to refinance a home typically carry interest rates that are about one-eighth to one-quarter point higher than purchase mortgages.
3. Your payment amount can change
According to Secure Investment Group, one of the biggest myths about a mortgage payment is that it never changes. This is one of the selling points people use when arguing for homeownership over renting. They argue that a mortgage payment will never change while your rent could go up annually. It’s true that the principal and interest amounts you pay will remain the same each month throughout the loan, but other parts of your payment are likely to change over time. Most monthly mortgage payments these days include escrow amounts for your homeowners insurance and real estate taxes. Your homeowners insurance could go up annually and your real estate taxes could increase every few years, depending on the value of your home and how often your local taxing authority revalues homes. Also, if you have an adjustable-rate loan, your payment could go up if interest rates go up. In some cases, your payment could go down — if your home value decreases or if you had mortgage insurance and build enough equity to get rid of it.
If you buy a home, you likely are going to need to get a mortgage. Though a mortgage is one of the best types of loans to get, it also is the longest loan commitment you will ever make — a minimum of 15 years and more likely 30. Because of that, it’s important to understand the terms of your loan and how they will affect your life. Understanding some of the less well-known mortgage facts can help you make a more informed decision.