Purchasing a home is one of life’s most exciting experiences, but getting your financing together can be overwhelming. The majority of buyers take out a mortgage loan to fund their investment, which requires extensive planning and careful decision-making. Before you approach the application process, there are several essentials you should understand about this type of loan.

Understanding Mortgage Loan Basics

1. Mortgage Structure 

Mortgage loans are structured to include principal, interest, taxes, and insurance. Principal is the amount that’s borrowed, while interest is how much it costs you to borrow the money. You’ll pay interest as part of your monthly mortgage payment, which is a certain percentage based on your income and creditworthiness, as well as the economy.

Property taxes must be paid every year and are calculated according to the home’s value. If you’re considered a high-risk borrower, or you don’t have a 20% down payment, you may also be required to get mortgage insurance. This will reimburse the lender if you default.

2. How to Get Approved 

To successfully get approved for a mortgage, lenders will want to see a fairly high credit score as proof that you’re a responsible borrower. The range is usually 680 to 750. Make sure your credit is in good standing by paying your bills on time, keeping your credit card balances low, and monitoring your credit report for mistakes. Having a debt-to-income ratio below 30% and a sizeable down payment is also preferable to most lenders

3. Types of Mortgages

There are several types of mortgage loans available, but some are more common among homebuyers than others. Conventional mortgages aren’t backed by the federal government but can be used to buy primary residences, second homes, and investment properties.

FHA (Federal Housing Administration) loans are insured and have less stringent qualifying guidelines when it comes to credit and down payments. VA (Veteran Affairs) loans are reserved for military veterans, active servicemen, and their family members. 

4. Term Options 

After you select a loan, you must decide if you want a fixed or adjustable rate. Fixed-rate mortgages maintain the same interest rate for the life of the loan. This means your payments will never change. Generally, you can pick a 15-year, 20-year, or 30-year fixed loan.

With adjustable-rate mortgages, the interest rate fluctuates depending on the market conditions. This can save you more in interest over time, but there’s a risk of the mortgage payments becoming unaffordable.

Once you’re ready to apply for a mortgage loan, turn to Putnam 1st Mercantile Bank for knowledgeable guidance as you navigate the process. Their team of professionals is available to answer all your questions and assist you in determining which kind of loan is most suitable for your situation. As a locally owned and operated bank, they have a vested interest in helping home buyers in and around the Cookeville, TN, community achieve their ownership goals. Call (931) 528-6372 to schedule an appointment or visit them online for more information about their services.