If you’re preparing to buy your first home, you’re probably finding out that there are many complex concepts you’ll have to learn. One thing that’s important to understand is what’s involved in a mortgage. While you already know this is a loan for buying a home, this guide can give you a deeper understanding of a mortgage. What’s in a Mortgage Payment? The mortgage payment is a sum that goes to your lender, which is put towards repaying the amount you borrowed. While most of your payment will go towards the principal, or what you owe to the bank, some of it will also go towards paying the interest. As you shop for a lender, one of the things you’ll consider is the interest rate each lender offers. The higher the interest rate, the more you’ll have to repay to your lender. As an example, you might buy a $200,000 home with a 20% down payment of $40,000. This will leave you with a $160,000 mortgage. If you’re paying 3% interest on your 30-year mortgage, you should expect a monthly payment of $1,146. Your payment will be applied to the principal and the interest. Depending on the type of loan you get, your bank may also create an escrow account for you, and then deposit money into it for your homeowner’s insurance and taxes. At the end of each year, your insurance and taxes will be paid from that account for you. How Do Your Mortgage Payments Affect Your Financial Growth? When you rent an apartment, the money you give to your landlord each month does nothing for you. However, when you pay on your mortgage, you’re actually building equity in your home. Each mortgage payment decreases the amount you owe and increases the amount of home you own. In the beginning, you won’t have any equity in your home, but, as you continue to pay, you’ll owe less and less. This will positively impact your credit rating, while also qualifying you for refinancing your mortgage, a home equity line of credit, and other types of loans. The mortgage you’ll use to buy your home will help you build up an investment that will benefit you throughout your lifetime. Although the buying process is complicated with title insurance, home inspections, and other steps, owning your own home is worth getting through all of these challenges. It will help you create financial freedom for yourself and give you a place to call your own.
Published: August 05, 2020
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