How to Understand your Home Loan
To make the most of your mortgage, you need to decide what works for you and then shop around to find it. In this section, you’ll find eight steps to get the job done right.
1. Define what affordable means to you. Only you can decide how much you are comfortable paying for your housing each month. In most cases, your lender can consider only if you are able to repay your mortgage, not whether you will be comfortable repaying your loan. Based on your whole financial picture, think about whether you want to take on the mortgage payment plus the other costs of homeownership such as appliances, repairs, and maintenance.
2. Understand your credit. Your credit, your credit scores, and how wisely you shop for a loan that best fits your needs have a significant impact on your mortgage interest rate and the fees you pay. To improve your credit and your chances of getting a better mortgage, get current on your payments and stay current. About 35% of your credit scores are based on whether or not you pay your bills on time. About 30% of your credit scores are based on how much debt you owe. That's why you may want to consider paying down some of your debts.
3. Pick the mortgage type—fixed or adjustable—that works for you. With a fixed-rate mortgage, your principal and interest payment stays the same for as long as you have your loan. With an adjustable-rate mortgage, your payment may change.
- Fixed Rate: Consider a fixed-rate mortgage if you want a predictable payment.
- Fixed Rate: You may be able to refinance later if interest rates fall or your credit or financial situation improves.
- Adjustable Rate: With an adjustable-rate mortgage (ARM), your payment often starts out lower than with a fixed-rate loan, but your rate and payment could increase quickly. It is important to understand the trade-offs if you decide on an ARM.
- Adjustable Rate: Your payment could increase a lot, often by hundreds of dollars a month.
- Adjustable Rate: Make sure you are confident you know what your maximum payment could be and that you can afford it.
Planning to sell your home within a short period of time? That’s one reason some people consider an ARM. But, you probably shouldn’t count on being able to sell or refinance. Your financial situation could change. Home values may go down or interest rates may go up. You can learn more about ARMs in the Consumer Handbook on Adjustable Rate Mortgages