Acquiring a house is a daunting experience. For those who need a little help with finances, mortgages are often the best way to go. In fact, Pew notes that the majority of homebuyers in the U.S. use mortgages to purchase their homes. This is due to the rights and protections afforded to mortgage borrowers, compared to the risks that accompany alternative financing.
Yet, not all financially qualified borrowers can get a mortgage, whether from the shortage of small mortgages or the fact that some properties are not mortgage-eligible. To get yourself up to speed, here’s a look at the in-and-outs of getting a mortgage.
How do mortgages work?
A mortgage can sound simple enough: it is a type of loan that you can use to purchase a home or land. The property is used as collateral to secure this loan while the borrower, who becomes the property owner, pays the money back in a series of regular payments often over 15 or 30 years.
These payments include either a fixed or variable rate of interest. Investopedia’s guide on mortgage interest explains how the majority of a property owner’s payment goes toward interest versus the principal balance, especially in the earlier part of the mortgage loan. Interest can thereby be heavy but looking at the bigger picture, securing a fixed-rate mortgage can be extremely valuable for when housing prices increase.
The process of securing a mortgage can be rigorous. The borrower must meet several requirements, such as minimum credit scores and down payments, and negotiations are to be made in order to fit the borrower’s needs and capacity.
Present-day mortgage considerations
While mortgages are still the top choice for aspiring homeowners, the recent state of the economy sees homebuyer demand for mortgages dropping 10% this year. This is no surprise given how the Federal Reserve is unable to tame inflation, leading mortgage rates to climb. 30-year fixed-rate mortgages averaged 5.81% last June, the highest since the winter of 2008.
The rise in inflation affects interest rates as well, leaving mortgage applicants hesitant to borrow money while the economy is tumultuously shifting. AskMoney’s report on interest rates and inflation explains how the two tend to trend in opposing ways. This is because, when interest rates go down, more people are able to borrow money which results in more buying power in the economy.
However, this indirect relationship is often the case only if the interest rate is the first to shift. When inflation strikes first, interest rates — then mortgage rates — spike accordingly in order to meet the demand for credit. Every party involved must therefore watch out for the trend, in order to decide whether the prices will continue to increase in the near future.
If a disinflation is expected, wherein the inflation decreases, aspiring homeowners may want to hold out before applying for a mortgage. On the other hand, lenders may want to take advantage of the current inflation period to agree on a fixed interest rate.
Acquiring a mortgage
Our previous article on Purchasing your First Home stresses the need to assess your financial situation before making any decisions, mores so for a long-term financial contract like a mortgage. This means comparing your outgoing debt to your monthly income and checking your credit score and bank account.
Lenders assess all of these variables when evaluating your loan applications to determine your ability to finance a property and the associated expenses. Don’t be discouraged if you do not qualify for one right away. Approval processes can differ, and you may qualify for a similar loan from another.
In the end, every mortgage journey differs. You may qualify for one financially, but the property you want doesn’t meet the required habitability standards. You might end up not qualifying at all and in that case, so you may want to look up alternative financing or perhaps, just renting a house!
Review your options thoroughly and your dream property won’t be too far away.