Mortgages are a lot like cars: Even those who have one don’t always understand what’s going on under the hood.
Whether you’re dreaming of your first house or living in your third, mortgages can seem complicated and a little scary. That’s why thousands of people punch mortgage-related questions into their Google search bars every day.
But before you put your thumbs through their paces, scan this list. These are some of the most common mortgage questions — along with helpful answers and tools to get and manage a mortgage with confidence.
1. What is a mortgage, and how does it work?
A mortgage is a loan and a legally binding contract. When you sign a mortgage agreement, you promise to repay the loan in full. You also agree to let your lender repossess the property if you don’t.
Mortgages are provided by banks, credit unions and companies like Quicken Loans that are known as nonbank lenders. The lender you choose has a big impact on how much your monthly payment is and how much your mortgage ultimately costs. Comparing the origination fee and annual percentage rate (APR) from a variety of lenders can help you make the best choice.
2. What are current mortgage rates?
All mortgage lenders charge interest — a fee you pay on top of the original loan amount to finance your home purchase. Mortgage interest rates vary from lender to lender and may change on a daily basis. The lower your rate, the better. Comparing daily interest rates over time can signal when it might be a good time to buy and helps you estimate your mortgage payment. Rates that are steady or falling may mean savings for buyers, but if rates are rising, quick action can help you stay on budget.
3. How much mortgage can I afford?
Short answer? Many experts say your mortgage payment and other monthly debts shouldn’t total more than 36% of your monthly income. A home affordability calculator can crunch the numbers for you.
The longer answer is: Only you can decide what’s affordable. A mortgage lender can tell you the maximum amount you can borrow, but that doesn’t mean it’s affordable. Borrowing less than you qualify for leaves some wiggle room in your budget in case money gets tight in the future.
4. How much will my mortgage payment be?
The amount of your monthly mortgage payment depends on the amount of your loan, your lender’s interest rate, and the property tax and insurance rates in your area, among other expenses.
You could try to figure out the total payment on paper, but this mortgage calculator makes it much easier. Try entering different values for home price, down payment, interest rate, and loan term to see how it affects the monthly payment.
5. What is private mortgage insurance?
Private mortgage insurance, or PMI, protects your lender — not you, although you pay for it. If you stop making your house payments, the mortgage insurer pays your lender a portion of your mortgage balance. If your down payment is less than 20% of the home’s price, you’ll probably have to pay for mortgage insurance. The cost, or “premium,” is added into your monthly mortgage payment.
6. How do I get preapproved for a mortgage?
To get preapproved for a mortgage, you’ll need to discuss your credit history, income and assets with a lender. You’ll complete a loan application and be asked to support your answers with financial documents, like tax forms, pay stubs and bank statements.
Using this information, your lender will approve (or deny) your application with a maximum loan amount. Preapproval isn’t a guarantee of a mortgage, but it’s pretty close, and it can help you know what price range to shop within. When it’s time to make an offer, a preapproval letter shows sellers that you’re a serious buyer who’s likely to follow through on your offer.
7. How do I pay off a mortgage faster?
Every mortgage has a term, or set number of years it takes to pay it off with monthly payments. If you want to pay it off faster than that, you’ll usually need to make larger or more frequent payments.
Refinancing is another way to pay off your mortgage faster. If your current mortgage has a 30-year term, you could refinance into a 20- or 15-year loan, for example. A shorter term means you’re slicing up the same loan amount into fewer chunks, so your monthly payment will probably go up. The reward for refinancing and taking on the bigger payment is usually a lower interest rate, which means you’ll spend less over the life of the loan.
8. How do I refinance a mortgage?
To refinance a mortgage, you’ll need a lender and a set of goals, much like when you purchased your house. Refinancing might be a good idea if it lowers your monthly payment, reduces the loan term or provides a lower interest rate. A mortgage refinance calculator can help you decide if refinancing will help you accomplish one or more of those goals. Just like a regular mortgage, refinancing requires a credit check, an appraisal, and in many cases, paying closing costs.
9. What is a reverse mortgage and how does it work?
Reverse mortgages are a way homeowners older than 62 can turn positive home equity into cash. Equity is the difference between what a house is worth and what’s owed on the mortgage.
In a typical mortgage, you make monthly payments to your lender and your mortgage balance goes down over time. With a reverse mortgage, the lender pays you a portion of your equity each month. Because interest and fees continue to accrue, your mortgage balance increases over time. Reverse mortgages are most often paid off by selling the home.