Does the term “amortization” leave you perplexed? Are you unsure how pre-approval differs from pre-qualification? If so, you are not alone. Here are some mortgage basics to help you get more familiar with the process.
What’s the difference between pre-qualification and pre-approval?
Getting pre-qualified is often the first step when searching for a home. You supply basic financial information, such as your income, assets and debts, to a lender, and the lender then provides a preliminary estimate of the amount for which you may qualify.
Pre-approval involves an in-depth look at your finances and usually requires an application fee, but it gets you closer to your potential interest rate and monthly payment. Being pre-approved also puts you in a better position in a competitive market because it shows you have your finances in order.
What is amortization?
Amortization is the process of paying off a home loan’s principal and interest over time within a consistent, planned repayment schedule. In the beginning, a large portion of each payment goes toward interest, but as the loan matures, larger amounts go toward paying down the principal.
What types of loans are there?
Fixed and Variable Rate Mortgages operate as their respective names imply. The former has a rate that stays the same for the life of the loan. The latter’s rate may start low, but it can increase after a predetermined period or depending on market conditions.
Government-guaranteed mortgages include FHA and VA loans. These are usually easier to qualify for and typically require lower down payments than other types of loans.
Why are escrow accounts important?
Think of them as automated savings plans. Once set up, a portion of your monthly mortgage payment goes into the escrow account. At the end of the year, there should be enough to cover property taxes and insurance.