For the average American, buying a home requires obtaining a mortgage. If you don’t understand how a mortgage works, it’s a type of loan that lets you buy a home, repaid through monthly payments in a period of 15 to 30 years. It can have a fixed-rate interest, which would remain unchanged throughout the life of the loan, or a variable-rate interest, which changes depending on the market’s behavior.
Besides the obvious, which is a place to live, a mortgage can give you other benefits that you may not know about yet. Let’s name each of them in this blog.
1. A Pre-Approval
If you’re planning to buy a home soon, you don’t have to wait for the time when you’re about to buy a property before approaching a lender. You can seek for a mortgage pre-approval, which is a process of having your credit checked and documents verified so that you can get early approval for a specific loan amount.
When you’re pre-approved for a mortgage, your chosen lender issues a statement that says you’re qualified to borrow up to a certain amount. The pre-approved interest rate is also indicated, though it’s subject to change based on how soon you put in an offer on a home.
Mortgage pre-approval also helps you budget more precisely, because the amount that you’ve been approved for can be your limit as you search for homes to buy. If you’re a good negotiator, you may use that price limit to bargain for a house you like.
Furthermore, being pre-approved enables you to close a deal faster than the usual 50 days it takes to settle on a house. Just be sure to seek a pre-approval 60 to 90 days before buying a home, because the approval period isn’t meant to last for an indefinite time.
2. Better Credit
If you’ve experienced applying for other loans, you’d know that a good credit is essential for your approval. While it’s also needed to be granted a mortgage, it can also boost your credit once you’ve proven your capability to repay.
Initially, your credit score will drop the moment you take on a large loan, such as a mortgage or an FHA loan. But when you’re consistent on making timely payments, you will earn back your lost points and more, because a mortgage can account for 10% of your credit score. Moreover, a mortgage is considered a responsible debt, unlike credit cards.
3. Loan Reversal
If you’re 62 years old or older who’s been repaying a 30-year mortgage, chances are your home has already built up substantial equity. That means that you may be allowed to apply for a favorable reverse mortgage plan.
Evidenced by its name, a reverse mortgage is also a loan, but instead of you making monthly payments to the lender, it is you who receives a lump sum of cash borrowed against your home’s equity. The loan balance only becomes payable on your death.
It is a good decision to reverse your mortgage if you need cash but don’t have the ideal credit to make another loan. Your home’s equity will only be the basis for approval, so you don’t need to make the extra effort to improve your credit. And once you get the cash, you can use it for any purposes, such as traveling, medical expenses, and home improvement.
Considering these fantastic perks from getting a mortgage, you should set your eyes on it instead of another credit card, or any other personal loan that you won’t have a practical purpose for. When you have a perfect credit, anyway, it’s the lenders who will likely chase you.