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Buying a home is an exciting but stressful time, especially if this is your first home and you don’t know what to expect. If you are ready to buy a home, understanding the process a little better can help calm those nerves. To learn more, check out these four terms you need to know when buying your first home.

1. Fixed vs. Adjustable Rate

Fixed and adjustable rates refer to the interest rate you pay on the mortgage. A fixed rate is set and cannot change during the life of the loan. If you refinance, however, the rate may change. If you get a fixed-rate mortgage during times with high-interest rates, you’ll be stuck with a high-interest rate even after they fall again.

An adjustable-rate mortgage changes as the market changes. If interest rates are low, your interest rate stays low. If they increase, your interest rate can increase. However, this means that your mortgage amount may not be the same every month, making it harder to budget. Typically, when you first get an adjustable-rate mortgage, the interest will start below the market rate.

2. Debt-to-Income Ratio

When you apply for a loan, the lender will consider your debt-to-income ratio to determine if you’ll be able to repay the loan consistently and in full. Debt-to-income ratio simply refers to how much money you bring in vs. how much money you spend on debt each month. If the lender determines you have too much debt, you can be denied the loan.

To calculate your debt-to-income ratio, you’ll need to add up all your monthly debts, such as credit cards, school loans, auto loans, or alimony. This does not include utilities, groceries, healthcare, and other non-debt-related expenses. All the debt is then divided by your monthly gross income to determine your debt-to-income ratio.

3. Down Payment

In most cases, a lender will require a down payment before approving your loan. This helps solidify the fact that you have purchased the home as an investment. Typically, you want to put down a 20 percent down payment. Not only will this drastically reduce your loan, but it also increases your chances of getting a loan and a low-interest rate.

Naturally, many people can’t afford this down payment, but you can consider other options. An FHA loan has government backing, so it is more secure for lenders. As a result, they will accept a down payment as low as 3.5 percent. Other types of loans with government backing include VA loans and USDA loans.

4. Equity

Owning a home is an investment, so instead of just thinking about it now, you must also consider your home’s future. One of the best ways to prepare for your home’s future is with equity. Equity is how much you actually own, and you accumulate it over time as you pay off the mortgage. Therefore, at first, the only equity is the down payment.

If something happens to your home, such as the roof needs replacement, you can invest this equity back into your home. Naturally, since this is your money, you can use the equity for whatever you want, but putting it back into your home helps keep the home’s value solid. However, many people also use equity to pay off other debt so they can better manage their mortgage.

Don’t let buying a home become a huge headache. By understanding more of the process, you’ll be sure to sail through the sale. If you would like to learn more or if you are ready to talk about a mortgage loan, contact us at Dominion Capital Mortgage Inc. today.