A home loan is a long-term commitment that will have a significant impact on your finances, so it's important to learn about the terms of your loan before signing the contract. However, there are two things people frequently forget to discuss when taking out a mortgage and why they're important to sort out from the start.
How are Payments Applied to the Balance?
Although you'll typically make only one payment each month to the bank, that payment will be divided up and applied to different obligations attached to your loan. For instance, a certain amount will go towards interest, some will be applied to the principal, and a portion will be set aside to pay property taxes at the end of the year.
This isn't always the case, though. Payments may be credited in different ways depending on the type of mortgage you have, any extras added to the loan, and your account status. If you didn't put up an adequate down payment, you will be required to get mortgage insurance, and part of your payments will be applied to that, for example.
It's important to understand how much of the money you're paying every month will be applied to the principal because this is what you're being charged interest on. The less money that goes to the principal, the more interest you'll end up paying over time. Knowing this can help you make smart financial moves (e.g. make extra payments) that will save you money in the long run.
When are Late Payments Reported to the Credit Bureau?
The bank expects you to make the mortgage payments on time every month but, realistically, there will be occasions when you'll pay late due to life circumstances. Unfortunately, when you don't pay by the due date, the bank will report that to the credit bureau, which can tank your score and make it harder to get credit in the future.
The good news is, federal law prohibits banks from reporting payments as late until they are over 30 days past due. When the timer starts, however, can vary. Some banks start the clock the day after the payment due date, while others base it on the statement closing date. You should make an effort to clarify how your lender handles this aspect of your loan, so you don't inadvertently pay too late and damage your credit.
For more information about home loan terms, contact a local lender.
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