Are you a first-time homebuyer asking yourself, “what is a home mortgage?” You’ve come to the right place! Let’s start with the basics, according to Consumer Financial Protection Bureau a mortgage is defined as, “An agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you’ve borrowed plus interest. Mortgage loans are used to buy a home or to borrow money against the value of a home you already own.” Similarly, Investopedia says, “The term mortgage refers to a loan used to purchase or maintain a home, land, or other types of real estate. The borrower agrees to pay the lender over time, typically in a series of regular payments that are divided into principal and interest. The property serves as collateral to secure the loan. A borrower must apply for a mortgage through their preferred lender and ensure they meet several requirements, including minimum credit scores and down payments. Mortgage applications go through a rigorous underwriting process before they reach the closing phase. Mortgage types vary based on the needs of the borrower, such as conventional and fixed-rate loans.” So, let’s dive into the specifics to really answer the pressing question, what is a home mortgage?
What is a Home Mortgage: How Does a Mortgage Work?
A potential buyer, or “would-be borrower” applies to one or more lenders. Each of the lenders will ask for evidence that the borrower would be able to repay the loan. A borrow can submit banking information from investment statements, recent tax returns, proof of employment, etc. Typically, this is when the lender will run a credit check on the borrower. Assuming that the application is approved the lender will present the borrower with a loan of a certain amount with a set interest rate. It’s important to remember that you can apply for a pre-approval before you find a home you are interested in, providing you with an understanding of what you should be shopping for based off of your pre-approval loan amount. Investopedia says, “Being pre-approved for a mortgage can give buyers an edge in a tight housing market because sellers will know that they have the money to back up their offer.” During your closing, this is when the borrower would make their first payment to the lender, the seller would transfer the rights of the home to the borrower and receive their selling price.
What is a Home Mortgage: Types of Mortgages
According to Investopedia, “Mortgages come in a variety of forms. The most common types are 30-year and 15-year fixed-rate mortgages. Some mortgage terms are as short as five years while others can run 40 years or longer. Stretching payments over more years may reduce the monthly payment, but it also increases the total amount of interest the borrower pays over the life of the loan.” They go on to list the most common, here is a summary of each:
Fixed-Rate Mortgage: “The term “fixed-rate mortgage” refers to a home loan that has a fixed interest rate for the entire term of the loan. This means that the mortgage carries a constant interest rate from beginning to end. Fixed-rate mortgages are popular products for consumers who want to know how much they’ll pay every month.”
Adjustable-Rate Mortgage: “An adjustable-rate mortgage (ARM) is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. With an adjustable-rate mortgage, the initial interest rate is fixed for a period of time. After that, the interest rate resets periodically, at yearly or even monthly intervals. ARMs are also called variable-rate mortgages or floating mortgages. The interest rate for ARMs is reset based on a benchmark or index, plus an additional spread called an ARM margin.”
Interest-Only Loan: “An interest-only mortgage is a type of mortgage in which the mortgagor (the borrower) is required to pay only the interest on the loan for a certain period. The principal is repaid either in a lump sum at a specified date, or in subsequent payments.”
Reverse Mortgage: As per the Federal Trade Commission Consumer Information Report “If you’re 62 or older – and want money to pay off your mortgage, supplement your income, or pay for healthcare expenses – you may consider a reverse mortgage. It allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills. But take your time: a reverse mortgage can be complicated and might not be right for you. A reverse mortgage can use up the equity in your home, which means fewer assets for you and your heirs. If you do decide to look for one, review the different types of reverse mortgages, and comparison shop before you decide on a particular company.”
What is a Home Mortgage: How Do You Get the Best Rate?
Comparing rates and using an online mortgage calculator to help you compare your payments can help. The Federal Trade Commission says, “To find the best loan for you, research all costs of the loan. Knowing just the amount of the monthly payment or the interest rate isn’t enough. Even more important than knowing the interest rate is knowing the APR — the total cost you pay for credit, as a yearly interest rate. The interest rate is a very big factor in calculating the APR, but the APR also includes costs like points and other credit costs, like mortgage insurance. Knowing the APR makes it easier to compare “apples to apples” when considering mortgage offers. This Mortgage Shopping Worksheet can help you keep track and compare the costs for each loan quote.” They also recommend using this handy Mortgage Shopping Worksheet to help you narrow down the right rate and lender for you.
When you work with IDEAL AGENT®, we can help you purchase a home just as easily as selling one! Whether you are a first-time homebuyer or a seller looking to purchase after your sale, we can’t wait to connect with you and learn more about your home shopping needs!
