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What is a mortgage loan 101 (And how to get it)

Who doesn’t want to own a house?

Or you’ve just found the house of your dreams, you’re on cloud 9, but wait … you forgot something. Who’s going to pay for it?

A mortgage loan might be your best bet.

However, before applying for a mortgage loan you should ensure that you’ll be able to afford whatever you’re borrowing.

Nonetheless, we’re here to help you find the best mortgage plans depending upon your requirements.

Table Of Contents
  • What Is A Mortgage loan?
  • Mortgage Characteristics
  • How Does A Mortgage Work?
  • Different Types of Mortgage
  • Choosing a Mortgage
  • Where to Get A Mortgage
  • How to Start the Mortgage Process?
  • Takeaway

What Is A Mortgage loan?

A mortgage is basically an amount of money that you take out as a loan to purchase any land or property (particularly a house).

Depending upon the type of mortgage, terms or conditions may vary but (as a general rule) most of the mortgage plans provide a term of approximately 25 years.

Furthermore, a mortgage loan is usually a secured loan (which means that you’re required to put an asset of yours as a collateral against the loan) since your lender requires something a security (in case you’re unable to repay the loan).

In case you cannot return the loan according to the agreement, then your lender has the authority to sell your home to get their money back.

Why should you consider a mortgage anyways?

  • A very less percentage of people have cash on hand to purchase their house right away, hence Mortgages help you fulfill their dreams of owning a house.
  • Different types of Mortgage loans are available in the market. Each type has its own minimum requirements for application of loan. These requirements may include Income and debts etc. You can choose the one suitable for you.
  • You can customize the Mortgages according to your needs so the terms and conditions or repayment plans can vary depending upon your requirement.

Mortgage Characteristics

There are different mortgage plans available but they all have some common characteristics such as:

    • Loan amount:  The loan amount varies person to person depending upon your house worth, and other factors like income, down payment and your credit worthiness.
    • Down payment: This is basically the amount which fills gap between loan amount and house’s price. You may borrow money from friends or family to pay the down payment.
    • Term: It is the time period within which you must pay off your loan. You may pay off in monthly installments as most plans offer.
    • Interest rate: This is the amount which Mortgage provider or lender charges for Mortgage balance. Annual Percentage Rate (APR) covers this which also includes fees.
    • Interest rate type: Mortgages can have either fixed interest rate or variable interest rate. In case of fixed interest rate you know exact amount or exact cost. It doesn’t change with the passage of time. In case of variable interest rate, mortgage will reset the interest rate periodically based upon payment conditions.
    • Prepayment penalty: This is the amount that the lender charges you in case you prepay the amount ahead of your paying off plan. Not many people like this type of Mortgage.
  • Loan guarantee: Some of the mortgages are insured by agencies such as Federal Housing Administration (FHA). So, the minimum standards for these loans can be specified by the guarantor, standards like maximum interest rate and minimum down payment.

How Does A Mortgage Work?

The money that you borrow as loan is called capital and the lender then charges you interest on it till the loan is paid off.

It depends upon you that either you want to pay back interest only or you want to pay back interest as well as capital.

Repayment mortgage loan

In case of Repayment Mortgage you have to pay interest as well as a part of capital monthly.

After 25 years, one should must’ve pain all the loan back and own the house.

Interest-only mortgage loan

In case of interest-only mortgages, you only pay the interest. You don’t pay anything off the amount that you borrowed.

Combination of repayment and interest-only mortgages

Some lenders also provide a combination of both options, i.e. dividing the loan between interest-only mortgage and repayment mortgage.

Different Types of Mortgage

Fixed rate vs. adjustable rate mortgages

There are two different Mortgage’s Interest Rate structures. You can either have a fixed-rate mortgage, which offers the fixed interest rate throughout the term, or you can have an adjustable-rate mortgage, which offers fix interest rate for specific period (five years is common), but after that the interest rate can be varied periodically.

Both mortgage types have their own pros and cons. It all depends on your requirement that which type suits you the most.

30-year vs. 15-year and other options

U.S industry has adopted the 30 year mortgage for many years, but there are other options too. In case of 15 years, the time period of paying back is less so there are lesser interest rates.

Conventional, FHA, and other types of mortgages

Apart from these there are several different types of mortgages that you should be aware of before taking any decision about the Mortgage Loan.

  • Conventional/conforming – This mortgage refers to loans that follow the Fannie Mae and Freddie Mac’s Lending Standards. This Mortgage is also known as “Standard” mortgage.
  • Jumbo – It is a mortgage which is not guaranteed by the government. This mortgage exceeds Fannie Mae and Freddie Mac lending limits. This Mortgage falls under the type of non-conforming conventional mortgage.
  • FHA – These mortgages are insured by the government. As they are insured by Federal Government so they have looser credit standards as compared to conventional mortgages.
  • VA –These mortgages are guaranteed by U.S. Department of Veterans Affairs. To have this mortgage the person must pass the eligibility criteria. These Loans have several advantages such as no down payment.
  • USDA – This type of Mortgage is offered to encourage buying homes in rural areas. Just like VA Loans, it also doesn’t require any down payment but this plan may charge relatively high fees.

Choosing a Mortgage

There are several factors which must be taken into account while choosing a Mortgage:

Amount you can borrow

The amount you can borrow may vary from plan to plan. A lender will decide the maximum monthly mortgage payment. This payment includes insurance costs as well as property taxes. The lender will then evaluate the data such as payment as income percentage (typical maximum: 28 percent), as well as total monthly debt as an income percentage (typically up to 36 percent). Lender’s offer may depend upon your credit history and your credit score. Your lender might require a higher score than FICO 620, which is generally required.

Amount you must put down

Most of the lenders mandate an amount more than 3.5 percent down. Lenders also require you to get private mortgage insurance. These insurances should have down payments below 20 percent.

Closing costs

Apart from ARPs, there are some other costs too which Lenders charge at closing. These costs may include origination fee, appraisal costs etc. So, not only compare the ARPs, compare these costs too so it will help you in choosing which plan is suitable for you.

Where to Get A Mortgage

To get the mortgage you can directly apply from a bank as well as from a building society depending upon their product range.

You can also get a mortgage broker who can compare different mortgages on the market which can help you in choosing the best mortgage for you. The broker can also get you some mortgages which are not offered to the customers directly.

Each broker has its own way of doing the business. Some of them look at mortgages from the ‘whole market’ and others look at products which are offered from a number of lenders.

Brokers will guide you about all this and will also tell you about their charges or commission.

As most of the people are not very experienced in land and mortgages matters so taking advice will be a better option unless a person is expert in these matters.

Sometimes, it is also a possibility to choose Mortgage without any advice – that is known as execution only mortgage.

These types of mortgages are offered under very limited circumstances.

You’d be expected to know:

  • The type of mortgage that you want.
  • What property you want to buy exactly?
  • What’s the amount that you want to borrow and what’s the period?
  • The interest type and interest rate at which you want to borrow the amount.

The lender will then write to make sure that you have not been advised and the mortgage has not been assessed to see if that is suitable for you.

In some cases, you have to confirm that you have not taken advice and you are aware of the consequences and you’re okay to continue without getting advice.

If you don’t take any advice and due to some reason later on the mortgage isn’t suitable for you anymore then it will be difficult for you to file a complaint.

  • If you do comparison online, make sure to visit more than one website before taking the decision.
  • It is important to do your own research about type of product and the features that you need.
Lenders Best for Financing rates Quotes Benefits
Quicken Loans Make the mortgage process simple with the largest online lender in the US 15- to 30-year fixed-rate mortgages Real-time quotes Mortgages approved in minutes
LendingTree Check rates from a network more than 350 lenders 15- to 30-year fixed-rate mortgages Get up to 5 free quotes Fixed rates as low as 3.625% (15-year)
J.G. Wentworth Long-term stability. Also offers range of fixed-rate term options Low mortgage rates for refinancing No points and no hidden fees Streamlined application
Rocket Mortgage Helps you in finding a simple mortgage that’ll work for you at touch of the  button 8- to 30-year fixed-rate mortgages FHA-backed loans available Speedy document and asset retrieval
NASB NASB offers a range of mortgages, including the unique IRA non-recourse loan Low credit scores accepted Quick application process Terms up to 30 years
Amerisave Mortgage lender offering rates without requiring personally identifiable information Low rates Rate quote with no personal info required Fast online process

 

How to Start the Mortgage Process?

Obtaining a pre approval from a lender is a good idea before starting shopping for the home. It will require full mortgage application. This includes credit check as well as employment verification

Also, try to find the offer with the lowest interest rate. If you do your rate-shopping within a period of two weeks, your credit score will not be affected.

Having complete and proper documentation before the process starts will help you throughout the whole process.

Takeaway

Mortgages are important part of life – especially if you’re one of those individuals who’re looking out to own a house (and to be honest, who doesn’t want to own a house?)

However, like every other crucial thing you purchase, a mortgage loan must also be borrowed carefully.

Consider all your options. Take a look at all your alternatives. Shop around. Search the internet.

And see what suits you the best.

Since who else knows your finances better than you?

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