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Mortgage Basics

 

What, exactly, is a mortgage?  Quite simply, a mortgage is a loan secured by real property and paid in installments over a set period of time.

The mortgage contract secures your promise that the money borrowed for your home will be repaid.

 

According to Wikipedia:

A mortgage loan is a loan secured by real property through the use of a document which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan.However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan.

Components Of A Mortgage:

1. Mortgage Approval:

Qualifying for a mortgage requires meeting a pre-determined set of conditions established by a lender.  These requirements may include credit history, income, employment and assets.

In addition to personal qualifying factors, the property itself must also meet certain criteria established by lenders before a borrower can obtain a loan secured by real estate.

2. Mortgage Payments

On a traditional 30 or 15 year fixed rate program involving principal and interest, each payment made is divided into two parts, (not including taxes or hazard insurance). 

 The first part of the mortgage payment, also referred to as principal, goes to paying down the initial amount borrowed.

The second part is the “interest” paid for the money borrowed to buy the property.

The amount paid in interest decreases each month, as the amount paid towards the principal balance increases. This apportioning is referred to as amortization.

Other types of mortgage payments available can include options for paying interest only, or a teaser rate.

Either way, it is extremely vital to comprehend the full mortgage payment and terms before moving forward with any option.

3. Mortgage Programs

Mortgage Programs come in many different types of options depending on the down payment and/or monthly budget a borrower has been approved for.

In addition, there are also federally insured mortgages, such as FHA or VA loans, which typically include more flexible qualifying guidelines.

4. Closing Costs / Fees

The actual cost of obtaining a mortgage mainly depends on whether or not the borrower is paying points to “buy down” a lower mortgage rate.  In some cases, there are also other costs processing and underwriting fees associated with the the work involved in the transaction.

Either way, a true mortgage professional should be able to fully explain the long and short-term financial benefits of choosing one loan program over another.

Fortunately, there are several consumer protection policies sponsored by the government to guide borrowers in understanding their options during the initial mortgage pre-qualification process.

Keep in mind that there could be additional closing costs not associated with a mortgage or   real estate transaction to be aware of.  For example, appraisal fees, pre-paid property taxes, homeowners insurance, HOA dues and inspection costs are a few additional out-of-pocket expenses you should budget for.

5.  Mortgage Rates

While mortgage interest rates may change several times a day, there are a few market factors you can pay attention to that can impact your final payment.

Whether you’re shopping for the best rate, or trying to determine the difference between the Note Rate and APR, it definitely helps to understand what questions to ask a qualified and professional mortgage lender about your specific loan scenario.

 

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