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A mortgage is a primary way to purchase homes, as most buyers are unable to pay the full price upfront. Here’s what it is, and how you can avail one.
People who are in the market for real estate should know all about mortgages, as it is the primary way to purchase properties.
Mortgages are often viewed with negativity, but with proper knowledge, it will be a positive experience that will allow individuals and families to acquire their dream homes.
What is a Mortgage?
A mortgage is a type of long-term loan that finances the purchase of real estate properties, such as a house and lot or a condominium unit. Most buyers are not able to pay the whole price of the property for sale upfront, so they turn to banks or other mortgage lenders.
In a mortgage, the property itself serves as the collateral for the loan, providing security to the lender in case the buyer fails, making the predetermined payments.
Mortgage payments, which are usually made on a monthly basis, includes a portion of the principal, which is the total amount of money borrowed; interest, which is the price that borrowers pay to the lender for the loan; and other expenses such as property taxes, homeowner’s insurance, and private mortgage insurance. Before starting monthly payments, however, borrowers are required to make a down payment on the total amount of the loan.
Over the years of the mortgage, borrowers repay the loan until they own the property free and clear. If they are unable to make the payments, the lender may foreclose, which is the legal process of recovering the balance of the loan by selling the property.
What are the Types of Mortgage?
There are several types of mortgages available to real estate customers to purchase a property. The first kind, called the fixed-rate mortgage, is the traditional version, in which the borrower pays the same, pre-determined interest rate for the duration of the loan. The total monthly payment stays the same from the first month to the last month, with the mortgage usually lasting from 15 years to 30 years.
A fixed-rate mortgage is protected from higher market interest rates, as borrowers will not have to increase their payments as well. However, if the market interest rates significantly drop, the borrower may be able to take advantage by refinancing the mortgage.
An adjustable-rate mortgage, meanwhile, only has a fixed interest rate for an initial term, which is usually below the market interest rate, then fluctuates afterwards with the market rates. Compared to the fixed-rate mortgage, the adjustable-rate mortgage is more affordable in the short term, but possibly more expensive in the long term if market interest rates go up. There is also the chance that the monthly payments turn out to be cheaper. It depends on borrowers if they are willing to take on the risk of this unpredictability.
There are other, less common types of mortgage, such as interest-only mortgages and payment-option ARMs, but these are often reserved for more sophisticated borrowers. For regular individuals and families, the choice often comes down to just between a fixed-rate mortgage and an adjustable-rate mortgage.
How to Avail a Mortgage
The first thing that potential real estate buyers need to secure is a good credit score, which will determine the approval of their mortgage application. Things that will raise credit scores include paying bills on time, using 30 percent or less of available credit, and not availing new credit accounts right before applying for a mortgage.
In addition to a good credit score, potential borrowers should also check their debt-to-income ratio. The lower the percentage of debt compared to a borrower’s monthly income, the better, so for better chances at approval, first pay off existing debt.
The next step would be to approach a bank or lender to get pre-qualified for a mortgage, which consists of several questions that will lead to a general estimate on the amount that will be approved for the loan. Interested borrowers may then proceed to get pre-approved for a mortgage, which entails the submission of the necessary documents to provide employment and income, among other requirements.
After receiving pre-approval, borrowers may then proceed with the formal application of the mortgage for the property that they are looking to buy, which will require even more documents and paperwork. They may approach the bank or lender that provided them with pre-approval, or they may check with others to see if they can get better rates.
Once the mortgage application is approved, the borrower may close the purchase of the property, which requires many signatures, making down payments, and paying other closing costs. Afterward, borrowers may move into their new home, which a mortgage helped make reality as long as they stay true to their monthly payments.
Sources: Trulia, Investopedia
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