Mortgage Basics

 

A home purchase may be the single largest financial transaction you’ll have. The more you know about the process, the better equipped you’ll be to make big decisions that will affect you for years to come. You might have heard of these mortgage terms before but perhaps you haven’t purchased a home yet or simply need a refresher.

A mortgage is a type of loan used to buy or refinance a home. These are also referred to as mortgage loans and are a type of home loan. A financial institution will lend a borrower money to purchase a property or refinance a property. Mortgages are considered secured loans because the borrower has promised to turn over the property to the lender in the event that they stop making loan payments. Loan payments are typically made monthly and terms span from 5 to 30 years, sometimes more.

Most people don’t have all the cash needed to buy a home out of pocket. Even if they do, sometimes they’ll still get a mortgage so that not all of their funds are tied up. There are ways to access equity in your home but sometimes there are immediate needs for cash on hand. To qualify for a mortgage you’ll often need an established credit history and regular source of income. If you’re thinking about buying a new home and you need to borrow money to do so, you should consult with a mortgage loan officer to review the current state of your finances and see how much you can borrow. The mortgage loan officer will review your established credit history and sources of income. They will also ask you about your assets and debts to see how much they can lend you. Consulting with a mortgage loan officer before you start house hunting will help you narrow down the field and focus your search.

Borrowers choose a mortgage that works best for them based on a couple key factors: the length of the loan or term, the amount they can or want to borrow, and monthly payment amount. At the beginning of the loan term, interest will make up a larger percentage of the monthly payment amount. Over time, that percentage will decrease and you’ll begin paying more towards the loan principle until it’s paid off.

Lenders can provide an amortization schedule to show exactly how much each monthly payment is going towards principle and how much is going towards interest. An amortization schedule can also tell you how much you’ll pay in interest over the life of the loan. Sometimes borrowers want to pay off their mortgage faster than the term requires. Extra payments or large one-time payments can be made to accomplish this goal.

Interest rate and annual percentage rate (APR) often get confused but there are differences you should know about when shopping for a mortgage. The APR reflects the cost of borrowing money based on the interest rate, fees, any insurance costs and loan term. Because APR includes interest rate, in addition to other costs, this is a good number for consumers to use to compare different loan program. The Truth in Lending Act requires lenders to tell you both interest rate and APR.

The borrower purchases private mortgage insurance (PMI) to protect the lender from losses incurred if payments aren’t made on the loan. Often, the borrower will be required to pay for mortgage insurance if their down payment is less than 20% of the value or purchase price of the property. Some lenders may provide alternative solutions that help borrowers without 20% down payment avoid PMI. The cost of mortgage insurance can vary from around 0.5% to 3% or more but the PMI Cancellation Act protects borrowers against excessive PMI charges. Once you’ve built up enough equity in your home, you may be able to remove PMI from your monthly payments by refinancing or getting your home reappraised. Check with your mortgage lender and Mortgage Loan Officer to understand all your options.