A Comprehensive Guide to Mortgages
If you are considering the purchase of a home or property, you will likely need to get a loan to cover the cost. The type of loan you will need to secure property is called a mortgage. For most people, getting preapproved for a mortgage is recommended so you can more fully concentrate of finding the property you want. This way, you can concentrate solely on the types of homes that fit within your budget whether you are looking for a single family dwelling, condominium, townhouse or tract of land and newly constructed home.
The reason mortgages are necessary is because most people do not have the large amount of available cash to purchase a home outright. As typical homes range from $100,000.00 and up, it is rare to have that much sitting about in your checking account. Therefore, a person will apply at a bank or lending institution to obtain funding. In order to get approved, you will generally need good or at least decent credit. The poorer your credit, the more difficult it will be to secure a loan. If you do obtain a loan, you will likely have a higher interest rate to compensate the lending institution for the increased risk.
Once a mortgage is approved, the bank will hold a lien on the property until the entire mortgage is paid off. The property itself is the collateral used to secure the loan. Payments on the mortgage are typically made monthly though there are some exceptions depending on the lending institution. There are also different types of mortgages and different terms. A fixed rate mortgage means you will have the same percentage through the life of the loan unless you refinance. A variable rate mortgage will fluctuate depending on market trends.
If the financing terms of the mortgage are not met, for example if the home owner is unable to make the required monthly payments, the bank that holds the mortgage may put the loan into default. During default, the homeowner has a certain amount of time to bring the account current. If it is not done in a timely manner, the bank may seize the property and sell it to recoup their losses. This is called foreclosure.
There are various parts to a mortgage that you should be familiar with. When you get a mortgage you will likely see some or all of these terms on your financial documents so it is important to know just where your money is going and how it is being used to pay off your mortgage.
- Down Payment - This is the amount of cash a buyer will put down on the home. Banks and lending institutions may dictate a required percentage or lump sum amount the buyer is required to have.
- Principal - This is the gross dollar amount you are borrowing from the bank in order to purchase your property. For example, you may have a home that costs $500,000.00. If you have a down payment of $50,000.00 you will need to finance $450,000.00. The $450,000.00 is the start of your principal balance.
- Interest - The bank offers loans to make money. They also want to mitigate risk so they charge an interest rate on the loan. This rate can vary depending on many factors including income, credit rating, and type of property. Shopping around to various financial institutions is also recommended because each one will have varying rates and may compete to get your business.
- Taxes - Property taxes are assessed on the home that can vary from location to location. Sometimes the estimated property tax is added to your loan and that amount is held in escrow until it is due. This ensures there is no shortage and the taxes will be paid on time so no liens are added to the home.
- Insurance - There are various forms of insurance that should be carried on a home in order to protect the investment. In addition to protecting the home, mortgage insurance may also be added to protect the bank in case of non payment of the loan and this amount may be added to the mortgage payment.
The monthly payment amount is calculated using particular portions of the above components. Each component is broken up into detailed amounts to make the sum payment. The amount that goes toward principal and interest is called amortization. If you over pay your mortgage the additional amount goes straight to the principal and this has the possibility of reducing your loan and paying it off faster. Mortgages typically range from fifteen years to thirty so shaving some time off that by consistently making higher payments is recommended if possible.
Kathleen Dougherty, Freelance Writer.
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