What Is a Mortgage?
Mortgage is a loan to buy a house, secured by an agreement giving the lender rights to repossess the property if you fail to repay the debt. A mortgage usually requires monthly payments that include principal and interest, as well as escrow for property taxes and homeowners insurance. It’s essential to understand the different types of mortgages so you can choose the right one for your situation.
In most countries, mortgages are regulated in some way to control the level of risk. This may be done through law, government intervention or market practice. For example, many lenders have an idea of what a “standard” mortgage looks like, such as 70-80% LTV or no more than one-third of the borrower’s income going toward their mortgage debt. Mortgages are also often backed by government programs, such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA) and the Rural Development program of the United States Department of Agriculture (USDA).
The most common mortgage is an adjustable-rate mortgage. In an adjustable-rate mortgage, the interest rate is tied to a specific index or basket of indexes. This means that as interest rates rise, your monthly mortgage payment will also increase. Fixed-rate mortgages are less popular, but they are also more stable. They’re offered by private mortgage lenders such as banks, credit unions and online-only lenders.
When you apply for a mortgage, the lender will review your financial information and credit history to make sure you’re capable of repaying the loan. They’ll also check to see if the home you want to purchase is free and clear of any liens or other claims against it, such as those from creditors or taxing authorities.
During the mortgage application process, you’ll need to provide documentation such as bank statements and income verification, along with other supporting documents. The mortgage lender will then run a credit check and verify your employment. If your application is approved, you’ll receive the mortgage documents, which contain all of the terms and conditions of your loan.
Once you find a home you want to purchase, you’ll submit an offer and get the mortgage loan processed. During this stage, the lender will examine the property and its title with a fine-tooth comb to ensure it’s free of liens. It’s a good idea to get pre-approved for your mortgage before beginning your search since it will give you an idea of how much you can afford.
When shopping for a mortgage, remember that it’s important to look at the entire cost of the loan, including fees and other costs such as points. Using this calculator can help you compare apples-to-apples when comparing mortgage offers. By knowing the overall cost of your mortgage, you’ll be able to make an informed decision and avoid surprises down the road. To learn more about the process, click here to download our free guide: The Complete Guide to Mortgages.