What Is a Mortgage?
Mortgage is a type of loan that allows you to buy a home or other property by paying the lender back over time, typically through a series of regular payments. Each payment is comprised of both interest and principal, which decreases the amount that you owe on your mortgage over time. Most borrowers are required to have homeowner’s insurance policies that cover the cost of damage or loss to their homes, and the premium for this coverage is often included in the monthly payment.
There are many different types of Mortgage loans, and the specifics of each vary based on the borrower’s needs and the lender’s requirements. However, most Mortgages are backed by a piece of real estate and carry an adjustable or fixed interest rate. Many lenders have a process that is called pre-approval, where they will take basic financial information and run a credit check to determine what you can afford for a loan. This is a useful tool for homebuyers because it allows them to shop with confidence, knowing that they will be approved for a certain loan amount and at a given interest rate.
Most borrowers are required to pay a down payment in order to get a Mortgage, and this deposit is credited toward the total purchase price of the property when closing occurs. This reduces the debt load that you have to pay out over time, and it also helps your credit score by lowering your debt-to-income ratio.
Some borrowers may be asked to provide a letter of explanation, which is used by the lender to gain a better understanding of your financial background and why you might have some issues in your past that could impact your ability to repay the loan. This is generally required if you have had major changes in your employment or a history of late credit card payments, and it can be the difference between getting or not getting the loan.
Once a mortgage is signed, it becomes a lien on the property and gives the lender a legal right to repossess or foreclose on the property in the event of non-payment. Most borrowers agree to sign a promissory note, which is a legal document that makes it clear that you promise to repay the debt and to hold the property as collateral in case of default.
Some lenders will sell mortgages to other investors, which is known as securitization. These transactions are very popular, and they allow the investor to diversify their portfolio of investments by purchasing a group of mortgages that have been secured with real estate as collateral. Mortgages that are sold in this way can be purchased by private equity funds, mutual funds and pension funds. They are also used by banks and credit unions to help their customers acquire new homes. A Mortgage can also be used to refinance an existing home loan. This is a useful strategy for homeowners who have been able to increase their incomes and qualify for a lower mortgage interest rate.