What Is a Mortgage?
A mortgage is a contract between a homeowner and a lender where the homebuyer pledges his or her house as collateral. The lender retains the right to the property if the borrower fails to repay the loan, and in some cases, can evict the occupants. In other situations, the lender may sell the home to cover the mortgage debt. To obtain a mortgage, would-be borrowers apply to one or more lenders. These lenders review the borrower’s financial profile and ask for evidence that the borrower will be able to repay the loan. Generally, mortgage lenders conduct a credit check on the applicant.
Depending on the circumstances, a mortgage may be either fixed-rate or adjustable-rate. Whether you choose a fixed-rate mortgage or an adjustable-rate mortgage will determine the cost of the loan. Mortgage rates vary depending on the type of loan you choose, your credit rating, and your ability to repay the loan.
If you have less-than-perfect credit, you may want to work on cleaning up any old debt. The higher your credit score, the lower your mortgage payment. A mortgage is secured by your home and your interest rate depends on the risk your lender believes you pose. In addition to your income, mortgage lenders also look at your debt-to-income ratio (DTI) to determine if you can afford the monthly payment. The maximum DTI is generally below 50 percent.
Mortgage lenders often require homeowners insurance to protect their investment in the home. Depending on the amount of down payment and loan type, homeowners insurance is an additional monthly payment you may have to make. Mortgage payments are generally divided between interest and principle. Early payments are dominated by interest, while later ones are dominated by principal. When comparing rates, look for a sample amortization schedule that shows the amount of principal versus interest over the life of the loan.
Before applying for a mortgage, check your credit score and report. Your credit score is essential for mortgage lenders. If you have a good credit score, your interest rate will be lower. If you have bad credit, your interest rate may be higher. When you have poor credit, you may find it difficult to get a mortgage.
When choosing the right mortgage, be sure to look for one with adjustable rates. These loans are generally 30-year loans, and have fixed rates for a fixed period, but then adjust based on market conditions. Some adjustable-rate mortgages have caps to prevent payments from spiraling out of control. Another important factor is the amount of the loan. A mortgage payment may include property taxes, which are typically paid in escrow.
A mortgage is a loan from a financial institution that enables the borrower to purchase a house. If the borrower defaults on the loan, the lender has the right to repossess the home. A mortgage is typically the largest loan a homeowner will ever take out. It is also often the longest term. A mortgage is generally regarded as “good debt” because it can build equity in the property.