What Is a Mortgage?
Mortgage is a loan that provides funds to help buy property, typically a house. The lender takes a legal “security interest” (or claim) in the property as a form of collateral against repayment of the debt, and may impose restrictions on the use or disposal of the property to ensure that the debt is repaid. Most mortgages are repaid with a mix of principal and interest payments over a period of time, ranging from 15 to 30 years. Mortgages are commonly used by individuals who cannot afford to pay cash for the purchase of a home or other real estate.
Before a borrower can close on a mortgage, they must submit a mortgage application and pass a rigorous review process to be approved for the loan. This process looks at all of the borrower’s financial history, including income and debt, credit history and assets. The underwriter also reviews other documents such as tax returns, pay stubs and bank statements. The lender’s goal is to be sure that the borrower can comfortably make monthly mortgage payments and manage any other outstanding debt.
When a lender approves a borrower for a mortgage, the lender will prepare a document called a Loan Estimate that outlines all of the costs associated with the loan. These include the loan’s terms, such as its term and payment amount, as well as its annual percentage rate, or APR. Borrowers should always review this document carefully to compare different lenders.
The APR reflects the total cost of the loan over its life and is determined by the lender’s own calculation of interest, plus fees and other costs such as origination charges. This formula differs by lender, and is based on factors such as the length of the loan, whether the loan is fixed or variable and other considerations. A mortgage’s APR can also change over the course of a year as market rates fluctuate.
During the closing process, the borrower and seller will meet with the lender or its agent to sign all final mortgage documents. The borrower will usually be required to put a down payment on the property and may be required to pay mortgage insurance or other fees such as loan origination fees or title insurance. At the closing, the borrower will hand over the money to the lender in exchange for the deed to the property.
There are a wide variety of mortgage products available today, including those from nonbank lenders such as Better, loanDepot and Rocket Mortgage. In addition to traditional banks, savings and loan associations and credit unions offer mortgages. As the mortgage industry continues to evolve, it’s important for consumers to understand the different types of mortgages and options available to them. This will allow them to make the best decision for their unique circumstances and goals. Then they can focus on finding the right home for them. Buying a new home is exciting, but it’s important to remember that the mortgage process can be complicated and can take some time.