What is a Mortgage?
Alternate title – Mortgage 101: What You Should Know About Mortgage Loans
Buying a home can be one of the largest purchases you make in your life. And not just in terms of money; this will be your safe place where you spend a lot of time resting and enjoying the mundane activities. It is why choosing the right mortgage can be crucial for your homebuying journey.
From understanding what a mortgage is to the different types of home loans available, let’s dive into the basics of mortgages!
What is a Mortgage?
A mortgage loan, or usually just referred to as a mortgage, is a type of legal loan agreement between you and the lender. The lender lends money for you to buy real estate and has the right to repossess the property plus interest if you fail to repay the loan.
Key Terms about Mortgages to Understand
These are some essential terms or concepts you will come across when trying to get a mortgage for your home.
Affordability is essentially the ratio of the cost of a property to your income. Costs would cover everything from the mortgage interest and how much you need to repay the lender to maintenance fees like heating and electricity. However, qualifying for a certain amount does not always mean you should go for the most expensive home you can. It can be wise to leave room for emergency funds and savings.
To qualify for a mortgage, there are several requirements to meet, with one of them being a credit score. TurnTimes can help calculate your credit score and figure out which home you can afford. You will generally need 580 for an FHA loan or 620 for traditional loans. Of course, the higher your credit score, the lower the interest rate and down payment you can enjoy.
Speaking of interest rate, this refers to how much the lender charges you for borrowing the money. In the mortgage world, the interest rate is calculated per year and is also known as the Annual Percentage Rate (APR). It can be affected by elements like your credit score, down payment, as well as the amount and type of loan.
Meanwhile, the down payment is a percentage of the property price that you have to pay first when you get the loan. Lenders would usually offer a low-interest rate for borrowers who pay more upfront, or a higher down payment. Down payment for some mortgages can be as low as 3%, with some even offering zero.
Refinance is what you can do to a pre-existing mortgage, in which you quite literally “refinance” your old mortgage with a new loan. This involves a new set of agreements with different requirements and terms and usually helps you get a lower interest rate.
How to Get a Mortgage
- Find out your credit score and home affordability. The first step would be to review your finances. You will answer some questions about your income, assets, and your house goals. This is a generic first step you will go through with any lender.
- Pick the right mortgage for you. Are you looking for a mortgage program that requires no down payment? Do you have a low credit score? Perhaps you’re eligible for a VA loan. It’s all about knowing your goals and identifying the best mortgage to help you achieve them!
- Choose a mortgage term. Most people would go for a 30-year, fixed-rate loan to look for the lowest possible payment each month. But if you can afford it, mortgages with a shorter time range can help you save tons in interest rate.
- Compare multiple lenders. The key to landing the best mortgage you can get is to do your homework. This means comparing rates from a few different lenders so you can choose the one who gives you the best deal.
- Get your preapproval. Before you start looking for the property, make sure that you have a preapproval letter. The document will state that you’re able to get a loan to buy the home, which will help when you go shopping for homes.
- Find your dream home. Now comes the fun part: finding the perfect home for your needs and budget. Your agent should help you make an offer, but make sure to negotiate with the seller before agreeing on a final price.
- Once you arrange for the details and make the down payment, ensure that all the documents are in order. Sign what you need to and start decorating your new home. Congratulations!
Types of Mortgage Loans
There are many types of mortgage loans, but today we will talk about the most popular ones.
Loans backed by the Federal Housing Administration require a less down payment – as little as 3.5% if you have a high credit score. This type of mortgage also requires annual insurance premiums.
The VA mortgage is intended to help military personnel and veterans purchase a home. It is insured by the Department of Veterans Affairs and requires zero down payment.
These are loans that are not insured by the government. It often offers minimal down payment, but you usually need a high credit score of 620 or higher.
15-year fixed-rate mortgage
This one has a fixed interest rate that lasts for 15 years and is a popular choice for refinancing. Although it has a higher monthly payment than 30-year loans, the interest is also much lower.
Other types of mortgages include the 30-year fixed-rate mortgage, adjustable-rate mortgage, USDA mortgage, jumbo mortgage, an interest-only mortgage.
Getting the Lowest Rates
So, how can you get a low-interest rate for your mortgage loan? The secret is to either have a high credit score or make a higher down payment. Other factors can help, including having a good work history.
Shortening the period of your mortgage will also give you lower rates. Finally, our tip is to consider refinancing your existing mortgage to secure a lower interest rate.
Mortgage vs Loans
What’s the difference between a mortgage and a loan? This is a common question asked by future homeowners. “Loan” is any financial agreement where a borrower receives an amount of money and agrees to repay it, sometimes with an interest rate, to the lender.
“Mortgage” refers to a specific type of loan that you can use to buy homes and property. It is also a secure loan where the borrower agrees that the home can be the collateral. This means the lender has the right to seize the property if the borrower fails to repay the borrowed amount.