What is a Home Mortgage and How Does it Work?
Buying a home is a dream for most. It’s also one of the largest financial transactions people will ever make. To make the purchase, a home mortgage is the most familiar and common way to finance it. So what is a home mortgage and how does it work? Glad you asked…keep reading to learn more!
If you're curious about what a mortgage is and how it works, then you’re not alone! According to Merriam-Webster: “A mortgage is a conveyance (see CONVEYANCE sense 2a) of, or lien against property (as for securing a loan) that becomes void upon payment or performance according to stipulated terms.” Now that doesn’t seem to clear it up much, and perhaps makes it even more confusing…so let’s clear it up.
Mortgages can be complex, and they’re one of the many “pieces of the pie” in the home buying process that you’re going to better understand after reading this. You’re going to not only know how it basically works, but what you need to know before you take out a home loan.
WHAT IS A MORTGAGE?
A mortgage is a loan that's used to purchase a property. It's a legal agreement between the borrower and the lender (usually a bank), where the borrower promises to repay the loan (plus interest) over a set timeline (like 15 years, 20 years or 30 years generally). Your mortgage agreement will include details such as the loan amount, interest rate, repayment period, and the “rules” for making payments. There are mortgage companies and brokers who specialize in helping people calculate and choose mortgage agreements (and if you’re seriously thinking about buying a home, let me know and I can connect you with resources in your area). When you take out a home mortgage, you will typically need to give a down payment (usually between 5%-20% of the purchase price) and pay closing costs (the fees to cover the costs of the loan). There are also specific types of loans that can further help veterans, first responders, teachers, people looking to purchase in certain areas that a USDA loan can assist with, and more!
HOW DOES A MORTGAGE WORK?
Mortgages can have fixed or variable interest rates. A fixed-rate mortgage means that your interest rate stays the same for the length of the loan term, while a variable-rate mortgage means that your interest rate can change (rise or fall) over the loan term (which could mean you pay more…or less in interest). The fixed-rate loan is known to be a safer loan to have, and the variable interest rate loan a more “risky” loan, but as mentioned, there are times when a variable interest rate loan and term can end up saving (or costing) you more money. You'll also need to choose between a conventional mortgage (which is not government-backed) or an FHA loan (which is backed by the Federal Housing Administration). This isn’t something to worry about, and your lender will guide you in the right direction for this. Another factor is that your credit score will also play a key role in determining your eligibility (and interest rate) for a mortgage. The better your credit score, the more options you’ll typically have when trying to qualify for a mortgage.
4 STEPS INVOLVED IN GETTING A MORTGAGE
To get a mortgage, you'll need to follow a series of steps (this is only a simplified list to give you a better idea):
Find a lender (such as a bank, credit union, or mortgage company) and get pre-approved (not pre-qualified). This means the lender will review your financial information and provide a conditional approval for a certain loan amount so you know what price range of homes you can be considering as options.
Complete and submit a formal loan application with the lender you choose. Be careful to not shop around with too many lenders and have each run your credit or it can do some damage to your credit score.
Provide documentation such as proof of income, assets and statements (bank and other requirements).
Once you find a home, be sure to get a home appraisal to determine the property's value. (The lender will order this for you).
If your loan application is approved, you'll close on the loan…which means you'll sign the mortgage papers and pay closing costs. Keep in mind that sometimes closing costs can be negotiated with the sellers. Ask a qualified real estate agent/broker for details and guidance on this.
WHAT YOU NEED TO KNOW BEFORE GETTING INTO A MORTGAGE
Before you get a home mortgage, there are a few things you should consider.
Think about how much you can afford - your monthly mortgage payment shouldn't exceed 28% of your gross income.
You'll also need to have a good credit score (at least 620, but the higher the better).
You’ll need to have a stable job for at least two years, or be in a similar industry if there’s job changes within this time.
You’ll need a solid financial history.
It's also a good idea to save for a down payment - which can help you secure a better interest rate and lower your monthly payments - as well as including a budget for closing costs (which can range from 2%-5% of the loan amount).
Be aware that we’re in a volatile times, and rates keep going up and down. It’s not always better to wait for a better rate when inventory is low in an area, and equity continues to increase…this could make it even more expensive for you, and then you’d need to qualify for even more of a mortgage…so please be cautious of this and ask a qualified real estate broker and lender for further assistance and insight.
As you probably realize, getting a mortgage can be overwhelming, but understanding the process can help you make informed, confident decisions. Now that you know more about what a mortgage is, how it works, and what you need to qualify and get approved, this can make a positive impact when it comes to financing your dream home. By following the steps outlined in this post and doing your research, you can become a savvy homebuyer and navigate the mortgage process with assurance.
If you’re thinking of listing your property, or if you don’t own a home, condo or similar, and are interested in buying, let me know so I can help walk you through the current market conditions, as well as all the resources and referrals I have from my many years of success in the industry. As an 11 year, Five Star Professional Real Estate Agent, knowing that no matter what is happening in the economy (and especially now), you need an exceptional real estate broker as your ally…and you’ll be in great hands with my team and me!
Please reach out, I’m here to assist and help you #moveforward,
Teresa Catania, Broker
West + Main Homes
West + Main Homes Oregon
Bend Oregon | Central Oregon | Portland Oregon
503-740-3293
teresa@teresacatania.com
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