Mortgage loans allow you to buy a home without having all the cash upfront. They have secured loans, meaning your lender can take possession of the house if you fail to make timely payments.
Understanding how mortgage loans work can help you choose the right one for your circumstances. Learn about the different types of mortgages, how monthly mortgage payments break down, and other aspects of the loan process.
What is a Mortgage?
Mortgages allow individuals to purchase real property without paying the entire purchase price upfront. The lender will hold a claim on the property until the borrower repays the loan plus interest over a specific number of years, known as the term.
Lenders review many financial factors, including the borrower’s income, debts, and credit scores, to determine whether or not they will lend money for a home and the terms of that loan. This process is called underwriting, and it can take weeks to complete.
Mortgage loans typically require borrowers to provide down payments to help mitigate the risk of defaulting on their mortgages. Borrowers also often pay property taxes and homeowners insurance as part of their monthly mortgage payments. Those bills are typically collected and held in an account by the lender until they are due, then paid on behalf of the borrower. Mortgages are the most significant financial obligation most people will assume in their lifetime, and it’s essential to understand how mortgages work and the different types of mortgages available.
Types of Mortgage Loans
When it comes to mortgage loans, the options are many. Whether you get a conventional or government-insured loan, you can choose from different term lengths, interest rates, and repayment structures.
A standard mortgage lasts for 30 years, but there are alternatives like a 15-year option that can save you money. And, of course, you can also choose between a fixed-rate mortgage, where the interest rate stays the same throughout the term, or an adjustable-rate mortgage, where your rate fluctuates with the market.
Conventional home mortgage loans are popular, but you can also consider Federal Housing Administration, or FHA, loans for low-down payment buyers. Finally, you can use a jumbo loan to buy a property above the conforming loan limit set by Fannie Mae and Freddie Mac. These government-sponsored enterprises keep our mortgage markets liquid but come with stricter credit and debt-to-income ratio requirements. Besides those, you can even opt for a construction loan or take out a refinance mortgage to change your existing agreement or cash out equity.
A mortgage calculator is a valuable tool to use at many stages of the home-buying process. Whether you’re just starting out or well into your loan application, a mortgage calculator can help you determine what you can afford based on your potential new home’s purchase price, down payment, and interest rate.
The mortgage calculator can also show you how much your monthly payments will include, including principal, interest, property taxes, and homeowner’s insurance (and, if applicable, HOA fees). Some lenders require you to deposit into an escrow account to cover future homeowner’s insurance and property taxes.
You can also use mortgage calculators to explore different payment options, like bi-weekly payments and extra payments, as well as calculate front-end & back-end debt-to-income ratios. Select a loan term, down payment amount, and interest rate from the drop-down menus to get started. Generally, the larger your down payment, the lower your mortgage payments.
Buying a Home
Buying a home is one of the most significant financial investments you may ever make. Being prepared for the process by understanding the types of mortgage loans available, how monthly payments are broken down, and mortgage term options can help you make a wise choice.
Getting pre-approved for your mortgage loan will give you an idea of what you can afford in a home and help speed up the process once you find the perfect property. It would help if you also cleared out any other debt, such as student loans and credit card balances, to increase your borrowing power and get a better interest rate.
It would help to look at the APR, which includes fees and points when comparing lenders. When you get preapproved, you’ll receive a Loan Estimate that breaks down these costs and makes it easier to compare lenders. Also, remember to factor in homeowner’s insurance and property taxes into your budget. You can use a calculator to estimate these costs.