Hello! Are you looking to buy a home or refinance your loan?
A primer on mortgage basics.
Mortgage Fundamentals.
Understanding the basics of home mortgage
loans is important for
anyone considering buying a home or
refinancing a current mortgage.
Here are the key fundamentals:
Amortization
An amortization schedule, which defines how monthly payments are split between principal (the loan amount) and interest, is usually included with mortgage documentation. On an amortized loan, the amount of the borrower's payment that goes toward principal increases over time, while the interest portion decreases.
Closing Costs
Various closing costs are involved when purchasing a home or refinancing an existing mortgage. Some examples include fees for services such as appraisals, inspections, title insurance, and legal services. Be sure to budget for these costs in addition to the down payment, as applicable.
Default and Foreclosure
Missing mortgage payments can result in default and, in some situations, foreclosure on the mortgage and repossession of the property. To avoid default, homebuyers must understand and honor the terms and conditions of their mortgage.
Down Payment
The initial, upfront payment made by the homebuyer to reduce the loan amount is known as the down payment, which can vary but is normally a percentage of the purchase price. A greater down payment can lead to lower monthly mortgage payments and better loan terms.
Interest Rate
A critical factor in determining the total cost of your mortgage, this is the cost of borrowing money. Interest rates can be fixed (remaining the same throughout the loan term) or adjustable (changing periodically based on market conditions).
Loan Term
The length of time over which the borrower will repay the mortgage is the loan term. Common mortgage terms are 15, 20, or 30 years, but other options are available. Shorter terms often come with higher monthly payments but lower interest costs over the life of the loan.
Mortgage Loan
Specifically used to finance the purchase of a home or real estate or the refinance of an existing mortgage, the borrower (homebuyer) borrows a sum of money from a lender (typically a bank or mortgage company) and agrees to repay it over time, usually with interest.
Monthly Mortgage Payments
The borrower must make a mortgage payment to the lender every month. This payment normally includes the principal, interest, and any other fees, such as property taxes and homeowners insurance, which the lender may hold in an escrow account to pay the appropriate entities when due.
Prepayment and Refinancing
Some mortgages allow for prepayment, which means the borrower can make extra payments to pay off the loan quicker. Refinancing involves obtaining a new mortgage with different terms, often to secure a lower interest rate or change the length of the loan.
Qualification and Creditworthiness
To secure a mortgage, a homebuyer must meet the lender's qualification criteria, which often includes having sufficient and stable income, good credit, and a reasonable debt-to-income ratio.
Types of Mortgages
Various types of mortgages are available, including fixed-rate mortgages, adjustable-rate mortgages (ARMs), and government-backed mortgages like FHA loans and VA loans. The choice of mortgage type available to an individual depends on their financial situation, qualifications, and preferences.
