Mortgage Basics: What Exactly Is a Mortgage?

When it comes to buying your future home, you’re more than likely going to be applying for a mortgage loan. In fact, unless you’re planning to hold up a bank the day before your property closes, you’re going to want to start preparing for your mortgage.

For first-time homebuyers, the subject of mortgages can be overwhelming. One minute we’re talking fixed rate versus variable rate and the next we’re onto the prevalence of stress tests and amortization periods. After an influx of mortgage jargon, it’s safe to say that you just might be ready for a drink.

But, it doesn’t always have to be such an intimidating experience. In fact, with a small degree of background knowledge in your pocket, you might actually look forward to meeting with your mortgage lender. So, before you arrange to meet with your lender, it’s best to acquaint yourself with what exactly a mortgage is and how it works.

What Is a Mortgage?

 Even if you’re entirely new to the world of real estate, the odds are that you have a general sense of what a mortgage is. You know, something about borrowing money from someone or something in order to purchase property. While this statement does have some truth to it, there’s certainly more to the equation.

Put simply, a mortgage is a loan from a lender that allows you to purchase property. Each month, the borrower is responsible for paying the monthly installment of the loan plus the agreed upon interest and potential insurance. Once you have repaid the loan in full, you will own the property outright.

It’s important to understand that the property is being used as security for the repayment of the loan. So, if you make a habit of missing your monthly payments, you’re going to be in serious trouble with your lender and run the risk of losing your home. This is why it’s so crucial to ensure that you can afford your mortgage in the first place.

What Is a Mortgage Comprised Of? 

Overall, a mortgage loan is comprised of three different elements: the principal, the amortization period and the interest rate.

Principal: The principal is the actual amount of the loan itself. This will be the final cost of your home minus your downpayment. So, if the purchase price of your home is $700,000 and your down payment is $140,000, your mortgage will be $560,000. This also happens to be the principal of your mortgage.

Amortization: The amortization period is the amount of time in which it will take to repay your loan in full. In general, most first-time homebuyers opt for an amortization period of 25 years. Although this means it will take longer to repay the loan in full, it helps to keep monthly payments at a minimum. However, some buyers may choose a shorter amortization period such as 10 or 15 years. While your monthly payments will be higher, the goal is to pay less money in interest overall.

The Interest: Remember, your lender is not choosing to loan you this money out of the goodness of their heart. After all, the eventual goal of any commercial lender is to make money off the loan. This is where the interest payments of your loan come in. When you meet with your lender, they will discuss the current interest rates available. You will be charged this interest each month in addition to paying the principal.

Note: If you have a down payment that is less than 20 percent of your purchase price, you will have to pay mortgage insurance. In most cases, this mortgage insurance will be added to your monthly mortgage payments.

Who Is My Mortgage Lender?

 Before you even consider signing up for a mortgage, you’re going to have to determine your lender. Of all the options for choosing a mortgage lender, it typically comes down to two major options: a mortgage broker or your bank.

 While a mortgage broker will not actually be your lender, they will locate an appropriate lender for you. Once they have your details, they will shop around to find you the best mortgage rate possible. The most advantageous perk in using a mortgage broker over a bank is that they can offer you a variety of rates.

 A bank, however, will be your lender as well as facilitate the loan for you. Some people choose to work with their bank since their bank is already in touch with all of their finances. However, a bank is only able to offer you their own private rates. This means that they’re unable to shop around for more inexpensive rates and products.

Wrapping Up

Now that you know what exactly a mortgage is, it’s time to understand what it takes to qualify for a mortgage loan. Be sure to check in next week to learn what exactly you need when meeting with your mortgage agent.