If you’re like many Americans, it’s your dream to become a homeowner. To buy a place that’s your very own, put down roots and make a lifetime of memories.
In fact, many Americans are making that dream a reality. In 2019 alone, according to the US Census Bureau and the US Department of Housing and Urban Development 701,000 new homes were sold. Even more surprising, the median home price was $299,400.
That’s a whole bunch of money that many Americans needed to borrow in the form of a mortgage. What is a house mortgage you might be wondering?
A home mortgage is a loan that allows so many people to make their dream a reality and become homeowners.
Read on to learn all about how mortgage loans work.
What Is a House Mortgage?
Many people assume the term mortgage is synonymous with the loan you take out to buy a house, but that isn’t exactly true. Mortgage is actually from a Latin root mort which stands for death. The term originally meant you have this until you die.
Well, when you buy a house, you want it to be yours for a long time, but not the loan that goes with it. In fact, the mortgage is the legal document you sign that says you understand the house can be taken from you if you don’t pay back the loan according to the details of the home loan.
So, when you go to buy a house, you go to the bank, credit union or mortgage company. You apply for the loan and sign the mortgage saying you agree to the terms of the loan. From the historical context if you don’t pay, you lose your house.
In reality the mortgage is far the gloom the name suggests. It is the tool needed for many to achieve homeownership. The actual house acts as collateral while you pay back the loan.
These lending institutions are willing to offer such big loans if they deem you a safe risk based on your credit history and ability to pay back the loan. They make money from the loan because they charge you interest on the amount you borrow over the life of the loan.
Mortgage and Mortgage Payment
In addition to looking at worthiness to pay back a home loan, you help show the lending institution you are invested in this agreement by paying cash upfront towards the price of the house. This is called the down payment.
Most homebuyers try to put down 20% of the cost of the home. In the end, the more you pay in cash up front, the lower your loan amount needs to be and therefore, the lower payments will be.
For example, if you are buying a $250,000 house. Following the 20% example, you need $50,000 in cash and only need to borrow $200,000. By including that large down payment, you show you are committed to the mortgage. If you only put down 10%, you would need to finance $225,000 and your monthly payment is higher.
Some lenders will allow homebuyers to get mortgages with as little as 3 to 5% down. Often though, the higher the amount you put as a down payment, the lower your interest rate is on the loan amount.
Once you know the loan amount the lender can calculate your payments. Payments include several parts.
It’s, of course, the principal, which is the amount of the loan divided by the number of months of the life of the loan.
This is how much the bank expects you to pay because they loaned you the money. It is the charge for getting a loan.
Because the lender wants to be certain the property is up to date, the borrower has the taxes included in the monthly payment. Then the tax money is put into an escrow account until they are due. Then they are paid by the lender.
When you have a mortgage, you are required to keep the property insured. This protects you and the lender in case of a disaster. Like the taxes, you pay the insurance premiums as part of your monthly payment, then the lender pays them when they are due.
Types of Mortgages
When applying for a mortgage, there are many different types of mortgages to consider. These are the terms in how your mortgage is financed and how much you will pay over the course of the life of the mortgage.
Let’s take a look at some types of mortgages.
A fixed-rate mortgage has to do with the interest rate. It means simply that the mortgage rate you get at the beginning of the loan remains the same throughout the life of the loan.
The most common type of mortgage is the 30-year fixed-rate mortgage. This means the interest stays the same and it will take 30 years to pay it off.
Some people opt for a 15-year fixed-rate mortgage. This means you pay off the mortgage sooner but the monthly payments are higher.
An adjustable-rate mortgage is one where the interest rate is adjusted based on current economic conditions. Usually the terms say the rate is adjusted as needed once a year.
Someone might opt for an adjustable-rate because the percentage is lower. Yet, they come with risk as you can’t predict economic conditions in the future. If the rate goes up, so does the monthly payment.
Other types of loans that come with unique risks are balloon mortgages and reverse mortgages.
Annual Percentage Rate
The annual percentage rate of APR as it’s commonly known is the number most pay attention to in conjunction with a mortgage.
The APR is the annual rate and the fees that go with the loan divided by the amount due on the loan over the course of that year.
APRs can be confusing to understand how they are calculated and the fees that go with them. You want a mortgage lender who will spend time explaining to you how APR is calculated and what the actual numbers are for your particular borrowing example.
Understanding the Mortgage Process
Understanding what is a house mortgage is key to becoming a successful homeowner.
After all, this is likely the largest amount of money you will ever borrow in your life. You want to understand all the terms, conditions, and fine print associated with the mortgage loan.
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