mortgage

What Is a Mortgage?

A mortgage is a loan that may be extended to a home buyer by a bank or another type of financial institution. Unlike unsecured personal loans, this is a loan that uses the real estate as collateral. If the borrower defaults on the loan, such as if he fails to make loan payments, the mortgage lender has the ability to seize the collateral and foreclose on the home. This ability to reclaim collateral allows mortgage lenders to extend lower interest rates and larger loan amounts on these loans than what borrowers may find on unsecured personal loans. Because of this, obtaining a home mortgage is generally a more feasible and attractive option when buying a new home than using an unsecured personal loan may be.

Common Types of Mortgages

There are many types of home mortgages that borrowers can apply for, but some are far more common than others. Perhaps the most common type of home mortgage is a 30-year fixed rate loan. With this type of loan, the borrower makes 360 equal monthly payments on the loan, and the monthly payment amount and interest rate remain fixed for the entire loan term. At the end of the loan term, the home is owned free and clear. A variation to this is a 15 or 20-year fixed rate loan. There are also adjustable rate loans. With adjustable rate loans, the interest rate can fluctuate, and this means that the monthly payment may also fluctuate. There are also balloon payment loans. With these loans, smaller monthly payments may be required for a specified number of months or years. Then, a large lump sum is due as a final loan payment. In many cases, the home must be sold or the borrower must refinance the loan when the large final loan payment is due.

Determining How Affordable a Mortgage Is

A borrower should consider many factors when applying for a home mortgage, such as how long he plans to be in the home and if fixed or adjusting monthly payments are a preferred option. However, one of the most important factors to consider involves the affordability of the mortgage. A mortgage payment is often one of the largest expenses in an individual’s personal budget, and it may be a financial commitment that the borrower is responsible for paying for several decades. In order to determine how affordable the payment is, a borrower should prepare a personal budget and factor the new payment in. The borrower should also include other expense related to home ownership, such as regular maintenance fees on the home, changes in utility expenses and more. Preparing a projected budget is a great way to ensure that the mortgage is affordable.

Analyzing Closing Costs and Fees

In addition to determining the affordability of a home mortgage, borrowers should also review closing costs and fees. The most significant expense that a borrower may be responsible for at closing relates to the down payment for the loan. In addition, a borrower may be required to establish an escrow account for property taxes and insurance. Additional expenses may include the property inspection, the appraisal, the survey, title fees and more. A general rule of thumb may be to estimate that closing costs will be around two to three percent of the sales price of the home plus the total down payment required by the lender. However, a mortgage lender may be able to prepare a more accurate estimate of closing costs and fees upon request.

Applying for a home mortgage can be stressful, but home buyers who work with an experienced mortgage professional may find that the process is less challenging. Therefore, one of the best steps that an individual can take when preparing to apply for a home loan is to first shop around and find a courteous, experienced mortgage representative to work with.