Understanding what and how mortgages work is essential for any home buyer. And contrary to popular belief, it is not a hard subject to get into the meat of. With a little research and some elbow grease, making the right financial decision on what mortgage to choose will be easy.
Simply put, a mortgage is a loan. It used to make real estate purchases without having to pay it up front. Instead, the borrower pays the loan plus interest over a period of years. For security, the house and land is put up for security. If the borrower fails to pay for the mortgage, the property will be foreclosed.
Cost of mortgages
Mortgages go beyond its monthly payment. It is in fact made up of underlying expenses. This includes the down payment and the closing costs. The mortgage is basically composed of the following:
Amount of money borrowed. This amount is fixed.
Fee charged to the borrower for the loan.
This is calculated by dividing the total number of monthly mortgage payments in a year.
Insurance payments have two types. The first is property insurance which protects the home owner from incidents such as theft, flooding, and fire. The second is mandatory for purchases with a down payment less than 20 percent of the home’s cost.
Types of mortgages
The type of mortgage one gets depends on that borrower’s need. Lenders will base it on a number of factors that range from credit reports, assets, liabilities, and even employment history. Here are two of the common types of mortgages:
- Fixed rate mortgages
This is fixed for an amount of time usually from 10 years or more. It is a conservative option that works best for long-term ownership. Rates do not change but there are refinancing options if rates drop significantly during the term of the loan.
- Adjustable rate mortgages
The interest rates adjust according to the current rate. However there is a minimum and maximum rate cap as to the adjustment. This is an apt choice if rates are very low and the borrower does not intend to stay too long in the property.
Type of loans
Mortgages are differentiated by their structure and the agencies that offer them. The most common types include:
- Conventional loan
This loan is not insured or guaranteed by the federal government. They are categorized between conforming and non-loan confirming loans. It is difficult to qualify due to the steep requirements for down payments, income, credit score.
- FHA loan
Provided by the Federal Housing Administration (FHA) and has lower down payments requirements. This is perfect for first time home buyers. Requirements are easier to comply to which includes lower loan costs and looser credit requirements of even just 3 percent.
- VA loan
This is for veterans and other military personnel. This program from the US Department of Veteran Affairs (VA) does not make loans but instead guarantees mortgages from qualified lenders. Through the program, veterans and other military personnel can obtain mortgages at favorable rates without down payments.
Financing a real estate purchase need not be a stressful and confusing part of the home buying process. Aside from researching, one of the best ways is to get the right real estate partner that can share their knowledge and expertise.
Call me today for your financing needs and questions at (480) 748-1696.