You may be considering home buying and wondering “what is a mortgage?” If you’re looking to buy a home soon, it’s time to find out. You’ll either need to have the full amount to pay for a home or borrow money and pay a mortgage each month. Most homebuyers don’t have enough money to purchase their home in cash, so they get a mortgage. When it comes to a mortgage, not many fully understand what it really entails. Here’s a rundown of a what a mortgage is and what to expect when you have one:
What is a Mortgage?
A mortgage is a home loan. To help you purchase a home, you’ll need to apply for a loan from a bank or other financial institution. The mortgage is tied to the home. This means that if you don’t pay your loan, the lender can sell the house to get back their loss. Payment on a mortgage is done on a monthly basis and consists of four components: insurance, interest, principal and taxes.
How Does It Work?
You’ll have to agree to terms and conditions, which specify how long you’ll pay the loan back and more. You can opt for 15 years with a higher monthly payment or 30+ with a lower one. You’ll need to have a down payment, which is a percentage of the cost of the home due at loan signing. The terms and conditions will also specify the rate of interest and whether it’s a fixed or adjustable rate. A fixed rate will stay the same for the entire loan, while an adjustable rate can change depending on the market. Or it can be a combination, which can be fixed for a while and then adjusted later.
As you pay, a portion of the payments goes to the principal, or the exact remainder you owe on the loan. The monthly mortgage amount will also include interest, as well as normal taxes (which are actually tax-deductible each year). Paying off the mortgage is called “amortization” in the financial industry. Unless you put down the recommended 20% of the house cost, you’ll have to have mortgage insurance, which protects the bank and the lender in case the mortgage defaults. This is added into the monthly payment.
You can also opt for government-backed mortgages if you qualify. For instance, veterans of the armed forces can qualify for special FHA mortgages, as well lower-income citizens. To find out more about what mortgage loans and programs might be available to you, contact Karen Douglas, The Mortgage Genie.