How Do Mortgages Work?
For aspiring homeowners, securing a mortgage can be a vital stepping stone in their journey. Learning about these loans allows you to make smart decisions that fit your situation.
Mortgage 101
How do mortgages work? As The Mortgage Reports explains, they function like most other secured loans. A lender provides the funds that allow you to buy a home now. Then, you’re able to pay back the borrowed money over time by making payments according to the terms you agreed to when you took out the loan. The terms vary depending on the type of loan, so it’s a good idea to educate yourself before shopping around for a loan. It’s also important to work with a reputable mortgage lender.
Mortgage Terms You Should Know
Businesses often have their own vocabulary. You have to educate yourself to understand what’s happening. Experian offers a few suggestions for mortgage terms you should know:
- The down payment is the amount of cash you bring to the sale.
- Closing costs are the fees paid to various vendors at closing for services provided in order to complete the sale of the property.
- The principal is the amount that you actually still owe on the home.
- The loan term is the amount of time that you have to pay the loan.
- Foreclosure is an option if you fail to pay your mortgage payments. In this situation, the lender can repossess the property.
Mortgage Types
Mortgages come in a variety of shapes and sizes. NerdWallet offers a quick overview:
- Fixed-rate loans. Home loans with interest rates that remain the same for the life of the loan are called fixed-rate loans. They’re the most popular type of home loan because of the stability and predictability they offer.
- Adjustable-rate loans. As their name implies, adjustable-rate loans, or ARMs, have interest rates that change. The timing of these changes depends on the terms of your loan. A borrower’s monthly mortgage payment can also change depending on their interest rate.
- Conventional loans. Offered by private lenders, conventional loans aren’t part of any government program. They typically require a high credit score and a down payment of at least 3 percent. A down payment of 20 percent will be necessary to avoid private mortgage insurance.
- Jumbo loans. Loans for amounts above the limits set by the government are called jumbo loans. Borrowers should prepare for extra scrutiny. Better credit and a larger down payment are helpful.
- FHA loans. These are government-backed loans that are provided by private lenders but insured by the Federal Housing Administration (FHA). They’re often touted as ideal for first-time homebuyers or those who might not have much of a down payment saved.
- USDA loans. If you’re searching for 100-percent financing, here’s an option. Backed by the U.S. Department of Agriculture (USDA), these loans have some income and geographic limits.
- VA loans. VA loans, which are ensured by the U.S. Department of Veterans Affairs (VA), also offer 100-percent financing. Eligible borrowers enjoy competitive interest rates and favorable terms.
Mortgage Qualifications
What does it take to qualify for a mortgage? Lenders weigh the risk before extending an offer, and different loan programs have different requirements. According to Credit.com, they’ll typically consider three factors:
- Creditworthiness. Your credit score and credit history provide insight into how likely you are to repay your debts.
- Ability to repay the loan. Lenders must feel confident that you can repay the debt. A suitable income and your level of existing debt are important.
- Property value. Mortgages are secured by the property that is purchased by the loan. The property must be a reasonable value.
When you have questions about how mortgages work, reach out to the loan experts at PrimeLending West Texas. We’ll be delighted to help you select the best loan product for your unique needs. Contact us today to get started.