Mortgage: what does it mean?
by Shawn Carvin, Senior Mortgage Banker
A mortgage is a loan that is obtained by a buyer in order to pay a seller in full for the purchase of a piece of real estate, such as a home.
The home buyer will then owe the lender the original sum they borrowed, plus any fees and all interest that accumulates over time. As a guarantee of payment – also called collateral – the lender will hold the title or deed of the property being financed until the buyer pays back the loan in full. While the buyer is making payments on the loan, they are considered the property owner and may utilize and enjoy the property accordingly.
Types of mortgage loans
There are many kinds of home loans available. Selecting the best loan option for a given buyer requires an understanding of their financial situation as well as their long-term plans. Some individuals intend to live in a home for several decades. Others plan to sell within just a few years in the hopes of moving up the real estate ladder. Mortgage loans are available with variable interest rates or fixed rates, and for short or long terms. Matching a home buyer with the proper mortgage requires the expertise of a qualified mortgage lender who has access to a range of home loan products for varying needs.
Qualifying for a mortgage
In addition to considering a borrower’s credit history, lenders evaluate a home buyer’s ability to pay back the loan, as measured by the ratio of their debts to their income. Monthly payments on car loans, credit cards, student loans, etc. will figure into this calculation.
Mortgage loan interest and fees
On top of the original amount borrowed (called the principal), other costs which must be paid by the borrower include the interest on the loan (calculated by the annual percentage rate, also known as APR), as well as points, closing fees, and private mortgage insurance (PMI) when required. While shopping for the lowest interest rate seems like a practical approach, the total cost of the loan must be understood. Interest rates and fees vary widely based on numerous factors, and the role of a mortgage lender is to help the buyer obtain a home loan with the most favorable overall terms.
Obtaining the lowest interest rates
In general, borrowers with very good to excellent credit will qualify for loans with lower interest rates than applicants with average to good credit. But one way to obtain a more favorable interest rate regardless of credit rating is with a larger down payment. If a home buyer is able to make a 20% down payment, their interest rate will be lower vs. putting 3.5% to 5% down.
Private mortgage insurance
Lenders require private mortgage insurance (PMI) when the buyer makes a down payment of less than 20%, because the outstanding balance of the home loan plus interest and fees is initially higher than the market value of the property. In case the buyer defaults on the loan, the PMI policy pays the lender the difference between what the borrower owed and the amount the lender recovered from the sale of the property.
If a homeowner is making payments on a mortgage loan with a higher interest rate than current rates and/or has accumulated significant equity and wants to pull it out as cash to be used for other needs, they may consider refinancing their home.
In practical terms, refinancing is taking out a new loan to pay off an older loan. The new loan can have a longer time period than the time remaining on the original loan and/or have a lower interest rate, both of which will help reduce the monthly payment. Some homeowners will refinance in order to convert some or all of the equity of a property into the form of cash paid to the borrower, which is frequently utilized to make home improvements.
How to get the right mortgage for you
The best mortgage for your needs hinges upon numerous variables. Make certain you obtain advice from a qualified mortgage lending professional, thoroughly inform yourself of available options, and shop around before committing to a lender and mortgage terms.