What Is A Mortgage?
You probably already know that most Americans use a mortgage to buy their home. But what exactly is a mortgage? We’ve put together a guide so you’ll know the basics as you search for your dream home.
Definition Of A Mortgage
A mortgage is a type of loan that you can use to buy or refinance a home. Mortgages are a way to buy a home without having all the cash upfront.
When you get a mortgage, your lender gives you a set amount of money to buy the home. You agree to pay back your loan with interest, over a period of several years. You don’t fully own the home until the mortgage is paid off.
What’s The Difference Between A Loan And A Mortgage?
The term “loan” can be used to describe any financial transaction where one party receives a lump sum and agrees to pay the money back.
A mortgage is a type of loan that’s used to finance property. A mortgage is a type of loan, but not all loans are mortgages.
Mortgages are “secured” loans. With a secured loan, the borrower promises collateral to the lender in the event that they stop making payments. In the case of a mortgage, the collateral is the home. If you stop making payments on your mortgage, your lender can take possession of your home, which is known as foreclosure.
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Parties Involved In A Mortgage
There are two parties involved in every mortgage transaction – a lender and a buyer.
A lender is a financial institution that loans you money to buy a home. Your lender might be a bank or credit union, or it might be an online mortgage company like Quicken Loans®.
When you apply for a mortgage, your lender will review your information to make sure you meet their standards. Every lender has their own standards for who they’ll loan money to. Lenders must be careful to only choose qualified clients who are likely to repay their loans. To do this, lenders look at your full financial profile – including your credit score, income, assets and debt – to determine whether you’ll be able to make your loan payments.
The borrower is the individual seeking the loan to buy a home. You may be able to apply as the only borrower on a loan, or you may apply with a co-borrower. Adding more borrowers with income to your loan may allow you to qualify for a more expensive home.
When you shop for a home, you might hear a bit of industry lingo you’re not familiar with. We’ve created an easy-to-understand directory of the most common mortgage terms below.
There are many types of mortgage loans. Each comes with different requirements, interest rates and benefits. Here are some of the most common types you might hear about when you’re applying for a mortgage.
FHA loans are a popular choice because they have low down payment and credit score requirements. You can get an FHA loan with a down payment as low as 3.5% and a credit score of just 580.
FHA loans are backed by the Federal Housing Administration (FHA); this means the FHA will reimburse lenders if you default on your loan. This reduces the risk lenders are taking on by lending you the money; this means lenders can offer these loans to borrowers with lower credit scores and smaller down payments.
The phrase “conventional loan” refers to any loan that’s not backed or guaranteed by the federal government. Conventional loans are often also “conforming loans,” which means they meet a set of requirements defined by Fannie Mae and Freddie Mac – two government-sponsored enterprises that buy loans from lenders so they can give mortgages to more people.
Conventional loans are a popular choice for buyers. You can get a conventional loan with as little as 3% down. If you put down less than 20% for a conventional loan, you’ll usually be required to pay a monthly fee called private mortgage insurance (PMI), which protects your lender in case you default on your loan. This adds to your monthly costs but allows you to get in a new home sooner.
USDA loans are only for homes in eligible rural areas (although many homes in the suburbs qualify as “rural” according to the USDA’s definition.). To get a USDA loan, your household income can’t exceed 115% of the area median income.
USDA loans are a good option for qualified borrowers because they allow you to buy a home with 0% down. For some, the guarantee fees required by the USDA program cost less than the FHA mortgage insurance premium.
VA loans are for active-duty military members and veterans. Backed by the Department of Veterans Affairs, VA loans are a benefit of service for those who’ve served our country. VA loans are a great option because they let you buy a home with 0% down and no private mortgage insurance.
Your mortgage term refers to how long you’ll make payments on your mortgage. The two most common terms are 30 years and 15 years. A longer term typically means lower monthly payments. A shorter term usually means larger monthly payments but huge interest savings.
An interest rate is a percentage that shows how much you’ll pay your lender each month as a fee for borrowing money.
There are two types of mortgage interest rates: fixed rates and adjustable rates.
Fixed interest rates stay the same for the entire length of your mortgage. If you have a 30-year fixed-rate loan with a 4% interest rate, you’ll pay 4% interest until you pay off or refinance your loan. Fixed-rate loans offer a predictable payment each month, which makes budgeting easier.
Adjustable rates are interest rates that change based on the market. Most adjustable rate mortgage (ARMs) begin with a fixed interest rate period, which usually lasts 5, 7 or 10 years. During this time, your interest rate remains the same. After your fixed interest rate period ends, your interest rate adjusts up or down once per year, according to the market. This means your monthly payment can change from year to year based on your interest payment.
ARMs are right for some borrowers. If you plan to move or refinance before the end of your fixed-rate period, an adjustable rate mortgage can give you access to lower interest rates than you’d typically find with a fixed-rate loan.
Your mortgage payment is the amount you pay every month toward your mortgage. Each monthly payment has four major parts: principal, interest, taxes and insurance.
Your loan principal is the amount of money you have left to pay on the loan. For example, if you borrow $200,000 to buy a home and you pay off $10,000, your principal is $190,000.
Part of your monthly mortgage payment will automatically go toward paying down your principal. You may also have the option to put extra money toward your loan’s principal by making extra payments; this is a great way to reduce the amount you owe and pay less interest on your loan overall.
The interest you pay each month is based on your interest rate and loan principal. The money you pay for interest goes directly to your mortgage provider. As your loan matures, you pay less in interest as your principal decreases.
Taxes And Insurance
If your loan has an escrow account, your monthly mortgage payment may also include payments for property taxes and homeowners insurance. Your lender will keep the money for those bills in your escrow account. Then, when your taxes or insurance premiums are due, your lender will pay those bills for you.
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The Mortgage Process
There are several steps you’ll need to go through to become a homeowner.
It’s a good idea to get an initial approval from your mortgage lender before you start looking for homes. Getting approved upfront can tell you exactly how much you’ll qualify for so you don’t waste time shopping for homes outside your budget.
Mortgage lenders use a variety of terms – including approval, preapproval and prequalification – to describe the initial approval process. It’s important to look for a lender that verifies most of your information upfront so you can make a strong offer. Only Quicken Loans® offers the Verified ApprovalSM, which verifies your income, assets and credit upfront, giving you the strength and confidence of a cash buyer.1
Shop For Your Home And Make An Offer
Now, the fun part begins! Connect with a real estate agent to start seeing homes in your area. Real estate professionals can help you find the right home, negotiate the price and handle all the paperwork and details.
Get Final Approval
Once your offer’s been accepted, there’s a bit more work to be done to finalize the sale and your financing.
At this point, your lender will verify all the details of the mortgage – including your income, employment and assets – if those details weren’t verified upfront. They’ll also need to verify the property details. This typically involves getting an appraisal to verify the value and condition of the home. Your lender will also hire a title company to check the title of the home and make sure there are no issues that would prevent the sale or cause problems later.
Close On Your Loan
Once your loan is fully approved, you’ll meet with your lender and real estate professional to close your loan and take ownership of the home. At closing, you’ll pay your down payment and closing costs and sign your mortgage papers.
A mortgage is a type of loan you can use to buy a home. It’s an agreement between a lender and a borrower.
Knowing some of the basic mortgage lingo ahead of time can help you understand exactly what you’re signing up for. There are different types of mortgages and different types of interest rates.
The biggest steps in the home buying process are getting approved, shopping for your home and making an offer, getting final approval, and closing.
To understand how much you can afford and what loans you might be eligible for, use Rocket Mortgage® by Quicken Loans®. Our online application is a fast way to get approved for a home and get expert mortgage recommendations.
1Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Quicken Loans’ control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply.
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