What is a Mortgage?
A mortgage is a tool used to allow a potential home owner to purchase a home without paying the full price up front. Using the bank's money the borrower is able to purchase a home they may not have been able to afford on their own. The borrower then must pay this loan back plus interest over the course of many years (depending on the term of the mortgage). If the homeowner fails to make payments on time and defaults on the loan the lender has the ability to evict the residents and put the home in foreclosure. The bank/lender can then sell the home and use any income to settle the mortgage debt.
What is a Mortgage Term?
The mortgage term is the amount of time your mortgage agreement with the bank/lender is in effect. This period can be as long as 10 years or as short as 6 months but at the end of this time you are no longer committed to the mortgage rate, lender or original conditions agreed upon by the lender. At this time generally one must renew terms with a lender at a new mortgage rate and under new conditions, for better or worse.
What is the Amortization Period?
This is the period of time it takes until you actually own your house. This can take up to 50 years depending on the agreed upon terms.
How to Get a Mortgage
Most first time home buyers require a mortgage but before you even start looking at homes you need to get your affairs in order so you can qualify for a mortgage. The best way to do this is by getting pre-approval for a mortgage, which will help you determine what price range you should be shopping around in.
There are many steps to the process of getting pre-approval for a mortgage these include:
- Evaluating your credit history (your annual credit check won't suffice)
- Reduce your debt-income ratio (that means pay off those old debts)
- Start saving for a down-payment
Once you've done all that you could apply of pre-approval of a mortgage which will allow you to take those first steps into the home buying market. When you have found a home you like it's time to put all that hard work you did early on to good use. Home buyers looking to borrow money can start shopping around for a bank/lender that's offering a good mortgage rate . Hopefully by this time you are equipped with all the right information lenders are looking for.
Helpful articles on How to Get a Mortgage:
Mortgage calculators are a handy tool used by both potential homeowners and lenders alike. They factor in elements like the loan principal, balance, compound interest rate, number of payments per year, total number of payments and the regular payment amount to determine the financial burden that will be put on the borrower/homeowner. In the end a good mortgage calculator can help you determine which homes you can actually afford in the long term. Luckily there are quite a few free mortgage calculators available.
Free online mortgage calculators:
What is a Mortgage Rate?
The mortgage rate is the rate of interest you are charged on the mortgage (essentially the amount of money you give the bank to pay them for their loan services). Mortgage rates are one of the single most important aspects of the mortgage industry. These along with interest rates are determined by the banks and can greatly affect the home buyer's market. Getting into the market when 'mortgage rates' and 'interest rates' are low is ideal.
How to Determine a Mortgage Rate?
There are many parts to determining the current mortgage rates , so many of which have to do with the economy and the borrower has no effect on. Generally if the economy is doing well then mortgage rates are higher and the inverse is also true. However, the borrower's credit score can also greatly affect the mortgage rate. Banks/lenders are usually risk averse and if they sense that there is a chance the borrower could fail to make payments or default on the loan then they will look to get initial amount they loaned out paid back at a faster rate— therefore a 'higher' mortgage rate is applied.
What is a Fixed Rate Mortgage?
A FRM or Fixed Rate Mortgage is a type of mortgage plan which has a fixed (unchanging) interest rate, as opposed to one that could fluctuate through the mortgage term. The advantage of a fixed rate mortgage is that the borrower can rely on steady consistent payments allowing them to better plan their budget and future.
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What is an Adjustable Rate Mortgage?
An ARM or adjustable-rate mortgage is a type of mortgage which the borrower agrees to have monthly payments which can fluctuate as interest rates go up and down with the market. Generally lenders agree to a short initial fixed-rate so the borrower can have some initial reliability but once that period is over the payments can go up and down. Borrower's and lenders can also agree to a "rate cap" which limits the amount the rate can change in a given term (these terms can last for a year or life depending on what is agreed upon).
Pros and Cons of an Adjustable Rate Mortgage
- Initial fixed-rate term is usually lower than on a standard fixed-rate mortgage
- If you play the market right the interest rates can go down with time and you may find yourself paying less
- These are higher risk mortgages since your payments could just easily go up as they can go down
- ARMs are unpredictable so if you are on a tight budget they won't provide the stability you might be looking for
What is an FHA Loan?
An FHA or Federal Housing Administration loan is a type of mortgage insured by government-backed lenders and are very popular for first time home buyers.
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How to Get an FHA Loan?
Before even looking at an FHA loan the borrower must have a credit score above 580, been employed for the last 2 years, not declared bankruptcy in the past 3 years and absolutely must intend to live in the residence (these loans are intended to help Americans afford a home to live in not for investment). If you have all these things in order then you should find an FHA-approved lender in your area. You can find out which lenders are approved on the United States Department of Housing and Urban Development (HUD) website .
Pros and Cons of FHA Loan:
- Substantially lower down payment (as low as 3.5% if your credit score qualifies)
- You won't have to pay more if you pay off your loan early (most lenders charge a prepayment penalty)
- Low credit score requirements mean borrowers can get a loan with a credit score as low as 580 (almost 100 points lower than most lenders)
- Borrower is required to pay a one-time mortgage insurance premium which is a percentage (usually between 1.3-1.4%) of their initial down payment
- Borrowers who put less than 10% down are usually required to a monthly premium for the full term of the loan
- FHA insured loans are only for homes that cost below $625,000
What is a Mortgage Broker?
A mortgage broker is someone who can broker (shop around for) a mortgage loan on your behalf. They have become more and more popular as they are often skilled at finding the right lender/bank for your specific needs. Most mortgage brokers are regulated by state and federal law.
Do I Need a Mortgage Broker?
Many borrowers swear by the process of going through a mortgage broker rather than directly to the lender often citing they get a better rate than if they were to walk into the bank themselves. Typically a broker has a long list of lenders that he/she knows well and a good broker's experience can definitely help you get a better rate in some cases.
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What is a Second Mortgage?
A second mortgage is exactly what it sounds like... It is everything a regular mortgage is, except it is done on-top of the original mortgage. Since a second mortgage is riskier for the bank or lender to take on, borrowers tend to get strapped with a higher interest rate than that of a typical mortgage.
Benefits of a Second Mortgage
A second mortgage uses your home as collateral and therefore can allow you to borrow a large sum of money since a home is generally worth quite a bit. In some cases you can borrow up to 80% of your home's value. You can also be eligible for tax deductions on the interest you pay on your second mortgage but be sure to consult with an accountant or tax professional.
Disadvantages of a Second Mortgage
While the benefits may sound tempting it is also important to remember that a second mortgage comes with some scary risks. If the borrower fails to make payments on time then their house can be put into foreclosure by the lender. There can also be high up front costs for taking out a second mortgage. Things like appraisals and credit checks all cost money and all of that combined with your new higher interest rate payments can become a major financial strain.