signing contract for mortgage loan

How to Understand Your Mortgage Loan

There’s no doubt about it, the housing market is hot right now. In 2020 (during a global pandemic, no less) 842,000 houses were sold across the US. The median home price was a whopping $355,900. 

That’s a whole lot of Americans achieving the American dream of homeownership. Also, worth noting is the average down payment of $59,880. So, where is the rest of the money coming from to make the dream a reality?

Most people would never be able to buy a home without seeking a mortgage loan because they could never save enough money upfront. You might have wondered about getting a mortgage loan but feel a little nervous because it’s such a big investment. 

Read on to learn more about mortgages and learn the terminology you need to know to be knowledgeable when it comes time for you to apply for a mortgage loan.

What Is a Mortgage?

As you prepare to buy a house you’ll hear the term mortgage over and over. You don’t as often hear the term mortgage loan though. Actually a mortgage is a type of loan specifically for buying a piece of property or home. 

A mortgage can be defined as a large sum loan that allows you to buy a home without needing to have all of your own money upfront. 

A loan can be any amount of money that’s borrowed, whereas a mortgage is a type of loan specific to buying a house or property.

Mortgage Basics

Because there are many different types of mortgages and ways to structure them, the idea of a mortgage can seem complex. Yet, once you break it down into a few terms it’s much easier to understand. Let’s take a closer look. 

One of the first things you will personally need towards getting a mortgage is a down payment. Different mortgage lenders and types of mortgages have differing requirements, but a down payment is the amount of cash you bring to the table.

In a conventional mortgage with a fixed rate, you might be required to have a 20% down payment. Whereas with an FHA loan, you might only need between 3% to 5% down payment. 

The amount of the loan is the next term to understand. It’s the amount of your house minus the down payment. The loan amount is the number you will pay back over time with interest. 

The loan term is how long the loan will last. Most mortgage terms are over 30 years, but it’s not uncommon to decide to get a 15-year mortgage. Over the loan term, the borrower will make monthly payments towards the loan amount with interest included. 

Finally, one of the most important aspects of the mortgage loan is the interest rate. The interest rate is the percentage the lender charges you to borrow the money. This is included in the monthly payments you make to the lender. 

How Does a Mortgage Work?

When you’re ready to buy a house, you will need to reach an agreement with the seller on the purchase price of the house. At this point, you should have your down payment saved and have already sought pre-approval on a mortgage. 

A pre-approval tells the seller that it’s likely you can get financing so the sale can go through. 

Most mortgage terms are set-up with a fixed rate over 30 years of the life of the mortgage. But mortgages come in a bevvy of shapes and sizes. 

It’s important to shop around for lenders and find one that is the right fit for your financial situation. Because the terms of a mortgage can vary depending on your credit score, credit history, employment and loan needs, you want to find a lender who will cater to you and help you get the right mortgage that you can afford. 

Types of Mortgages

When you work with your lender, they should help to find the right type of mortgage. Let’s take a look at some of the types you’re most likely to hear about. 

A conventional mortgage, often over 30 years, is not backed by the government. It requires the most money down and better credit scores. A conventional mortgage is funded by your lender and they are taking on the risk of loaning to you without the insurance or backing of the federal government. 

There are several different types of mortgages that do come with government backing. This doesn’t mean you get the mortgage from the government. You would go to your lender and the government insures the mortgage for the lender so it reduces the risk. 

The government backed mortgages include:

  • FHA loans
  • VA loans
  • USDA loans

The government backed loans often allow someone to become a homeowner with a smaller cash down payment and less than perfect credit. Each has their own requirements and standards for approval. 

Another way a mortgage might be classified is by whether it’s a conforming or nonconforming mortgage. 

A conforming mortgage means it falls under the guideline limits set by the federal government mortgage associations. Simply put, the amount of the mortgage needs to be at or smaller than the limit to be considered conforming. A conforming mortgage is a smaller risk and generally a little easier to obtain. 

A nonconforming mortgage means there something about the terms aor amount of the mortgage that don’t fit within the established guidelines. Often this is because the amount being borrowed is higher than the federal limits. If you have a recent bankruptcy, poor credit or a high amount of debt, you might also get a nonconforming type of mortgage. 

Interest Rates

One of the most important aspects of any mortgage is the interest rate you get. This is the amount of money you’ll be charged by the lender over the course of the mortgage. 

Interest can be fixed or variable. A fixed rate means you pay the same interest rate over the whole life of your loan and your payments will remain consistent throughout the time you’re paying off the mortgage. 

A variable interest rate means the percentage you pay on the amount borrowed can change over the life of the loan. Often in a variable rate mortgage, the rate will remain locked for a shorter period of time, then adjust after that time period going up or down based on the current market conditions.

Mortgage Loans, What You Need to Know

Taking the leap to being a homeowner is both a little scary and exciting too. The more information you have about your mortgage loan and its terms the less daunting it will feel. 

If you’re interested in getting a mortgage loan or want more information on mortgage services, we can help. Contact us today about our mortgage options to help you get into your next home.


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