Find out how a mortgage works. Information about mortgage types and terms.
If you are thinking about buying a home, you may be wondering exactly how a mortgage works. Mortgages are a long-term loan given by a lending institution that is secured by the home you are purchasing or other collateral. If you fail to make payments on your mortgage, the lending institution may repossess your home.
Terms You Should Know:
Some terms to be familiar with when considering buying your first home are: mortgage loan, term, fixed rate, and adjustable rate. As I’ve stated above, a mortgage loan is a loan for purchasing property. A term is how long your mortgage is for. Most mortgages are for 10-30 years. Fixed rate is a type of loan where the the amount you pay stays the same for the duration of the loan. Adjustable rate indicates that your loan payments will change based on an index.
Where Does the Money Come From?
The money for home loans comes from one of three institutions: Federal National Morgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), or the Government National Mortgage Association (Ginnie Mae). The bank that you go through to get your loan is responsible for servicing the loan for the major mortgage lenders.
Loan Types:
When looking into how mortgage work, you may find that there are 3 major types of loans; FHA, VA, and conventional. An FHA Mortgage is administered by the Federal Housing Administration. They regulate approvals, down payment amounts, and set a limit on the price of the property. This type of loan is a popular choice for low income people because it is designed to put borrowers in homes with small down payments.
VA Mortgages are through the Veterans Administration and are only available for veterans, surviving spouses, and active-duty military (with qualifications). VA mortgages do not lend money directly but guarantees a portion of the loan. Also, they do not set limits on the loan or regulate interest rates. The benefit with this type of loan is there is no down payment required, you can have a term for the maximum of 30 years, and there are no prepayment penalties.
Conventional loans depend heavily on your credit score to set your amount for a downpayment as well as the interest rate for your loan. Often these loans are in terms of 15-30 years and people that are self employed will find it easier to qualify for than an FHA loan.
*Affects pricing. With the No Closing Cost
Option, borrowers finance the closing costs instead of paying for them at
closing. Borrowers who pay closing costs at closing may qualify for a lower
interest rate. Some upfront fees (ex. credit report and appraisal) may apply
and may be credited at closing.
*Refinancing or taking out a home equity loan or line of credit may increase
the total number of monthly payments and the total amount paid when compared to
your current situation.
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