Mortgage Basics

Simply stated, a mortgage is a long-term loan for a property purchase or refinance obtained from banks, independent mortgage brokers, online lenders and sometimes from property owners. When closing on a mortgage, the mortgagee signs documents that give the mortgagor a lien against the property. If the borrower were to default on mortgage payments, the lender can take the property through the foreclosure process. Mortgage loans are generally approved for 15 or 30 year terms.

Some lenders permit or may require borrowers to pay for additional costs above and beyond the principal and interest on the mortgage loan and usually includes real estate taxes and property hazard insurance. The estimated yearly cost for taxes and insurance is divided into monthly amounts and added to the cost of principal and interest on your mortgage loan. The amount collected monthly for taxes and insurance is placed into an account called an escrow account and is paid once a year when due. When escrow is used, a monthly payment is often referred to as a PITI payment (Principal, Interest, Taxes, Insurance).

Some lenders may require an additional payment for private mortgage insurance. Whether or not your mortgagor will require you to pay for PMI will depend on the type of mortgage you have and how much vested interest, equity, you have in your home.

How to Qualify for a Loan

When considering your application, mortgage lenders are primarily concerned with your ability to repay your mortgage. To determine if you qualify for a loan, they will consider your credit history, your monthly gross income and how much cash you will have for a down payment (most lenders will require anywhere from 5 percent to 20 percent of the purchase price of the home). A mortgagor will calculate your debt to income ratio when considering your mortgage application. There are two ways to do this. Generally, your monthly mortgage payment (including principal, interest, taxes and insurance) should not exceed 28 percent of your gross monthly income. Additionally, all of your debt (including car loans, mortgage payment, child support or alimony, credit cards, student loans, etc.) should not exceed 36 percent of your gross income.

Types of Mortgages

Lenders offer several types of mortgages, but the most common are fixed-rate mortgages. These loans feature fixed rates and set monthly payments, generally for 15-year and 30-year periods. They're popular because managing a monthly budget is easier with set payments and they are affordable when interest rates are low. However, if you are planning on owning your home for a short period of time (less than five years) or if interest rates are high when purchasing your home or refinancing and you think they will fall, then an adjustable rate mortgage (ARM) might suit your needs. Adjustable rate mortgages differ from fixed rate mortgages because after an initial fixed rate period, the interest rate on an ARM will fluctuate as the market interest rates change. Adjustable rates start lower than fixed rate mortgages but there is the risk of higher rates over the years. Adjustable rate mortgages are available with different initial fixed-rate periods that range from one year, three years, five years, seven years and even up to ten years before the rates will adjust. Borrowers do have some protection from extreme interest rate increases because adjustable rate mortgages come with caps that limit the amount by which the interest rate can change.

Additional Mortgage Types

Other, less-often used mortgages include: Jumbo mortgages, which exceed the loan limits set by Fannie Mae and Freddie Mac; Two-Step mortgages, which combine elements of both fixed and adjustable rate mortgages; Biweekly mortgages, which are fixed rate mortgages in which payments are made every other week instead of monthly; Balloon mortgages, which give borrowers lower rates and payments for a specific period of time with a large lump sum principal balance payment due at the end of the balloon period; Assumable mortgages, which permit homeowners to “hand-off” the loan to a buyer instead of paying it off at the time of sale; Subprime mortgages, which are generally approved for home buyers or owners with less than perfect credit; and Construction mortgages, which are issued to people to build their home instead of purchase an existing home.

LendingLeaders will match you with lenders who will work with you to help decide what mortgage options are right for your situation. To have one of our lenders contact you, simply fill out the quick, no obligation loan form by clicking here.