A mortgage is a type of loan that allows you to purchase a home without having to save up a large down payment. It’s an important tool in homeownership, but it also comes with its share of confusion and potential pitfalls. Whether you’re a first-time homeowner or a seasoned professional, understanding how mortgages work can help you make smart financial decisions.
Buying a house with a mortgage involves a lot of paperwork and a significant commitment to repay the loan, so it’s important to understand what you’re getting into before making a purchase. Knowing how mortgages work can help you find the best loan for your situation and avoid common pitfalls that can cost you thousands of dollars over the life of the loan.
There are many different types of mortgages, each with its own set of requirements and benefits. Here’s a quick look at the most common ones:
Conforming loans (also known as conventional mortgages) are government-backed and typically carry a lower interest rate than jumbo mortgages. They’re ideal for people with good credit and a stable income who are looking to buy or refinance a home.
Non-conforming loans, on the other hand, are generally geared toward borrowers with less-than-stellar credit or no credit at all. They come with a higher interest rate than conforming mortgages, but they also offer more flexibility and may have less-stringent qualifications.
Mortgages can be secured against any real property, such as a house, apartment building, condominium or other residence. They’re typically a long-term debt that’s paid off over time, usually in the form of monthly payments. The amount of the loan (called “principal”) goes down with each repayment, and a portion of each monthly payment goes to paying off the principal as well as the interest on the mortgage.
The term “mortgage” is derived from the Law French word “mortier,” meaning “death pledge.” A mortgage is a legal agreement between a lender and a borrower that involves the security of the property being financed. It’s often accompanied by a deed of trust, which sets out the terms of the loan.
How your mortgage will work:
When you’re ready to apply for a mortgage, start by checking your credit and determining how much you can afford. Then, you’ll need to factor in your other monthly expenses to figure out your debt-to-income ratio. This number will give you an idea of how much you can spend on housing costs each month, and it’s the key to finding a home that fits your lifestyle and financial goals.
If you haven’t already, get your free Experian credit report and FICO(r) Score. This will give you an idea of your credit history and help you make smarter mortgage decisions.
A mortgage is a long-term debt that’s usually paid off over the course of 30 years. It’s a big commitment to make, but it can be the key to unlocking your dreams of owning a home.
The process of securing a mortgage can be intimidating, but with the right research and guidance, it can be a rewarding experience. It’s especially important to get your finances in order before shopping for a home, so you can make sure you’re getting the most affordable mortgage possible.