A mortgage is a type of loan that allows you to buy or refinance a home or other real estate. In exchange for borrowing money from a lender, you agree to repay the amount of the loan plus interest over time. The lender then holds the deed to the property until the loan is paid in full.
A mortgage requires that you make regular payments to the lender over a specified period of time, typically for 30, 20 or 15 years. During this period, you repay the principal (the amount that you owe on the loan) and interest, in addition to any monthly fees.
The amount of the loan and interest you pay are calculated by your lender based on your creditworthiness, income and assets. The lender then sets an interest rate that you must agree to pay, which is usually a fixed rate for the life of the loan.
There are several different types of mortgages, each with its own set of benefits and drawbacks. Understanding these differences can help you choose the best mortgage for your financial needs and budget.
First, its important to understand the difference between a conventional mortgage and an adjustable-rate mortgage (ARM). The former is backed by the US government, while the latter is not.
Conventional mortgages are the majority of mortgages offered in the United States, and they can be obtained from a variety of lenders, including banks, credit unions, online-only lenders and mortgage brokers.
They may have lower interest rates than ARMs and come with fixed or adjustable-rate terms. Adjustable-rate mortgages, or ARMs, typically have an interest rate that rises and falls over a period of years. However, the loan’s interest rate can be lowered if you make timely payments and meet certain conditions.
Before you apply for a mortgage, consider your debt-to-income ratio, which is the total of your monthly debt payments divided by your gross monthly income. This number is a major factor in your application because it shows lenders that you can afford a mortgage payment.
Your lender will also run a credit check to verify your finances and your ability to repay the mortgage. Theyll look at your income and assets, credit history and employment history.
After reviewing your credit report and other information, your lender will determine whether you qualify for a mortgage and what terms they can offer. Its a good idea to interview multiple lenders before making a decision, as that will allow you to compare the rates and fees they charge.
Once your lender has approved your application, youll need to submit an appraisal of the home and other documents required for approval. After this, youll have a title search and inspection done to make sure that the property is in good condition and free of any issues that could affect your ability to sell it later on.
Besides providing you with the chance to purchase a house, a mortgage can also be an excellent way to build up equity in your home. For example, if youre in the process of remodeling your kitchen and need a large sum of cash to finish, you might qualify for a home equity line of credit (HELOC).