A mortgage refers to an agreement between a lender and a borrower for the repayment of a loan granted on the basis of a security, technically known as “collateral”. In real estate transactions, the property being purchased is often pledged as collateral by creating a lien against it. The amount borrowed to make a purchase is referred to as a mortgage loan or a home mortgage. In common parlance, the three terms “mortgage”, “home mortgage”, and “mortgage loan” refer to the same thing, that is, a loan used to purchase a house.
The repayment of a loan taken on a mortgaged property is done through a number of installments, usually known as payments. Generally, you are required to make monthly payments, but you can also find options for biweekly, quarterly, or half-yearly payments. A mortgage payment typically consists of four parts, which are:
We usually refer to these four components as PITI. While the first two must be paid to the lender, you have an option to pay real estate taxes and homeowners insurance on your own. When these are part of the payment, the lender must create an escrow account where the money is collected in advance to pay for the next year’s dues on taxes and insurance premiums. Private Mortgage Insurance (PMI) is a kind of insurance that becomes mandatory when you are putting down an amount less than 20% of the home value.
Apart from the monthly payments, the cost of borrowing money includes the following as well:
Mortgage loans exist in several types, out of which two are the most common forms. These Include:
Other home mortgage options may include interest only, jumbo loan, and FHA loans, etc. You should check with a lender to know the options that can suit your needs. While banks and big lenders, such as Bank of America, Chase Bank, Wells Fargo and Citibank, lack in variety, you can find mortgage brokers, credit unions and direct lenders offering a product customized to your typical financial needs. They are particularly the best sources of borrowing for people with bad credit or bankruptcy.
When shopping for a mortgage loan, you must take action well in advance to ensure the following:
Once you are through with these preliminary steps, you can start the prequalification process at a lender that you think is the best. It is simple to get pre-qualified for a mortgage. Only you need to supply information about your assets, income and liabilities. A pre-qualification process is easy and can be done online as well. A lender is, however, not bound to offer the same borrowing amount and interest rate when you actually apply for the loan.
In most cases, you need to get pre-approved prior to making any serious attempt to search for the house of your dreams. A pre-approval process requires verification of credit rating, employment details and other financial information. A document known as Good Faith Estimate is sent to you, which contains a list of all expected charges that you are supposed to pay at the time of closing.