What Is A Mortgage? Loan Basics For Beginners

Buying a home? You must have a proper understanding of mortgage and interest payments. Purchasing a home is one of the most crucial financial decisions because owning a home is a dream come true for most people. However, owning a home has a big impact on your finances, not just for now but for quite a considerable number of years. Therefore, you need to choose with due deliberation and diligence. 

Continue reading to better understand the meaning of a mortgage loan and gain insights into the basics of a mortgage. With the proper understanding of the basics, prospective buyers are empowered to make informed decisions. 

What is a Mortgage?

A mortgage loan is a type of loan used to purchase real estate. The property becomes the collateral for the transaction. The loan helps make homeownership accessible for US residents so that they can buy a home without the need to pay the entire price upfront. You take a loan from a lender who pays the amount to buy the property and then pays it back monthly.

Let's reinforce a few terms in this context.

• Principal: the original amount you borrowed from mortgage companies to buy the home. 

• Interest: the amount the bank or mortgage companies charge you instead of the principal. 

• Foreclosure: If the borrower does not return the principal and interest, the lender has the right to take possession of the property.

• Loan Term: This is the period or amount of time that you require to repay the mortgage loan. In most cases, the loan term is between 15 and 30 years. 

• Monthly Payment: This is the amount you must return every month. It is the sum of principal, interest, taxes, and insurance, divided into equal parts, covering the entire term of the loan. Calculating the monthly payment is called amortization, where in the early years, the monthly payment is adjusted chiefly to pay off the interest. Towards the end of the term, most of the payment is used to adjust the principal. 

You can use an online mortgage calculator to know the monthly payment amount before finalizing the loan.

Mortgage companies either offer the loan at a fixed interest rate or an adjustable rate. In the former, the interest is constant throughout the term, and in the latter, it varies according to market conditions. 

Many mortgage companies today offer the borrower different kinds of mortgage loans. For example, government-insured loans like FHA, USDA, and mortgage VA rates are pretty low, and people with low credit scores can avail of these loans. Then, there are jumbo loans for properties that are priced higher. Look up each loan type's eligibility criteria, limitations, and benefits before making a choice.

What is the process of taking a mortgage loan?

This is a multi-step process. 

• It starts with the pre-approval process, during which the lenders evaluate the borrower's creditworthiness.

• The next step is where the lender makes the offer.

• Lastly, the loan is given to the borrower, who gets legal ownership.

Amortization Example

Let's take an example to understand amortization. You can always use the mortgage calculator to get insight into your monthly mortgage payments.

Let the principal amount be $100,000. The interest is 7%, and the loan term is 30 years. With amortization, the payment calculation is done as below - 

 

 

As you can see, when you make the last payment after 30 years, you will settle the original loan amount of $100,000 and have paid an extra lump sum of $139,509. 

Some Other Terms You Should Know 

• Escrow: This arrangement is very commonly used in property buying and selling transactions. In this case, a third party manages funds and even holds the documents of the buyer and the seller. This condition continues until some pre-agreed conditions are fulfilled. Both parties need to meet all contractual obligations before the deal is completed.

• PMI or Private Mortgage Insurance: For borrowers paying an interest rate of less than 20% of the property's price, the lender will want you to buy PMI to safeguard their interest. This is an added amount to your monthly payment due to PMI. With 20% accrued equity returned, the request for PMI removal can be forwarded to the lender.

For any query about mortgage loans, contact the expert team at Total Mortgage to help you find the right financing solution for your dream home.

Types of Mortgages

1. Fixed-Rate Mortgages

In this loan type, mortgage companies offer a constant interest rate. Thus, the amount is the same throughout the loan term. The good thing is that the borrower is sure of the principal and interest payment from the beginning of the loan. However, the interest rate can be high compared to other loan types. 

2. Adjustable-rate Mortgages (ARMs)

In this loan type, the interest rate is lower initially. Therefore, the initial payment is relatively low. During the term of the loan, however, the interest rate changes. The rate remains the same during a pre-defined period. This period can be as low as six months and up to ten years. After the period ends, the interest rates are adjusted and keep varying from time to time. The interest rate depends on the index that showcases the current market conditions and the margin that is a % and added to the index. 

3. Interest-Only Loans 

In this loan type, the borrower must repay only the interest on the mortgage loan in the initial years, that is, between 3 and 10 years. After the end of the first few years, the lender charges you the principal and the interest. In most cases, the interest is the ARM type. So, be prepared to change monthly payments with time. 

4. Payment-Option ARM

In this case, the interest rate is low for the first few months. Then, the rate increases. Thus, the monthly payments are initially low, but later on, they are higher than most conventional loans. 

Get the Best Mortgage Rates with Total Mortgage!

Now that you have learned about mortgage loans, you would definitely want to secure the best rates for your home. Well, you don’t have to go anywhere else when Total Mortgage is here. Yes, we are one of the trusted mortgage companies in the United States. Whether you’re a first-time home buyer or looking to refinance your existing mortgage, our experts can help you from start to finish, ensuring you move into your dream home with confidence.