How mortgages work

A mortgage is an agreement that allows borrowers to use the property as collateral to obtain a loan. In most cases, the term refers to a housing loan: when you borrow money to buy a house, you sign an agreement that says that if you do not pay the loan, the lender has the right to take action.

More importantly, banks can repossess foreclosure properties, forcing them to move so they can sell their homes.

The proceeds from the sale will be used to pay the debts owed on the property.

A mortgage is an agreement: The terms “mortgages” and “housing loans” are often used interchangeably. Technically, a mortgage is an agreement that makes your mortgage possible, not a loan itself.

For real estate transactions, the agreement must be in writing, and the mortgage is a document that, among other things, gives the lender the right to exchange the house.

Mortgages make it possible to buy a home Real estate is expensive. Most people do not have enough savings to buy a house, so they pay a deposit of around 20% before borrowing money. Many markets still require hundreds of thousands of dollars.

Banks are willing to give you so much money only if they have a way to reduce risk. Safer for banks: banks ask you to protect yourself by using the property you buy as collateral. To do this, you have to use the property as collateral, and the mortgage is your “mortgage.”

Under the terms of the agreement, the Bank has the right to retain your home in order to recover the guarantee if necessary.

More affordable loans: Borrowers have also benefited from this agreement. By helping lenders reduce risk, borrowers will pay lower interest rates.

Mortgages are usually used by consumers (individuals and families), but businesses and other organizations can also buy properties with mortgages.

Type of mortgage loan

There are several different types of mortgages, and understanding the terminology can help you choose the right loan for your situation (and avoid embarking on the wrong path).

Again, if you want to continue with this, we are talking about different types of loans, not different types of mortgages (because mortgages only say that if you stop paying, they can be mortgages). Fixed rate mortgages are the simplest type of loan. You will pay exactly the same amount during the entire loan period (unless you pay more than you want, which helps you get out of debt more quickly). Fixed rate mortgages usually have a term of 30 years or 15, although other provisions are not inescuchaciones.

The calculation of these loans is very simple: given the amount of the loan, the interest rate and the number of years of repayment, the lender calculates the fixed payment amount monthly. Fixed-rate loans are so simple that you can calculate the mortgage payment and the payment process yourself (spreadsheets and online templates make it easier). These calculations are a valuable exercise that can help you compare lenders and decide what type of loan to use.

You may be surprised to find that long-term loans lead to higher interest costs over the life of your loan, which makes the home more expensive than it should be.

Adjustable rate mortgages are similar to standard loans, but interest rates are likely to change at some point in the future.

When that happens, your monthly offer also changes-for better or for worse (if interest rates increase, your monthly offer increases, but if interest rates fall, your monthly offer will be reduced). Interest rates generally change in a few years, and there are some restrictions on the scope of changes in interest rates.

These loans can be risky because you do not know how much your monthly payments will be in 10 years (or if you are able to pay). The second type of mortgage, also known as a home equity loan, is not used to buy a house, but to mortgage the property you already own. To do this, you will add another mortgage (if your house has been paid, you will first add a new mortgage to the house). Your second mortgage lender is usually in the “second place”, which means that they will only receive refunds if the first mortgage holder has the money left after being reimbursed. The second type of mortgage is sometimes used to cover the cost of home repairs and higher education.

During the financial crisis, these loans were used infamously to “cash” their living equity.

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Interest loans only allow you to pay the interest charge on your loan each month. As a result, your monthly payments will be reduced (because you have not paid any loan balance). The disadvantage is that you have not paid your debt, you have not built property rights, and one day you will pay those debts.

These loans make sense in some short-term situations, but they are not the best option for most homeowners who want to accumulate wealth. Balloon loans require you to pay with a large “balloon” to repay the loan.

Instead of paying the same debt in 15 or 30 years, you must pay a large sum of money to eliminate the debt (for example, 5-7 years later).

These loans are used for temporary financing, but it is risky to assume that you will be able to get the money you need when the balloon payment expires. Refinancing loans allow you to replace a mortgage if you find a better offer. When you refinance your mortgage, you will get a new mortgage to pay off the old loan. This process can be expensive due to the cost of shutting down, but if you order these numbers correctly, it is worth it in the long term. Loans do not need to be of the same type.

For example, you can get a fixed-rate loan to pay off a mortgage with an adjustable interest rate.

How to get a mortgage loan To borrow money, you must apply for a loan.

Home loans require more documentation than other types of loans (such as car loans or personal loans), so be prepared for a long-term process.

Credit and income: As with most loans, your credit and income are the main factors that determine whether you can get approval. Before applying for a mortgage loan, check your credit history to see if there are any problems that may cause problems (correct them if it is wrong).

Reimbursements, lawsuits and other problems that have expired may result in your application being rejected, or you may get a higher interest rate, which means you will pay more during the term of your loan.

Documents and scales: Lenders must verify that they have sufficient income to pay for the loans they approve.

Therefore, you must provide proof of income (DELETE your W-2 form, your most recent tax returns and other suitable documents to your lender).

Debt income ratio: Lenders will look at your existing debt to make sure you have enough income to pay off all loans, including the new loan you are requesting.

To do this, they calculate the debt income ratio, which tells them how much of their monthly income is consumed by the month.

Value & amp; Loan: Although you can buy with a small deposit, when you pay a large deposit, your chances of getting approval are even greater. Lenders calculate the ratio of loans to value, which indicates the amount of money borrowed, compared to the value of the property.

The less money you borrow, the less risky the lenders are (because they can quickly sell the house and recover all their money).

Prior approval: Before you start buying a house (or loan), it is better to know how much money you can borrow. One way to do this is to get approval from the lender in advance. This is an initial process for lenders to evaluate your credit information and your income. With this information, they can give you a maximum loan amount that they could approve. This does not necessarily mean that you have been approved-especially for a particular property-but this is useful information and a pre-approval letter can help strengthen your offer.

Once you sign the contract, the lender will carefully review everything about you and issue a formal approval (or rejection).

Amount of loans: Lenders always tell you how much you can borrow, but do not discuss how much you “should” borrow. It is your responsibility to decide how much to spend at home, what type of loan to use and how much down payment you want to pay (affecting the value of your loan). All of these factors determine how much you pay each month and how much interest you pay during the term of your loan (small loans lead to small monthly payments and small interest charges).

It is risky to borrow as fast as possible, especially if you want to have some “buffers” in your monthly budget.

Where to borrow money? There are several different sources of housing loans.

Get a quote from at least three different lenders, and then choose the one that works best for you. Mortgage brokers provide loans to many lenders.
Banks and credit unions provide loans to customers. Money in checking accounts and savings accounts must be invested, and lending money is a way to invest that money.

These agencies also earn income from initiation costs, interest and other closing costs. Online lenders can finance loans for themselves (for example, using investor funds) or act as mortgage brokers.

These services are convenient because you can deal with everything in a virtual way, and often you can get a quote more or less immediately. Each lender should provide you with an estimate of the loan, which will help you compare the cost of the loan from a different lender. Read these documents carefully and ask until you understand what you are looking at.

The CFPB explains several parts of the loan estimate to help you understand the characteristics of the loan.

Loan Projects You can get help with loans through loan programs from governmental and local organizations. These projects are easier to obtain approval, and some also offer creative incentives to make housing more affordable and attractive.

In addition to buying a house, you can refinance through these programs (even if you owe more than the value of the house). The government loan program is the most generous. In most cases, private lenders (such as banks) provide financing, and if you do not, the federal government promises to repay the loan.

There are a variety of shows, some of the most popular shows listed below.

FHA Loans: Loans guaranteed by the Federal Housing Administration (FHA) are popular for buyers who want to pay a small advance. You only need a 3.5% down payment to buy it, and they are relatively easy to get (for example, if you do not have a perfect credit history).

Get more information about FHA loans.

VA Loans: Veterans, military personnel and eligible spouses can buy a home with a loan guaranteed by the Department of Veterans Affairs (VA). These loans allow you not to have to buy mortgage insurance and do not need an initial payment (in some cases).

You can use less than perfect credit loans, transaction costs are limited, and loans can be hypothetical (if you qualify, allow others to take over the payments). The first-time purchase program at home makes it easy for you to own your first home, but there are attached ropes. These programs are usually developed by local governments and nonprofit organizations and can help with advances, approvals, interest rates, and so on.

However, they are difficult to find (and qualify) and can limit the amount of profits you make when you sell your home.

4 ways to save money

Mortgages are expensive, so you can save hundreds of dollars, even if you save a little (in percentage terms).

  1. Buy around Likewise, it is important to obtain at least three offers from different lenders-preferably different types of lenders (for example, mortgage brokers, online lenders, and local credit unions).

Everyone has a different price and you will learn a lot in the process.

  1. Look at the speed The larger the size of the loan (the longer it takes), the more important the interest rate is. You pay interest on your loan balance year after year, and these interest costs can be as high as $ tens of thousands of dollars.

Sometimes it makes sense to pay more money in advance if you can block low interest rates for a long time, including “points” to buy a loan.

  1. Pay attention to mortgage insurance If you make an initial payment of less than 20%, you will probably have to pay for mortgage insurance. This insurance is not for your benefit-it protects the lenders in case you stop paying and they can not get your money back-so it’s better to avoid that cost. Evaluate other methods, propose 20%, and find out how to cancel mortgage insurance as soon as possible.

For some loans, such as the Federal Housing Administration Loan, you really can not get rid of those costs unless you refinance them.

  1. Close the management costs When you get a mortgage loan, you will have to pay a lot of fees. There are application fees, credit inspection fees, initiation fees, assessment fees and so on. Some lenders charge a higher or lower rate, but you always pay one way or another. Be careful with the “no mortgaged execution cost” loan unless you