What is a Mortgage?

What is a Mortgage

For many people living in the United States, owning a house is part of the American dream. And for a good number of homeowners, a mortgage is one of the easiest ways to achieving the dream. If you’re also hoping to own a house but do not know how to get started on mortgages, you’re in the right place. This article answers the question, what is a mortgage? while giving other useful insights. 

Definition of a Mortgage 

A mortgage is a type of loan that you can use to buy a house or home. The bank or a mortgage lender usually provides it with conditions that enable you to purchase your desired property. Of course, it is almost impossible to secure a loan that covers your home’s entire cost, but it is possible to get up to 80% of your home’s value. 

Usually, the loan is secured against the value of your home until full payment is made. So, if you do not honor the terms of repayment, lenders have the right to repossess your property to get their money back. 

Who gets a mortgage? 

Anyone that fulfills the requirement for a mortgage gets one. To qualify for a mortgage, you must meet the eligibility requirement of the bank or mortgage lenders. These often include a stable and reliable income, a credit score of at least 580 for Federal Housing Administration (FHA) loans and 620 for conventional loans, and a debt-to-income ratio of less than 50%. 

Types of mortgages 

There are two common types of mortgages; they include 

1. Fixed-rate Mortgage 

The fixed-rate Mortgage provides a borrower with a standard interest rate over a set period- mostly 15, 20, or 30 years. The shorter the repayment term, the higher your monthly turnover. On the contrary, the longer the repayment period, the shorter the amount you turn over monthly. But the longer it takes to pay the mortgage, the more you pay interest charges. 

One of the biggest advantages of a fixed-rate mortgage is that the borrower can have the same mortgage payment every month throughout the lifetime of the Mortgage. It is easier to set budgets, meet up the payment, and avoid unexpected charges. Consequently, even if the market value increases, you have a uniform monthly payment. 

2. Adjustable-rate Mortgage 

Adjustable-rate mortgages like the name have adjustable interest rates. They can, and usually, they do change over the lifetime of the loan. One of the factors contributing to this change is an indiscriminate increase in market values and rates. This changes the interest rate and amount and the total monthly payment. The good news is that the interest rate is subject to review and adjustment at specific periods. The rate can be changed maybe once a year or twice a year (once every six months). 

A popular form of adjustable-rate Mortgage is the 5/1 ARM. It offers a fixed rate over the first five years of the repayment period, while the remaining year’s interest rate is subject to annual adjustment. ARM makes it difficult to set monthly budgets in the long run, but they are popular because of the starting interest rates. 

A potential risk is that ARM interest rates may increase so much over the years that monthly repayments become difficult to meet. At such points, the borrower is at a greater risk of losing their home because the chance of defaulting becomes inevitable. 

House Buying

Mortgage payments 

The mortgage monthly repayment plan has four main components: 

  • Principal 

The principal is the exact amount that you requested for. For instance, if you take a $25,000 mortgage, the principal is that $25,000. However, lenders often take a 20% down payment so that you will make a down payment of $5,000. The total purchase price is $30,000. 

  • Interest 

The interest is a monthly percentage of the total Mortgage. It is a monthly charge or earning on the money loaned. 

  • Taxes 

Most mortgage payments include a property tax that the borrower pays as a homeowner. This is calculated according to the market value of the home. 

  • Insurance 

Mortgage insurance is a type of lender cover for damage. It acts as the collateral on the property and is required as a down payment. The insurance protects the bank or the lender if the borrower defaults. 

Conclusion Of, What Is A Mortgage

With these answers to what is a mortgage, it is clear that knowing all the details before opting for a mortgage is the best approach. Since there are different types of mortgages, you can pick one that works best for you.