Understanding How Home Loans Work

Mortgage loans are one of the most common ways to finance a home. It may seem like an intimidating process, but it’s not too difficult. There are different types of mortgages available today—some riskier than others—and this article will help you get started understanding how they work.

What is a mortgage?

To begin with, a mortgage is simply a loan that you use to purchase or refinance a home. The loan is secured against the property for which it was taken out, and the lender has the right to sell this property if you do not make your monthly payments.

When you take out a mortgage, you will be required to pay two types of payments: the monthly “note” or “mortgage payment,” which includes both interest and a portion of the home’s principal, and an additional charge for any taxes and insurance. If you do not make your monthly note payments on time, this is called defaulting on the mortgage, and at such time your lender may take possession of your home.

It is worth noting that mortgages are “non-recourse” loans, meaning that the lender may only take possession of the house itself to collect on the debt. They cannot come after you for any other assets or wages.

Why do people take out mortgages?

Your goal in obtaining a mortgage is obviously to minimize your total monthly costs so you can enjoy your new home. Mortgage brokers will help you find the best type of mortgage for your financial situation, based on factors such as how much money you have to put down and what your credit score is.

How do mortgages work?

The most common kinds of home loans are adjustable-rate and fixed-rate loans. For a fixed-rate loan, your interest rate and monthly payments will stay exactly the same throughout your entire loan term. With an adjustable-rate mortgage (ARM), your interest rate on the loan will fluctuate with changing market conditions. This is similar to how the stock market works.

You should also understand that your monthly payment will not actually go to your lender right away when you take out a mortgage. You are paying interest for borrowing the money. When you pay off the loan, there is also repayment of some of the principal.

That means that if you take out a $200,000 30-year fixed-rate mortgage with an interest rate of 3.5%, your payment will be $938 at the beginning of the loan until you pay off some of the principal and it goes down.

What do you need to apply for a mortgage?

You should also know that taking out a mortgage is serious business, and lenders take this very seriously. You must meet some strict requirements to secure a proper home loan for yourself, including the following:

  • A good credit score, typically higher than 675 if you want to qualify for a conforming loan or 700+ for an investor loan. This is determined by how responsible you have been with your current debts and previous loans in the past.
  • A down payment of at least 20% unless you are buying a home in Baltimore with FHA financing
  • The ability to pay the mortgage back over time, typically 25+ years. If you are not sure you can repay this loan, don’t take out a mortgage.
  • A stable job history and income that you can prove on your tax returns
  • Proof of insurance, which is required in Baltimore on every home

Can you refinance your mortgage?

Another option available to homeowners is to take out a new loan on their existing property, which they can use to pay off the first one or do anything else they wish with it. This is called refinancing, and if your interest rate drops significantly since you took out your original mortgage, it can be a very smart option. However, only do this if you are sure it will benefit you because refinancing is money that comes out of your pocket and accrues interest on top of the cost of your original mortgage (unless it’s an FHA loan)

Some tips when paying off a mortgage

If you are having trouble paying off your mortgage, you can still do some things to lessen the burden. If you have extra cash lying around, make sure to pay more towards your loan every month. This will reduce the term of your loan and save you money in interest charges.

You should also try refinancing your mortgage to get a lower interest rate once you are eligible. This will decrease the amount of money you need to pay each month so you can save up more money for other things—if this is an option for you.

As you can see, the ins and outs of mortgages are very complex. It is important to understand how they work before signing up for one. But once you do, they can save you a lot of money over time. If you have any questions about whether taking out a mortgage is right for your situation, consult with a local mortgage broker who can advise you.