A mortgage is a loan distributed by banks to individuals and banks to assist in the purchase of a property. Since a mortgage is a type of loan, the borrower is responsible for paying back the bank on a monthly basis with interest over a set period of time. In the event that the borrower is no longer able to pay off their mortgage, they become subject to foreclosure- where the borrower is evicted from the property, and the bank sells the property to receive the leftover funds back. A mortgage is a secured loan because the property is the collateral for the loan.
What are the Different Types of Mortgages?
There are a few different types of mortgages, but the two most popular are:
A fixed rate mortgage is a mortgage that has a fixed income for the entire span of the loan. In the event that housing market interest rates fluctuate, the amount of the borrowers' monthly payments stay stagnant. However, if there is a decrease in the markets interest rates- the borrower has the option to refinance their mortgage and potentially pay less. Fixed rate mortgages usually have a time span of about 15-30 years.
An adjustable-rate mortgage is a mortgage that eventually reflects the current market. Being that the interest rate is fixed for the first term an usually lower than the lower market rate, it seems more affordable to borrowers. However, if there is a market increase, the borrower's payments will experience an increase as well.
There are a few more types of mortgages in existence, which are usually more complex and rarely taken out. This includes an interest-only mortgage, where the borrower only is responsible for paying off the interest for a certain period of time. The principal amount of the mortgage is not due until a later date. Some anticipated homeowners may opt into these mortgages if they expect their income to increase in the future.
How Can I Apply for a Mortgage?
Interested borrowers can be pre-approved for a mortgage in order to see how much they can get approved for. Approval is based on many different factors such as one's credit score, income, assets, and debts. Upon approval, almost all mortgages require a down payment. Though the standard for down payments used to be 20% of the principal amount, some homeowners have taken out mortgages with as little as 5% down.
Some mortgages also include escrow, where a person pays an additional amount in their mortgage in order to pay the property and other state taxes yearly. The lender estimates the amount of these taxes and increases the mortgage payment accordingly. Downsides of escrow include the fact that the estimated amount may be less than the actual amount of the taxes, causing the borrower to pay even more. Also, an escrow causes one's total mortgage payments to change on a yearly bases.