Saturday March 25, 2017
 

What is a Mortgage?

When you want to purchase a home and don’t have the cash to buy it outright (meaning you’re most people), then the very first most basic term you’ll need to be acquainted with is the term “mortgage.”

What is a mortgage?

A mortgage is a loan on a home—a mortgage lender (usually a bank) agrees to loan you money to purchase a home.  The title on the home transfers to you, and you get to live in the home.  During that time you will owe payments on the mortgage.

In order to truly and completely own to home in actual terms you will need to pay off the entire mortgage plus interest.

In legal terms you are the home’s owner the entire time, but should you fail to pay your mortgage the home itself becomes collateral on the loan (so in a very real sense you’re just borrowing it from the bank until it’s paid off).

Should you become delinquent long enough, the home will be forfeit, and you will lose it in a foreclosure or similar event.  The “amount” of the home you’ve paid for at any time is your equity in the home.

Technically the word “mortgage” refers to the note on which your agreement with the bank is recorded, but usually the term is used in common language to refer to the loan itself.

Mortgages are classified as either fixed rate or adjustable

These classifications refer to the way in which interest is determined and charged over the duration of the loan.  A fixed rate loan generates fixed rate interest.

When you sign on the house you will lock in a particular interest rate which will never change over the entire course of the loan, which is usually 30 or 15 years.

If you go with an adjustable rate mortgage (ARM) however, your mortgage interest rate will float against an index that will rise and fall along with the housing market itself.  This can result in major fluctuations up or down.

ARMs usually have very lower interest rates for several years which are temporarily fixed, and then after those first few years elapse they float against the index.

Many subprime borrowers chose to get ARMs in the 90s and early Aughts only to find that after their rates were floated, they soared during the housing market crisis during recent years.

So getting an ARM for a long time period comes with major risks; getting one for just a few years though (if you plan to inhabit the house only temporarily) can result in some great savings.

Mortgages come with lots of other options.  For example, some mortgages have you pay mainly on interest for the first few years, while others allow you to start building up equity in the home right away.

There are also federal programs administered by HUD and the FHA to help first time buyers and others in special situations to get mortgages where it might otherwise be difficult.  If you don’t qualify for federal programs and have a low credit rating or a unique scenario which is deterring lenders, you may be able to get a subprime mortgage or a hard money loan.

There are plenty of options out there, so look into everything, and good luck buying a home!

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