A loan provided by a mortgage lender or a that enables an individual to purchase a home

A mortgage is a loan – provided by a mortgage lender or a bank – that enables an individual to purchase a home or property. While it’s possible to take out loans to cover the entire cost of a home, it’s more common to secure a loan for about 80% of the home’s value.

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Types of Mortgages

The two most common types of mortgages are fixed-rate and adjustable-rate (also known as variable rate) mortgages.

Fixed-Rate Mortgages

Fixed-rate mortgages provide borrowers with an established interest rate over a set term of typically 15, 20, or 30 years. With a fixed interest rate, the shorter the term over which the borrower pays, the higher the monthly payment. Conversely, the longer the borrower takes to pay, the smaller the monthly repayment amount. However, the longer it takes to repay the loan, the more the borrower ultimately pays in interest charges.

The greatest advantage of a fixed-rate mortgage is that the borrower can count on their monthly mortgage payments being the same every month throughout the life of their mortgage, making it easier to set household budgets and avoid any unexpected additional charges from one month to the next. Even if market rates increase significantly, the borrower doesn’t have to make higher monthly payments.

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Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARMs) come with interest rates that can – and usually, do – change over the life of the loan. Increases in market rates and other factors cause interest rates to fluctuate, which changes the amount of interest the borrower must pay, and, therefore, changes the total monthly payment due. With adjustable-rate mortgages, the interest rate is set to be reviewed and adjusted at specific times. For example, the rate may be adjusted once a year or once every six months.

One of the most popular adjustable-rate mortgages is the 5/1 ARM, which offers a fixed rate for the first five years of the repayment period, with the interest rate for the remainder of the loan’s life subject to being adjusted annually.

While ARMs make it more difficult for the borrower to gauge spending and establish their monthly budgets, they are popular because they typically come with lower starting interest rates than fixed-rate mortgages. Borrowers, assuming their income will grow over time, may seek an ARM to lock in a low fixed rate in the beginning, when they are earning less.

The primary risk with an ARM is that interest rates may increase significantly over the life of the loan, to a point where the mortgage payments become so high that they are difficult for the borrower to meet. Significant rate increases may even lead to default and the borrower losing the home through foreclosure.

Mortgages are major financial commitments, locking borrowers into decades of payments that must be made consistently. However, most people believe that the long-term benefits of homeownership make committing to a mortgage worthwhile.

Mortgage types and Payments

Mortgage Payments

Mortgage payments usually occur every month and consist of four main parts:

1. Principal

The principal is the total amount of the loan given. For example, if an individual takes out a $250,000 mortgage to purchase a home, then the principal loan amount is $250,000. Lenders typically like to see a 20% down payment on the purchase of a home. So, if the $250,000 mortgage represents 80% of the home’s appraised value, then the homebuyers would be making a down payment of $62,500, and the total purchase price of the home would be $312,500.

2. Interest

The interest is the monthly percentage added to each mortgage payment. Lenders and banks don’t simply loan individuals money without expecting to get something in return. Interest is the money a lender or bank earns or charges on the money they loaned to homebuyers.

3. Taxes

In most cases, mortgage payments will include the property tax the individual must pay as a homeowner. The municipal taxes are calculated based on the value of the home.

4. Insurance

Mortgages also include homeowner’s insurance, which is required by lenders to cover damage to the home (which acts as collateral), as well as the property inside of it. It also covers specific mortgage insurance, which is generally required if an individual makes a down payment of less than 20% of the home’s cost. That insurance is designed to protect the lender or bank if the borrower defaults on his or her loan.

 

Why compare mortgage rates?

Shopping around for quotes from multiple lenders is one of Bankrate’s most crucial pieces of advice for every mortgage applicant. When you shop, it’s important to think about not just the interest rate you’re being quoted, but also all the other terms of the loan. Be sure to compare APRs, which include many additional costs of the mortgage not shown in the interest rate. Keep in mind that some institutions may have lower closing costs than others, or your current bank may extend you a special offer. There’s always some variability between lenders on both rates and terms, so make sure you understand the full picture of each offer and think about what will suit your situation best. Comparison-shopping on Bankrate is especially smart because our relationships with lenders can help you get special low rates.

Pros and cons of getting a mortgage vs. renting

Homeownership is synonymous with the American Dream, but the housing boom has pushed this goal out of reach of many. Some of the advantages and disadvantages of homeownership:

Pros

  • A home is a powerful way to build wealth over time.
  • Homeownership provides the certainty of knowing where you’ll live from one year to the next.
  • You know your principal and interest costs won’t change with a fixed-rate mortgage. A landlord can boost your rent when your lease is up.

Cons

  • Homeownership is expensive, prohibitively so in some markets.
  • Maintenance and repairs are a constant — and costly — a reality for homeowners.
  • As home values rise, so do insurance premiums and property taxes.

What are mortgage points?

Mortgage points, also referred to as discount points, help homebuyers reduce their monthly mortgage payments and interest rates. A mortgage point is most often paid before the start of the loan period, usually during the closing process. It’s a type of prepaid interest made on the loan. Each mortgage point typically lowers an interest rate by 0.25 percentage points. For example, one point would lower a mortgage rate from 3 percent to 2.75 percent.

The cost of a point depends on the value of the borrowed money, but it’s generally 1 percent of the total amount borrowed to buy the home.

Buying points upfront can help you save money in interest over the life of your loan, but doing so also raises your closing costs. It can make sense for buyers with more disposable cash, but if high closing costs will prevent you from securing your loan, buying points might not be the right move.

How do I choose a mortgage lender?

Mortgage lenders come in all shapes and sizes, from online companies to brick-and-mortar banks — and some are a mix of both. Decide what type of service and access you want from a lender and balance that with how competitive their rates are. You might decide that getting the lowest rate is the most critical factor for you, while others might go with a slightly higher rate because they can apply in person, for example.

Some banks offer discounts to existing customers, so you might be able to save money by getting a loan where your savings account or checking account is.

And if your credit is a bit tarnished, many lenders offer loans with lower down payments and credit requirements through the FHA. Veterans will find VA mortgages especially attractive.

Who is the mortgage?

In a real estate agreement, the mortgagor is the borrower of a mortgage loan and the mortgagee is the lender. The mortgagor makes regular payments on the loan and agrees to a lien on the mortgaged property as collateral for the mortgagee.

Who owns a mortgaged house?

A mortgage is a temporary transfer of property to secure a loan of money. The person who owns the land is the ‘mortgagor’. The person lending the money is the ‘mortgagee’.

Can my wife be on the title but not the mortgage?

Can I have my spouse on the title without them being on the mortgage? Yes, you can put your spouse on the title without putting them on the mortgage. This would mean that they share ownership of the home but aren’t legally responsible for making mortgage payments.

What happens if the husband dies and the wife is not on the mortgage?

law prohibits enforcement of a due on sale clause in certain cases, such as where the transfer is to a relative upon the borrower’s death. Even if your name was not on the mortgage, once you receive title to the property and obtain lender consent, you may assume the existing loan.

What if my partner dies and the mortgage was in their name only?

In most states, you must notify the lender that your spouse has passed away. Other than this notice, you don’t have to take any action. The loan will automatically become your responsibility. One exception is if your spouse had a mortgage life insurance policy.

What is a child entitled to when a parent dies with a will?

If you have two living parents, they will inherit equally from your estate. If you leave behind one surviving parent, that parent will inherit half of your estate, while the descendants of your deceased parent will inherit the other half.

Who is executor if no will?

An administrator is someone responsible for dealing with an estate under certain circumstances, for example, if there is no will or the named executors aren’t willing to act. An administrator has to apply for letters of administration before they can deal with an estate.

Do grandchildren get an inheritance if their parent dies?

Your children are entitled to share the balance of your estate equally. If any of your children died before you, but left children (your grandchildren) who survive you, those grandchildren are entitled to share the portion of your estate that your child would have received if he or she was alive.

Can two people buy a house?

Yes. Two friends, including a non-married couple as well as two relatives or two investor partners, can purchase a home together as co-borrowers on the mortgage loan.

 

 

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Written by Muhammad Bilal

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