Home Buyers, Money and Mortgage Understanding Mortgage Terms and Types of Loans
What is a Mortgage?
The term “mortgage” can be overwhelming and confusing for many people. The truth is mortgages and loans can be difficult to understand if you are not a professional. Do not let this intimidate you from applying for a mortgage and buying your dream home. Let the team of mortgage professionals at HomeHunt break down the basics and help you understand the mortgage industry a little better.
Let’s start with defining what the term “mortgage” means. Simply, it is a type of loan you can use to buy or refinance a home. Mortgages are also known as mortgage loans and are used to buy a home without paying the entire cost upfront. Most people who are looking to buy a house will need to apply for a mortgage. To receive a loan, you must meet certain criteria, including a decent credit score and stable income.
Mortgages vs. Loans
A loan is a general term that is used to describe any financial transaction where a lump some of money is given to a person who agrees to pay it back with interest. A mortgage is a type of loan that is primarily used to finance a property. Think of a mortgage as a sub-section under the loan heading.
Once you are approved for a mortgage, your lender will give you a set amount of money to purchase your home. You will agree to pay back this loan with interest over a period of years. The home is not fully yours until your mortgage is paid off. If you stop making payments on a mortgage, your lender can take possession of your home. This process is known as foreclosure.
Let’s talk about interest rates. This is where mortgages can become a bit complicated. Interest rates are determined by two things:
- Current market rates
- The level of risk the lender takes to loan you money
Unfortunately, you cannot control the current market, but you can control how a lender views you as a borrower. The higher your credit score, the more responsible you will look to a lender. This will show your lender that you are less of a risk, giving you a lower interest rate.
The amount of money you can borrow depends on what you can afford and the fair market value of the home. This is determined through an appraisal and is important because the lender cannot disperse more than the value of the home.
Types of Loans
There are many different types of loans you can get when buying a house. Each one has different requirements and benefits.
- FHA Loans: This is a very common choice for home buyers because they have a lower down payment and more forgiving credit score requirement. These loans are backed by the Federal Housing Administration.
- Conventional Loans: This type of loan refers to any loan that is not backed by the federal government. Conventional loans meet a set of requirements defined by Fannie Mae and Freddie Mac, which are government-sponsored enterprises that buy loans from lenders. These loans are also very popular among home buyers.
- USDA Loans: These loans are only for homes in eligible rural areas. To receive this loan, your household income cannot exceed 115% of the area median income.
- VA Loans: These loans are available for active military members and veterans. VA loans let you buy a home with 0% down with no private mortgage insurance.
Who is Involved in a Mortgage?
There are two individual parties that are involved in a mortgage transaction: the lender and borrower. A lender is a financial institution that loans you the money to buy your home. A lender could be a bank, credit union, or an online mortgage company. A borrower is the person seeking the loan to buy a home. You can apply to borrow a loan yourself or as a co-borrower.
Helpful Mortgage Terms
Adjustable Rate Mortgage (ARM): This is a type of loan where the interest rate can change. Your payment may go up or down depending on the loan’s introductory period, rate caps, and the index interest rate.
Annual Percentage Rate (APR): This reflects the interest rate, mortgage broker fees, and any other charges to get the loan. Your APR is usually higher than your interest rate.
Equity: This is the amount your property is currently worth minus the amount of any existing mortgage on your property.
Refinance: This is the process of revising and replacing the terms of an existing loan or mortgage. Most people choose to do this to try and lower their interest rate and monthly payment.
Mortgages can be confusing, but do not let that stop you from buying the home of your dreams. HomeHunt will help you receive the best possible loan for your situation. Contact us today!