In the simplest of terms, a mortgage is a type of loan used to purchase real estate. Real estate can mean a home, commercial building, or land. Borrowers typically get a loan because they can’t afford to pay for real estate in one large transaction of hundreds of thousands of dollars.
Mortgages serve as an economic and financial engine for homeowners in the United States. They allow people to own property, invest in it, improve it, and live in their dream home for as long as they can afford it.
In the United States, mortgage debt totals $11.39 trillion at the end of June 2022, according to the U.S. Federal Reserve. Around 6 million homes are sold in the United States annually, and about 40% of all homes are debt-free.
How do I get a mortgage?
Borrowers who wish to buy a home apply for a mortgage through a qualified mortgage lender.
More than 5,500 financial institutions in the United States offer mortgages to people who qualify. To qualify for a mortgage, the FHA requires a 3.5% down payment or money to pay upfront to lower the mortgage amount on the home’s value if the borrower has a FICO credit score of 580 or higher. For borrowers with a FICO score of 500 to 570, the FHA requires a down payment of at least 10%.
For example, the value of a home is $250,000. Someone with a FICO score of 590 needs a down payment of $8,750. With a FICO score of 535, that borrower needs a down payment of $25,000.
The FHA will also examine someone’s employment history for two years and the debt-to-income ratio, which must be less than 43%. Debt-to-income ratio means how much someone’s income is compared to debt. If the borrower’s take-home pay is $4,000 a month, the debt the person has must be less than $1,720 per month.
Why do I need a mortgage to purchase a home?
A borrower typically does not have enough money saved up to buy a home with just an up-front investment.
The median home price in America in the first quarter of 2022 was more than $428,000. Unless a homeowner has that much money saved, the person will need to borrow money from a lender to purchase real estate.
How Does a Mortgage Work?
A mortgage lender will pay for the value of the real estate in full based on the contract signed by the seller and buyer. In exchange, the home buyer agrees to make monthly payments until the mortgage is paid in full. Mortgages usually last 15 to 30 years, with some going as long as 40 years. If a loan is 15 years, the interest rate is generally lower.
A mortgage loan is more than the home’s value because the mortgage lender will charge interest to the buyer. For example, someone buys a home for $500,000 at 6.5% interest. The monthly payment for a 30-year mortgage comes to $3,160. Over 360 payments, the entire value of the loan comes to $1,137,600. The interest paid is $637,600. The property purchased with the loan serves as collateral for the loan.
What are the main parts of a mortgage payment?
A mortgage payment consists of four parts: principal, interest, taxes, and insurance. Mortgage lenders usually put property taxes and home insurance payments into a mortgage payment. Homeowner’s insurance is required for many mortgages because if the home becomes damaged or destroyed, the insurance will cover the loan’s value. Each month someone makes a mortgage payment, it will show a breakdown of what part of the payment goes towards interest, principal, insurance, and property taxes. Most mortgage lenders will require a down payment. Minimally, someone will need 3.5% down. Some lenders may ask for 20% of the home’s value. How does a mortgage lender determine the interest rate?
Every mortgage lender is different, but there are seven main factors that lenders use when determining the interest rate for the loan.
- Someone’s credit score is a metric that can tell a lender someone’s ability to pay back a loan. A higher credit score usually means a lower interest rate.
- The loan amount determines the down payment amount.
- The down payment amount lowers the amount of money a borrower gets from the lender.
- Length of the loan. With a shorter term, like 15 years, the interest rate is lower, but the overall monthly payment is higher.
- Loan type, from a fixed-rate VA or FHA loan to an adjustable-rate mortgage that changes over time.
- Interest rate type, such as fixed-rate or adjustable-rate. Adjustable rates typically start out lower.
- Home location. Interest rates can vary from state to state.
How often do I make a mortgage payment?
Most lenders need one payment per month. However, borrowers can make payments every two weeks or make an extra payment any time and designate the money to go towards principal instead of interest.
Who can help a homeowner get a mortgage?
A member of the Association of Independent Mortgage Experts via Brokers Are Better can help prospective homebuyers with their mortgage; look for a local AIME member when shopping around for a mortgage lender using our broker directory here.