Mortgages
What is a mortgage and what are they used for?
Mortgages are loans that are used to buy homes and other types of real estate.
Do I need a mortgage? If so, why?
Unless you have hundreds of thousands of dollars to spend to pay for a house in savings, yes!
A mortgage allows you to borrow money from the bank to pay for the house.
Important to note:
The house/property itself functions as collateral for the loan
Mortgages are available in many different types, including fixed-rate and variable-rate.
The cost of a mortgage will depend on the type of loan, the term (such as 30 years), and the interest rate the lender charges.
Mortgage rates can vary widely depending on the type of product and the qualifications of the applicant.
How do I go about obtaining a mortgage?
The Mortgage Process
1
Application
The process would begin by you applying to one or more mortgage lenders. The lender will ask you to provide them proof that you will be able to continually pay for the loan. This may include bank and investment statements, recent tax returns, proof of current employment, a credit check, etc. If you're proof is deemed adequate, the lender will offer you a loan up to a certain amount at a particular interest rate.
2
Pre-Approval
You can apply for a mortgage after you have chosen a property to buy, or while you are still in the market shopping around for one. This process is called pre-approval. Being pre-approved for a mortgage can give buyers an advantage in a tight housing market because sellers will know that they have the money to back up their offer.
3
Closing
Once a buyer and seller have agreed upon the terms of their deal, they (or those representing them) will meet at what's called a closing. This is when the borrower makes their down payment to the lender. The seller transfers ownership of the property to the buyer, the seller receives the agreed-upon sum of money, and the buyer will sign any remaining mortgage documents.
Can anyone get a mortgage?
Mortgage approval is based on a few things:
Proof of income
Proof of assets
Good credit score
Employment verification
Some other types of documentation
Harder to get a mortgage if you don’t satisfy their requirements
Different types of mortgages
Fixed Mortgages
With a fixed-rate mortgage, the interest rate stays the same for the entire term of the loan, as do the borrower's monthly payments toward the lender. A fixed-rate mortgage is also called a traditional mortgage.
Variable Mortgages
Also known as Adjustable-rate mortgages, Variable Mortgages have an interest rate fixed for the first term, and afterward it changes periodically based on the current market interest rates. The first term interest rate is usually below the market rate, so variable mortgages are affordable in the short term, but long term you don’t know what the market rate will rise or fall to.
Variable mortgages typically have limits (caps) on how much the interest rate can rise each time the market adjusts and in total over the life of the loan.
Interest- Only Mortgages
An interest-only mortgage is a type of mortgage in which the borrower is required to pay only the interest on the loan for a certain period. The principal is repaid either in a lump sum at a specified date, or in subsequent payments.
Reverse Mortgages
They are designed for homeowners 62 or older who want to convert part of the equity in their homes into cash. These homeowners can borrow against the value of their home and receive the money as a lump sum, fixed monthly payment, or line of credit. The entire loan balance becomes due when the borrower dies, moves away permanently, or sells the home.
How do I know if a mortgage is right for me?
You should choose a mortgage based on several factors of yours:
How much you could afford
Your savings goals
Duration of loan
Whether you want a fixed or variable interest rate
Your credit score and mortgage approval things from previous slide
Congrats for financially educating yourself! You are now equipped with the basic knowledge on how to decide what kind of mortgage is right for you, what you need in order to secure your next mortgage, and how to go through the mortgage process with clarity.