Real Estate

How Do Home Mortgages Work? The Ultimate Guide

Most people who own a home don’t own their home. Well, not completely, anyway.

Instead, they have a mortgage. Mortgage loans are used for the sole purpose of buying a house.

So how do home mortgages work? When you buy a house by getting a mortgage, you get the title of the property but have to make monthly payments until you own the home free and clear.

It’s the only way that most people can afford to get a house and build equity, rather than pay rent each month. Each payment you make lowers your overall debt and increases your equity, and stake of true ownership.

Wondering if a mortgage is the right path for you? Want to see what it takes to work with mortgage companies? Read on below for more.

Why You Need a Mortgage

Whether you rent or own, you’re going to be making monthly payments. It’s likely going to be your biggest expense every month.

But the difference is who the money is going to. When you rent, you pay a landlord for the privilege of living in their property. The landlord takes that money, pays off their own mortgage, and keeps any leftover as profit.

After you make a rent payment, that money is gone and you’ll never see it again.

But when you buy a house using a mortgage, your monthly payment doesn’t go away. It pays down your loan, thereby increasing your equity.

So the principle that you pay back effectively stays in the home. When you go to sell the house, much of that money will come back to you.

Owning a house, as opposed to renting, is one of the foundational steps of building wealth in your personal life.

How Do Home Mortgages Work?

So how do mortgages work, then?

They are one of the greatest tools available today for people to build wealth. Lenders are willing to provide massive loans on houses at low-interest rates.

Mortgage businesses are willing to provide such large loans to strangers because they are secured. The home itself is used as collateral.

What that means, is that if you fail to make your monthly payments for an extended period, the lender can seize the home from you, and sell it to get their money back.

So there’s less risk for the lender, and as a result, interest rates are pretty low. Compare this with a credit card, an unsecured line of credit, where there isn’t any collateral. Interest rates on these are variable, with the average being 17%.

Once you make your final monthly payment (usually after 15 or 30 years), you own the house free and clear. You don’t need to deal with a lender anymore.

If that sounds like a plan to you, here are the basic steps of obtaining a mortgage:

Choose a Lender

First off, you need to choose a lender or multiple lenders and fill out an application. It helps to apply with multiple lenders, to receive multiple quotes, since each lender will be different.

Make sure the lenders you are applying with follow HMDA compliance regulations to ensure fair treatment. Also, make sure the lenders you apply with have the loan program you’d like to use.

There are different types of mortgages available. A conventional mortgage is great for those who have a decent sum of money for a down payment, good credit, and solid income history.

FHA loans are great for first-time homebuyers with less money on hand for a down payment, and/or a low credit score. Other loans are available for those in unique situations requiring a tailored application process.

Applying for a Mortgage

Applying for a mortgage is the process of filling out an application. You’ll include personal information, along with your financial and employment history. Lenders will check your credit score to see if you are a reliable borrower.

The better your score, the better your interest rate will be. If you’ve had a consistent job for the last two years, the process should be easy. Otherwise, additional documentation may be required.

Getting Preapproved

When a lender confirms that you are in a good position to borrow, they will provide you with a preapproval letter. This letter tells your real estate agent, and home sellers, that you have a mortgage in place and are ready to submit offers on homes.

Preapprovals are usually good for 90 days. If your home search takes longer than this, you may need to verify the information again with your lender.

Closing on the Home

With a preapproval letter, you can make offers on homes. Once accepted, you will being the closing process.

There are many steps involved, which is why the process usually takes 30 to 45 days.

You’ll need to get the house appraised, to ensure it’s worth the amount you are buying it for. You will need to get it inspected, to make sure there aren’t any hidden problems. And you’ll need to finalize payment and sign lots of paperwork to finally get the key.

Making Payments and Managing the Mortgage

Once you sign on the dotted line and receive the key to your new home, things are pretty easy. You just need to make monthly payments on time. It’s best if you set up an automatic payment through your online bank portal.

After all, this is your most important expense and should be paid before spending your money on anything else. Otherwise, a late payment could hurt your credit score and eventually cause you to lose the home.

But if you make all of your payments on time, you will probably never hear from your lender, and you’ll enjoy the smooth, easy process of homeownership.

Mortgage Made Simple

So how do home mortgages work? You apply to borrow money, and if you look like a reliable borrower, your lender provides you with hundreds of thousands of dollars to buy a house.

This money comes with a relatively low-interest rate, and you make monthly payments on the home until you own it free and clear, or sell the home and pay off the mortgage.

Looking for more tips on building your wealth? Head back over to our site for more informative content.

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