What is a mortgage?

Buying a house can be both a difficult and enjoyable time but until you know the ins and outs of obtaining a mortgage, it will be more stressful than fun.

If you are a first-time buyer, the process may seem extremely complicated. You may not even know what a mortgage is and how it works. Basically, a mortgage is a loan for buying a home. Although there are a lot of stages to go through in order to obtain a mortgage, the process can be quite straight forward once you know what you are doing.

You will need to work out how much you can afford to repay and know where you can get a mortgage from. You will also need to know what different types of mortgages are available and which one is best for you. Use the following information to help you navigate this tricky subject with a cool head.

How does a mortgage work?

Unless you happen to have several hundreds of thousands of dollars in your bank account, you will need to get a loan to purchase a home. Essentially, this is what a mortgage is: a loan that covers the cost of a home which you pay back over the years with interest. It usually takes decades to repay a mortgage, but once the debt has been paid off, you will be the proud owner of your own property. The collateral of the property secures the debt of a mortgage. Therefore, if you stop paying your mortgage because you cannot afford the monthly payments, the bank can force foreclosure and you could lose your home. Therefore, you need to make sure you can comfortably afford to take out a mortgage before you rush into buying a property.

The best mortgage will be the one that offers an affordable monthly payment with the best interest rate for which you qualify.

There are various types of mortgages available. The two most common types are fixed-rate mortgages and adjustable-rate mortgages. Here is the difference between the two:

  • Fixed-rate mortgages: With this type of mortgage, you pay the same interest rate for the duration of the loan. Even if market interest rates go up, your monthly payment will not change. If the market interest rate significantly decreases, you might be able to secure a lower payment rate by refinancing your mortgage. Fixed-rate mortgages usually have a 15 to 30-year term. Fixed-rate mortgages are also known as traditional mortgages.
  • Adjustable-rate mortgages: With this mortgage, you have a fixed interest rate for an initial time, but it will then change according to market interest rates.
  • Typically, the initial fixed-rate term lasts for five years. This is because the initial interest rate is low which can make the mortgage appear to be more affordable than it actually is. The danger of adjustable-rate mortgages is that if the interest rate increases, you may not be able to afford the higher payments.

What do mortgage terms mean?

If you are applying for a mortgage, there are three main terms you need to familiarize yourself with. These are “down payment,” “principal,” and “interest”:

  • Down payment: Before you start repaying your monthly mortgage loan, in order to purchase a property, you will need to pay a down payment. Typically, a down payment is 20 percent of the price of the property you are purchasing.
  • Principal: This term refers to the amount of money you are borrowing that must be paid back. Therefore, it is the price of your property minus the down payment figure.
  • Interest: Unfortunately, your monthly repayments do not just cover the price of the house. They also include the interest charges. After all, your lenders are not giving you the loan out of the goodness of their hearts. They want to make a profit, so they charge interest.

Where can you get a mortgage?

There are three main places you can get a mortgage. These are banks, mortgage brokers and other lenders. Regardless of which you choose, you should first shop around, as different banks and brokers can offer different terms and rates:

  • Banks are a popular choice for mortgages. After all, by going to a bank you already bank with, your financial situation will already be known by the bank. Having said that, banks generally only have a few mortgage options, so you should compare their loan options with other lenders.
  • Mortgage brokers are professionals who can wade through the various loan options to find the right mortgage for you. This takes some of the pain out of the process for you but be sure to find an independent and trustworthy broker who does not have self-interests.
  • Other lenders available to use are generally companies that are not banks. These private loan companies are often used by people who cannot get a mortgage with a bank because of their risk profile. A non-bank lender may be best for you if you have poor credit history. If you do go with one of these independent lenders, make sure their interest-rates are not astronomical. You need to be able to afford the repayments.

VA Loans

What are VA loans? These loans assist service members, veterans and surviving military spouses to buy homes. The Veterans Affairs loan is a down payment mortgage option of zero percent, which effectively means you do not have to pay a down payment. The loan was created by the United States government in 1944. Its objective was to help returning service members purchase their own homes and it is going stronger than ever today.

The loans are issued by private mortgage lenders and they are guaranteed by the United States Department of Veterans Affairs. Not only can you avoid paying a down payment for a property, VA loans also have the additional benefits of competitive interest rates and no private mortgage insurance to pay. In most states, people who qualify for a VA loan are able to buy a property worth up to $453,100 without the need of a down payment.

People eligible for VA loans can also get help with other housing-related programs. These programs can assist you in repairing and adapting your home, or even building a property from scratch. These include:

  • Interest Rate Reduction Refinance Loan: This loan can help you to receive a lower interest rate. It does this by refinancing your existing VA loan. This loan is also known as a Streamline Refinance Loan.
  • Native American Direct Loan Program: If you are a Native American veteran, you could be entitled to this loan that helps you purchase or construct a home, as well as assisting you with the improvements of your home, on Federal Trust land. It can also decrease the interest rate of a VA loan.
  • Adapted Housing Grants: If you are a veteran with a disability connected to your service, you may be able to receive this grant to purchase, modify and adapt a home to make the property more suited to the problems of your disability.

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